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Thursday, March 31, 2011

House prices flat in February

After a natural disaster-affected January (-1.5 per cent seasonally-adjusted or -0.7 per cent ‘raw’), RP Data-Rismark’s Hedonic Index reports that Australian home values held ground during the month of February.

In the capital cities, RP Data-Rismark recorded flat dwelling values (0.0 per cent seasonally-adjusted or a slightly stronger +0.7 per cent in actual ‘raw’ terms). The ‘rest of state’ areas, which account for the 40 per cent of homes not located in the capitals, also displayed some improvement during February with house values rising by 0.5 per cent seasonally-adjusted (+0.3 per cent raw).

Over the 12 months to end February, Australia’s capital city home values have hardly moved, rising by only 0.8 per cent. The story is the same in the rest of state regions, where home values remain unchanged (-0.2 per cent) over the last year.

The median dwelling price in the capital cities has eased down to $459,000 over the three months to end February from a peak of $473,000. (Note: rates of return or capital growth should not be inferred from these medians.) The median in the rest of state markets is markedly lower at just $323,000. Across all Australian regions, the national median dwelling price was $410,000 over the past quarter.

In the property investment market, RP Data-Rismark estimate that gross apartment and detached house yields were 4.8 per cent and 4.2 per cent, respectively, in February. Darwin (5.7 per cent), Canberra (5.3 per cent), Sydney (5.1 per cent) and Brisbane (5.1 per cent) all offer reasonable rental yields in the apartment market. Melbourne is the laggard at 4.2 per cent.

Since the end of the last housing cycle in 2003, Australian households have realised healthy disposable income growth of 6.3 per cent per annum according to the ABS’s National Accounts.

Over this same period, Sydney dwelling values have generated annual capital growth of just 2.1 per cent. Across all the capital cities, Australian dwelling values have risen by only 5.2 per cent per annum since December 2003 according to RP Data-Rismark’s hedonic indices.

Australian home values have therefore underperformed disposable household income growth by a striking 1.1 per cent per annum since 2003. In cumulative terms, Australian household incomes have risen by 11.0 percentage points more than Australian dwelling values over this period.

If one simply looks at ‘average’ dwelling prices, rather than RP Data-Rismark’s more accurate hedonic indices, and compares them to the ABS’s quarterly estimate of ‘average’ disposable household income from the National Accounts (adjusted on a per household basis), one finds that Australia’s dwelling price-to-disposable income ratio was 4.5 times as at December 2010.

Importantly, this ratio has not increased since the end of the last housing cycle in 2003. And if we measured the change in the cost of Australian housing using RP Data-Rismark’s regression-based hedonic indices, rather than via simple ‘averages’, the house price-to-income ratio would have actually declined materially during this time.