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Housing's short-lived stability
Christopher Joye
Published 10:49 AM, 29 Oct 2010 Last update 10:25 AM, 1 Nov 2010
In good news, Australian housing affordability has been improving for the last four months. In the month of September, Australian capital city dwelling values were effectively unchanged (+0.1 per cent seasonally-adjusted or +0.4 per cent raw) based on results released by RP Data-Rismark today (the previous raw month of August results revised by a tiny margin from 0.0 per cent previously to -0.1 per cent).
Indeed, there has been no growth at all in capital city dwelling values since the end of May 2010. More specifically, dwelling values over that time have actually fallen by around one per cent (or 0.8 per cent raw), which implies that affordability is getting better.
Over the September quarter, Australian capital city dwelling values declined by 0.4 per cent seasonally-adjusted (or 0.0 per cent raw). And in the 12 months to September, Australian capital city dwelling values grew by 8 per cent.
The affordability situation is even better in the less supply-constrained ‘rest of state’ markets, which cover the 40 per cent homes not located in capital cities. House values in the rest of state areas registered a seasonally-adjusted decline of 0.9 per cent in September (-1.5 per cent unadjusted), according to RP Data-Rismark.
Perhaps more interestingly, rest of state house values have realised no capital growth at all in 2010, and are up by just 2.7 per cent in the 12 months to end September.
Over the September quarter, RP Data-Rismark’s Rest of State Index recorded a 1.5 per cent seasonally adjusted fall in house values (-2.4 per cent unadjusted).
These results are gratifying insofar as they accord with our long-term projection that Australia’s housing market would flat-line in the second half of 2010. It is also worthwhile highlighting here that the monthly RP Data-Rismark Hedonic Home Value Index was the first benchmark to report a big shift in housing conditions with a substantial fall in Australian dwelling values in the month of June. This followed annualised double-digit capital growth since the start of 2009.
Other house price measures, such as APM’s stratified median price index, are now starting to fall into line. We expect the ABS’s stratified median price index to report similarly negative results for the third quarter on Monday.
Nationally, the median Australian dwelling price (across all regions) in the three months to end September was $406,500 which is $9,500 (or 2.3 per cent) lower than it was at the end of June 2010 (note: medians should not be used to measure changes in value over time).
After falling 1.7 per cent since the end of May, the 20 per cent most expensive (capital city) suburbs in Australia staged a comeback in the month of September by generating modest capital gains of 0.4 per cent. In contrast, the cheapest 20 per cent of suburbs fell in value by 0.4 per cent. The most resilient part of the market has been the middle 60 per cent of suburbs, which realised 0.7 per cent capital growth in September.
There has been much recent talk about housing bubbles, which appears to be a universal constant in the local landscape no matter what part of the cycle one finds oneself in. GMO’s Jeremy Grantham has sought to defend himself after coming in for a tonne of technical criticism for the questionable analysis he used to justify claims that Australia was in the grip of the mother of all bubbles. Unfortunately, Mr Grantham got it wrong again. The immediate clue in his latest response is the argument he tenders upfront: there must be a housing bubble because people have disagreed with him!
Grantham then reasserts the line that Australia’s dwelling price-to-income ratio is 7.5 times or higher, when many experts, including the RBA, have repeatedly demonstrated that this is wrong: the right ratio is about 4-5 times if you compare national dwelling prices with national incomes, or capital city dwelling prices with capital city incomes. Just this week, Westpac’s Matthew Hassan concluded, “A price to income ratio based on an all dwellings, all regions national median is 4.3x and has ranged between 3.9x and 4.4x over the last seven years. This compares to an often quoted national price to income ratio from Demographia of 6.8x, who view a ratio over 5x as severely unaffordable.”
A final mistake is Grantham's claim that Australia has "accommodating monetary conditions", when, in fact, mortgage rates are exactly in line with their long-term averages, and amongst the highest in the developed world.
The biggest risk to Australia’s housing market is likely posed by the course of monetary policy. The consensus view is that the cash rate will rise another 100 basis points to 5.5 per cent. Banks are also likely to add another 25 basis points on top of this, leading to an effective increase in lending rates of 125 basis points. This means that the headline variable mortgage rate will rise to 8.65 per cent.
While household balance-sheets will be supported by a strong labour market and robust income growth, our analysis suggests that a substantial increase in rates would put some downward pressure on dwelling prices. New borrowers taking out loans should, therefore, be sure that they can service mortgage rates that are a good 1.5 per cent higher than what they are currently paying.
RP Data-Rismark’s Hedonic Index is based on Australia’s largest real estate database, which has recorded 266,942 dwelling sales in 2010 alone, and is the preferred benchmark for most economists.
Christopher Joye is managing director of research group Rismark International which produces the RP Data-Rismark Hedonic House Price Indices. Rismark also operates a series of funds that invest in residential mortgages. His blog can be found here.
2 Comments
Peter Cain wrote:
Chris, you project that prices will flat-line but then forecast a fall if rates rise, which you say they will, by another 1.25 per cent. (See Housing's short-lived stability, November 2.) You are either contradicting yourself or just hedging your bets, as seems to be the case with a growing number of your fellow bulls.
1 Nov 2010 10:14 PM
David Graham wrote:
Bubble or not, it appears property prices peaked around March this year. Regardless of the technical analysis it appears the average family can no longer afford the average property. Your comments regarding housing affordability are a convenient smoke screen masking the fact that house prices are falling in real terms. (See Housing's short-lived stability, November 2.)
Now, don't get me wrong I am happy about that. I would love to see my children be in a position to buy a home some day. However I expect those investors who subscribe to the conventional wisdom 'property always goes up' are in for a nasty surprise. With global monetary settings inevitably setting the scene for a future inflation shock, it may not be apparent for some time that property prices are falling. Nominal growth may continue. But as inflation takes hold real property prices are likely to revert to mean over the medium term. It is like paddling against a rip – it feels like you are moving forward but in reality you are going backwards. Let's lock in March 2010 as the end of the 13 year long great property bull market.
5 Nov 2010 2:14 PM
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