Strong rental growth rates combined with slowing dwelling value declines have seen home owners realise positive ‘total return’ growth in August (+0.2%). While national dwelling values fell by -0.4% (s.a.) (or -0.1% raw) in August, this was the smallest seasonally-adjusted decline since April 2011. Bucking the national trend, home values in Australia’s biggest city, Sydney, rose +0.4% in raw terms (0.0% s.a.) in August. Including gross rents, Sydney dwellings have delivered a total 3.4% return in 2011 year-to-date. Nationally, capital city dwellings also produced a +0.2% total return over 2011.
In this August monthly release, RP Data and Rismark have published more detailed data on Australian housing’s ‘total return’. Like any other asset, property owners receive two forms of return: capital growth plus income (or rents).
If you let your house, you receive rents in dollar terms. If you own your home, you save the market rent. This is the same as a business owning and occupying a building (it similarly saves on rental payments). The higher the market rent, the greater the saving (or “imputed rent”).
Using its hedonic index technology, RP Data-Rismark measure monthly capital and gross rental returns across Australia. RP Data-Rismark report capital returns as changes in the “value” of homes, and rental returns as “yields”. This month RP Data-Rismark will commence publishing a “total return” series, which was always available in the underlying data as an “accumulation index” (the ASX also publishes accumulation indices that include dividends).
In the month of August, RP Data-Rismark’s Combined Capital Cities Index reported a seasonally-adjusted capital loss of -0.4 per cent (-0.1 per cent in raw terms). This was the smallest decline since April 2011.
According to RP Data’s senior research analyst Cameron Kusher, “One of the more noteworthy findings was the resilient performance of home values in Australia’s largest city, Sydney, which rose in raw terms by +0.4 per cent (although 0.0 per cent s.a.). Over the last 12 months, Sydney dwelling values have increased by 0.3 per cent. Including rents, Sydney’s total return has been 5.0 per cent over the past year, and is up 3.4 per cent in the first 8 months of 2011.”
“Another key finding in August was a change in the Melbourne growth dynamics. In the four months prior to August, Melbourne home values declined by about one per cent per month (-1.0 per cent s.a. and -1.2 per cent raw). In August, Melbourne home values actually rose in raw terms by +0.2 per cent and reported a much lower seasonally-adjusted decline of just -0.2 per cent. It will be interesting to see whether this trend continues as the ‘Spring Selling Season’ kicks-off,” Mr Kusher said.
The second big driver in the Australian housing market today has been the surge in rental returns. According to the ABS, rents have increased at a 4.9 per cent annualised pace in the first half of 2011, which is well above the rate of core inflation.
RP Data-Rismark carefully estimates “hedonically-adjusted” gross rental yields for all capital cities and the national market. Across Australia, units were yielding 5.0 per cent in August while houses generated 4.3 per cent.
In pure capital terms, Australian capital city dwelling values have declined by -3.2 per cent over the 12 months to August 2011. However, accounting for rents, the total returns have been a positive +1.1 per cent over the year.
Mr Kusher also highlighted the wide divergences in housing outcomes across Australia. In the 12 months to August 2011, Perth capital values fell by -7.1 per cent (s.a.). Yet in Sydney home values are up 0.3 per cent (s.a.).
Total returns also vary markedly on a city-by-city basis. While Melbourne (-2.0 per cent), Perth (-2.0 per cent), Adelaide (-1.8 per cent) and Brisbane (-1.6 per cent) have all experienced negative total returns over the first eight months of 2011, Sydney (+3.4 per cent), Canberra (+2.8 per cent), and Darwin (+1.8 per cent) are in the black.
Analysis shows that the premium sector of the market remains the most volatile. The most expensive 20 per cent of suburbs have recorded capital value (ie, exclusive of rents) falls of -5.5 per cent over the last year compared with a -3.1 per cent capital loss across the broad ‘middle’ market and a -2.9 per cent capital loss amongst the 20 per cent of most affordable suburbs.
Rismark economist, Christopher Joye, commented, “For most of 2011 Australian households were expecting to get slammed with 2-3 additional interest rate hikes on top of the circa two hikes they bore in November last year.
“As a consequence of the US and European sovereign debt ructions, and a bump up in the local unemployment rate, interest rate expectations have swung 180 degrees. The financial markets are now pricing in nearly six rate cuts by June next year. Goldman Sachs, Deutsche Bank, Westpac and AMP are all forecasting RBA rate cuts this year. Former Gillard economic advisor, Stephen Koukoulos, says the RBA will cut rates in both October and November.”
“As the most interest rate sensitive sector of the economy, Australia’s housing market will be the main beneficiary of any rate reductions. Almost all Australian mortgage debt is variable rate, and prices off the RBA’s target cash rate one way or another.”
“Importantly, consumers are starting to listen and have radically adjusted their views on the future cost of debt. According to NAB’s latest survey, only 20 per cent of people now expect interest rates to be higher in 12 months time compared to a stunning 70 per cent of people in June. This will likely provide support for housing sentiment. A number of leading indicators point to more positive portents: for example, Australia’s largest mortgage broker, AFG, reported the largest number of new housing finance applications in August for 18 months.”
“For the record, we remain much more concerned about inflation than the financial markets, and think it is unlikely that the RBA’s cash rate will fall to 3.5% or less over the next year.” Mr Joye said.
On a total return (capital growth plus rents) basis, Australian capital city dwellings produced a positive +0.2 per cent result in the month of August.
