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Tuesday, May 1, 2012

Parsing the April house price data

So we have a bunch of house price data out today. The ABS’s quarterly median detached house price index, which was published at 11.30am this morning, claims that capital city prices across Australia fell 1.1% in the March quarter. Confusingly, Australian Property Monitors (APM) reported a 0.9% increase in detached house prices over same period (but with a notably smaller +0.1% rise in the price of units). And APM and the ABS apparently use similar “stratified median” index methodologies.

In contrast, RP Data-Rismark have recently launched a radically different, and much more sophisticated, “hedonic” house price index technique that tracks changes in the value of the overall housing “stock” rather than simply the transactional sales “flows”. Only about 5-6% of the housing stock turns over each year, and these transactions can be an imperfect representation of the 95% of homes that do not trade.

RP Data-Rismark’s eight capital city “all dwellings” index, which includes both houses and units, registered a flat (actually up slightly) result over the first three months of 2012. Yet when we look at the detached house sub-series values declined by 0.1% over this period (units were up 0.9%).

Aggregating across the three major indices—with one up, one down, and one flat—one might reasonably conclude that home values were mostly unchanged during the quarter. This makes sense given that the RBA’s two rate cuts in November and December arguably helped galvanize an improvement in housing conditions over the first quarter of 2012.

A crucial rider to this is the fact that the banks have over February and April taken 50-60% of the December rate cut back. Beyond reducing the stimulus that the RBA’s rate relief would have otherwise injected into the economy, these independent pricing decisions by the banks—justified or not—have undoubtedly created substantial confusion in the minds of consumers in respect of the future level and direction of lending rates.

Today RP Data-Rismark also reported their results for the month of April. On a month-on-month raw basis, dwelling values across Australia’s eight capital cities declined by 0.8%. This movement is highlighted in the first chart below, which shows the daily index changes over the month of April. The second chart stretches this data back to the start of 2011 using a one week moving average.

What is especially interesting is that 100% of the decline experienced in April occurred in the second half of the month. Whereas over the first 14 days of April Aussie home values followed on from the trend set in February and March, yielding a small capital gain based on RP Data-Rismark’s method, they slumped by 0.85% in the second half of the month. What could have caused this dramatic intra-month change?

One possible explanation is the intervention of Easter, which saw a sharp decline in auction and private treaty sales activity over the period 6 through 9 April, inclusive. This does not, however, shed light on the adverse price action that really began on the 16th of April.

A likely more powerful explanation is the fact that one of Australia’s largest banks, ANZ, lifted all of its variable mortgage rates by six basis points on Friday the 13th of April, which triggered a tsunami of negative media coverage and speculation that other banks would follow suit. This coincides perfectly with the inception of the price falls on Monday the 16th of April.

There are two other factors that probably contributed to the malaise in the last few weeks of April. The first is the fact that the RBA had said for months that it would not cut rates unless it received a “benign” inflation print when the first quarter inflation data were published on the 24th of April.

Once again, there was a great deal of media coverage speculating on the impact different inflation figures would have on the RBA’s policy decisions. As it transpired, the inflation data printed low, and the debate shifted to the size of the RBA’s cuts as opposed to whether we would actually get a cut.

In parallel there has also been an animated public debate swirling around the impact, if any, the Gillard Government’s austere budget settings would have on the RBA’s decisions. The composition of the budget will not be revealed until the 8th of May, which has led some to suggest the RBA will book-end its rate cuts either side of this event (ie, in May and June). The alternative, of course, is that they front-end load them.

It is not unreasonable to think that the unusual dynamics described above, and ANZ’s rate hike in particular, gave buyers and sellers considerable pause in the second half of April. In the event that the central bank judges that lending rates should indeed be pushed one quarter-to-one half of a percentage point lower, I would expect that the 2012 consolidation in housing conditions will firm up further.

In this context, it was comforting to see the RBA report yesterday that Australian housing credit is expanding at a pace consistent with the growth in disposable household incomes (ie, over 5% per annum), as I’ve long argued should be the case here.