The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Saturday, October 31, 2009

September house price index results...

Based on the nation’s largest property database, which includes nearly 200,000 sales in the first nine months of 2009 alone, Australia’s housing recovery moved sideways in the month of September with national home values flat after a record 1.8 per cent monthly rise in August.* September represents the lowest monthly result recorded thus far in 2009.

According to the market-leading RP Data-Rismark National Capital City Hedonic Index – which is the only monthly index published by the RBA in the Statement on Monetary Policy – Australian home values were essentially unchanged (+0.1 per cent) in the month of September. (Note that the RP Data-Rismark index includes all property types, not just detached houses like the ABS.)

Over the September quarter, Australian home values rose by a healthy 2.5 per cent, which was driven by RP Data-Rismark’s previously published estimates for the months of July (+0.7 per cent) and August (+1.8 per cent). Contrary to some other claims, the September quarter result was actually slightly less than the first two quarters of the year.

The growth in Australian home values in 2009 has been remarkably consistent since their nadir in December 2008, with the strong first quarter rise of +2.8 per cent followed by similarly robust outcomes in the second (+2.6 per cent) and third (+2.5 per cent) quarters (see chart). This is consistent with our analysis showing a tapering in auction clearance rates and the fading away of first time buyer demand. It should also presage a return to more sustainable growth outcomes.

Source: RP Data-Rismark (click to enlarge)

Cumulative capital growth in Australian home values in the first nine months of 2009 has been an impressive 8.1 per cent following on from the 3.8 per cent peak-to-trough fall registered in 2008.

Source: RP Data-Rismark (click to enlarge)

The upward momentum in Australian dwelling values is a vital economic signal from the market to builders, developers and their creditors to encourage them to invest capital in the production of new housing supply in an environment where scarce capital is being diverted into the resources sector. For those interested in seeing the supply-side of the housing market elastified (ie, most policymakers), it would be unwise to seek to suppress these market signals – assuming that this was, in fact, possible.

Here it is interesting to observe that the rebound in home values in 2009 has not been fuelled by unusually high credit growth. Housing credit has been running at an annualised rate of 7.8 per cent, which is nearly half the average growth rate of 14.7 per cent since January 1991, and noticeably less than the 12 per cent per annum growth experienced between 1990 and 1992.

So the key question is whether September is just a temporary pause following the incredibly strong August numbers, or whether it represents a more general cooling in conditions in line with other data that we have seen recently. Only time will tell. Rismark is, however, projecting materially lower rates of house price growth going forward as mortgage rates increase.

Since the RBA was aware of the RP Data-Rismark August numbers when they lifted rates by 0.25 per cent one would think that the flat house price growth in September, and the lower overall quarterly rate, does not increase the probability of a more aggressive 0.50 per cent hike at the RBA’s next meeting, all other things being equal (which is a significant caveat). The most important take-away here is simply that there is no evidence of accelerating house price growth.

While the national market was flat in the month of September, this conceals very different city-by-city stories that have played out over the course of 2009.

Whereas Melbourne, Sydney, Darwin and Canberra all experienced significant capital appreciation in September, Brisbane, Adelaide and Perth registered flat to negative outcomes.**

For the three months of the September quarter, Melbourne (+4.8 per cent), Canberra (+3.8 per cent) and Sydney (+2.8 per cent) all outperformed the national market (+2.5 per cent). In contrast, Perth (-1.4 per cent), Brisbane (0.0 per cent) and Adelaide (+2.4 per cent) all underperformed. The standout in the third quarter has once again been Darwin with exceedingly impressive 6.3 per cent growth.

In the year-to-date (ie, the first nine months to end September) Melbourne (+12.6 per cent), Sydney (+9.2 per cent), Canberra (+8.1 per cent) and Darwin (+14.1 per cent) also outperformed the national market (+8.1 per cent). In comparison, Brisbane (+3.5 per cent), Adelaide (+3.4 per cent) and Perth (+2.6 per cent) have yielded weaker capital gains.**

In the month of September, detached houses (+0.1 per cent) have shaded units (-0.1 per cent).

Over the September quarter, house values (+2.5 per cent) and unit values (+2.4 per cent) have realised similar growth.

