House prices set to cool

APM’s house price index result (released today) for the fourth quarter was a ridiculously strong +4.8 per cent with Sydney and Melbourne up by more than 5 and 6 per cent, respectively. I am guessing that the RP Data-Rismark’s ‘hedonic’ index results, which will be reported tomorrow, will provide a substantially more conservative picture of Australia’s housing market conditions. The median price indices produced by APM and the ABS are adversely affected by changes in the composition of buyers in the market. RP Data-Rismark’s hedonic index is not influenced by these changes. In the first quarter of 2009, APM and the ABS got it very wrong, claiming that house prices were flat or falling when in fact they were rising rapidly. The medians were being dragged down by a surge in first time buyers purchasing cheap homes in the first three months of 2009. RP Data-Rismark, in contrast, reported strong growth of nearly 3 per cent in the first quarter in 2009. Since the first quarter, RP Data-Rismark’s index has shown stable growth. We expect the market to cool in the fourth quarter of 2009. In comparison, the median price indices are being artificially boosted by the fading of first time buyers and the return of upgraders buying more expensive homes, which drag the medians upwards. At the current time, the true rates of capital gains across Australia are likely to be significantly less than those reported by APM and the ABS.