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Friday, January 29, 2010

December House Price Index Results...

Based on the residential property database, which is the nation’s largest with over 280,000 sales in capital cities in the first 12 months of 2009 alone, Australia’s housing market growth came to a halt in December in line with the standard seasonal slowdown.

According to the market-leading RP Data-Rismark National Capital City Hedonic Index—which is published by the RBA in the Statement on Monetary Policy—Australian dwelling values fell slightly by 0.3 per cent in the month of December after 1.1 per cent growth in November (importantly, there was no revision at all to the previous ‘indicative’ index estimate for November).*

In the December quarter, Australian home values advanced 2.1 per cent, which was the weakest result in 2009 and not surprising given the typical summer slowdown (ie, there is some seasonality in the data). More generally, quarterly capital gains in 2009 have been very stable at 2-3 per cent per period.

Over the 2009 year, Australian home values rose by 11.1 per cent following on from their 2-3 per cent calendar-year falls in 2008, which was the worst performance in recorded history.

Based on settled sales over the three months to end December 2009, the median (ie, 50th percentile) house price in Australia is $485,000, while the median unit price is $400,000.

RP Data-Rismark’s December quarter result is noticeably less the 4.8 per cent growth reported by one median price index provider. As discussed previously, median price indices can be adversely affected by changes in the composition of buyers in the market, amongst other typical biases (such as capital improvements and variations in the type and quality of homes manufactured over time). RP Data-Rismark’s “hedonic” index is not influenced by these changes and seeks to explicitly control for each individual property’s unique attributes, including, but not limited to, its longitude, latitude, landsize, type (ie, detached house or unit), and number of bedrooms/bathrooms using a non-linear, adjacent-period hedonic regression technique.

The problems associated with using median prices were graphically illustrated in the first quarter of 2009, when APM and the ABS reported that house prices were falling—by a record margin in the case of the ABS—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’s hedonic index, in contrast, reported strong growth of circa 2-3 per cent during this period.

Since the first quarter, RP Data-Rismark’s index has shown relatively stable quarterly growth. In comparison, the median price indices have reported wild changes in value, which appears to be evident again in the fourth quarter. The latest median price estimates are likely being artificially boosted by the fading of first timers and the return of upgraders buying more expensive homes, which automatically drag the medians upwards (even if one uses the superior “stratified” median price index). At the current time, the true rates of capital gains across Australia are likely to be less than those reported by median price suppliers.

The best capital city performer in 2009 was Darwin with 16.6 per cent growth across all dwelling types. This was closely followed by Melbourne, where dwelling values registered a stunning 15.6 per cent increase (after suffering a 1.8 per cent decline in 2008). Residential real estate in Canberra came a close third with 14.7 per cent growth. Dwellings in Australia’s largest city, Sydney, experienced their highest capital gains since the boom in the early 2000s with values accreting by 11.4 per cent.

Amidst the media hysteria about escalating house prices (which, as we discuss below, have not outpaced household incomes since 2003), it is sometimes forgotten that between December 2003 and December 2006 Sydney dwelling values fell by over 6 per cent. In inflation-adjusted terms, the losses in Sydney were obviously much larger. Similarly, between December 2003 and end 2005 dwelling values in Melbourne registered very weak nominal growth of just 2.8 per cent.

The worst capital city performer in 2009 was Adelaide where home values rosse by a still quite reasonable 6.2 per cent (Adelaide had, however, outperformed in 2007 and 2008).

Alongside Melbourne, the other major story of 2009 was Perth’s rebound. Dwelling values in Perth had been falling since September 2007 with total cumulative losses of 7.9 per cent at their nadir at the end of 2008. Yet Perth property has staged a solid comeback in 2009 with capital gains of 7.1 per cent to nearly retrace their 2007 heights.

When we divide the patented RP Data-Rismark Hedonic Index up into the cheapest 20 per cent of suburbs ranked by price, the middle 60 per cent of suburbs, and the most expensive 20 per cent of suburbs, we find that contrary to popular belief the least expensive areas (+8.2 per cent) significantly underperformed the luxury markets (+11.9 per cent) during 2009. This reverses out the trend in 2008 when the cheapest areas fared the best with +0.2 per cent growth while the luxury markets performed worst and realised substantial value losses of 7.2 per cent. The table below shows the relative performance of each cohort on a quarter-by-quarter basis.

In the December quarter every mainland capital registered capital gains. The best performer was Canberra (+6.9 per cent) followed, interestingly, by Adelaide (+2.7 per cent), Darwin (+2.5 per cent), Melbourne (+2.3 per cent), Brisbane (+2.1 per cent), Sydney (+1.9 per cent) and Perth (+0.5 per cent). (Note, however, that the indicative estimates for Canberra are volatile due to its inherently thin market.)

In the December quarter, detached houses (+1.6 per cent) have underperformed units (+3.5 per cent). This trend is also evident in the calendar year results with units (+13.5 per cent) generating higher capital gains than houses (+10.4 per cent).

National rental yields tapered slightly in December with the gross annualised rental yield for units (houses) 4.9 per cent (4.1 per cent).

Is Australian Housing Expensive?

There has been wide public debate around how the cost of Australian housing has changed over time. Media commentators frequently reference “house-price-to-income-ratios” produced by overseas groups to gauge whether Australia’s housing market is over- or under-valued.

These measures typically suffer from a range of shortcomings, including the fact that they ignore non-capital city regions (around 40 per cent of homes are located outside of the capitals), often only examine wages as opposed to “household incomes”, and frequently restrict their analysis to detached houses when one quarter of all homes are semis, terraces, and apartments.

To better examine these issues, Rismark International (“Rismark”) has developed an alternative housing affordability index that compares Australian dwelling prices across all metro- and non-metro regions (including all property types) with the RBA’s definition of national “disposable household incomes” over time. The property sales data in this index derive from Australia’s most comprehensive residential property database (sourced exclusively from RP Data Ltd), which captures 100 per cent of all transactions consummated across the country.

The quarterly Rismark National Dwelling Price-to-Income Index shows that Australian house prices have not risen relative to disposable household incomes since late 2003 (see chart below).

As Australian home values rose robustly in 2009, Rismark’s National Dwelling Price-to-Income Index has risen from its low of 3.7x in December 2008 to 4.1x as at the third quarter of 2009 (which is the date of latest ABS National Accounts data).

Over the last six years, Rismark’s National Dwelling Price-to-Income Index has remained broadly static after solid growth during the early 2000s (refer to chart above). In December 2003 Australian dwelling prices were 4.2x disposable incomes, which is effectively where they remain today.

The fact that there has been no discernible increase in Australian house prices relative to disposable incomes since the end of the last boom in 2003 is one important explanation for the exceptionally resilient performance of Australia’s housing market during the GFC.

In contrast to claims that Australian house prices are 7-8x incomes, Rismark’s National Dwelling Price-to-Income Index implies that the true ratio across all regions and all property types is around half this estimate.

This suggests that Australian housing is not as expensive as is commonly believed. It also reconciles with RBA analysis highlighting Australia’s internationally low mortgage default and mortgage stress rates.

*On a “seasonally-adjusted” basis the December index result was slightly positive.

**Note that there are on average 1.3 employed persons per household, and ‘income’ includes all earnings from savings, investment and labour sources—ie, not just wages.