In the year-to-date, units (+8.8 per cent) have generated slightly higher capital gains than houses (+7.9 per cent).

National rental yields were unchanged in September with the gross annualised rental yield for units (houses) equal to 5.1 per cent (4.3 per cent).

The median capital city house (unit) value across Australia is $515,366 ($419,852). (Note that the medians across all metro and non-metro regions are materially lower than these estimates.)

The most expensive (cheapest) houses are in Sydney (Adelaide) where the median house value is $606,804 ($424,793).

The most expensive (cheapest) units are in Perth (Brisbane) where the median house value is $458,450 ($341,584).

The highest (lowest) rental yields for houses are in Darwin (Melbourne) where rental yields are 5.9 per cent (3.9 per cent).

The highest (lowest) rental yields for units are in Darwin (Melbourne) where rental yields are 6.2 per cent (4.5 per cent).

The RP Data-Rismark National Home Value Index was the first index to identify the recovery in Australian house prices at the start of 2009. Other less sophisticated ‘median price’ indices have lagged. For example, the ABS index did not record a rebound in Australian home values until the second quarter of 2009. Analysts should be wary of inferring too much into the high growth recorded by alternative indices in the second and third quarters of 2009 as they are likely to be catching up to the more consistent appreciation registered by the RP Data-Rismark Index since January 2009.

In a speech two weeks ago, the Governor of the RBA, Glenn Stevens, was asked whether he thought Australia was suffering from a house price bubble. His response is enclosed as follows:
“Well, a lot of people have bandied the word “bubble” around; I’m not one of them, let me be clear. Even though I’m often interpreted as having said that, I haven’t said that. It is a fact, though, that housing prices have started to rise again…That is part of the economic picture – the general economic picture – that monetary policy looks at…That’s not the same as saying that, because housing prices are rising, that itself is going to drive a rate increase. We haven’t said that. In fact, I’ve said that I wouldn’t expect that, per se, to be the case.”
On the subject of whether Australian housing is unduly expensive, the IMF commented in its October 2009 World Economic Outlook Report: “In the case of Australia, if the impact of long-term migration on housing demand is taken into account, the results do not produce evidence of a significant overvaluation of house prices.” In the same report, the IMF also concluded that: “If past is prologue, these estimates suggest that…the [housing market] corrections in Australia and the United States are close to complete…”

IMF analysis released earlier this year showed that between 1997 and 2009 real house price growth in Australia had been no greater than the median comparable country selected by the IMF in a survey of Australia’s peers. The IMF also found that growth in Australian house price-to-income ratios over the period 1997 to 2009 had actually been less than the same metrics in the UK, Ireland, Spain and NZ. Indeed, Australia’s house price-to-income ratio is no greater than it was at the beginning of this decade according to the IMF.

*RP Data-Rismark’s previous 'indicative' estimate for the month of August of +1.9 per cent has hardly changed (now +1.8 per cent) based on the latest data.

**The indicative 'monthly' estimates for Brisbane, Adelaide, Perth and Darwin are inherently more volatile than the bigger cities such as Sydney and Melbourne on a month-to-month basis due to the lower underlying liquidity in these markets (think of it as akin to comparing the volatility of a small cap stock with a blue chip company).

** Readers should be aware of three technical points. First, the monthly RP Data-Rismark Hedonic Index compares month-to-month index results. For example, the first quarter of 2009 index results compare the end of March index with the end of December index. Another way to measure index returns is to combine all the months together in a quarter and compare them to the previous quarter’s pooled index. So you would combine all sales in January, February and March and compute an index value. You would then compare this to the pooled October, November, and December index value. The problem here is that because many home sales are reported by the Valuer Generals offices with a 1-3 month delay, the sample sizes in the more recent months are smaller than the earlier month. So in the first quarter of 2009, January’s sales will dominate because there are more January sales than February and March. In practice, however, there will in the end be a much higher number of sales in February and March. This is the approach used by the ABS. To overcome this problem, RP Data-Rismark treats each month separately. The other issue is that the ABS uses a stratified median price index. If more lower-valued homes are selling because of an increase in, say, first time buyer activity, median price indices can report lower returns when in fact house prices may be rising. RP Data-Rismark’s hedonic regression method overcomes this problem. Finally, unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.