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Rate cuts help housing market recover in June with 1% rise in capital city dwelling prices: RP Data‐Rismark
By Larry Schlesinger
Monday, 02 July 2012
Lower interest rates helped Australia’s eight capital cities record a 1% gain in dwelling prices over June to a median of $460,000, according to the latest RP Data‐Rismark June Hedonic Daily Home Value Index.
The three biggest markets – Sydney, Melbourne and Brisbane – all recorded dwelling price gains of 1% over June.
Perth was the standout market, with a 2% gain to a median of $460,000, with Perth dwelling prices now down just 1.4% over the previous 12 months.
Perth also had the strongest house price gain over June, with house prices up 2.4% to a median of $475,000.
The combined Brisbane-Gold Coast market was the strongest unit market over June, with a gain of 2% to a median of $355,000.
For the 12 months to the end of June Sydney dwelling prices are down 2% to a median of $541,000.
Melbourne remains the weakest housing market, with dwelling values down 6.6% for the year to June to a median of $480,000. The Brisbane market is down 4.7% to a median of $415,000.
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RP Data research director Tim Lawless says the catalyst for the improvement in market conditions “is likely to have been the 55-basis-point reduction in the average discounted home loan rate over May and June as well as the subtle improvement in consumer sentiment readings that have been reported”.
“The increase in capital city dwelling values is an encouraging sign that the market appears to be responding to improved housing affordability and lower interest rates,” Lawless says.
Lawless notes that capital city dwelling values have simultaneously risen over three months and fallen over three months – but the end result is that the market is still down 1.2% over the first six months of 2012.
“Regardless, while discounted variable mortgage rates are as low as 5.6%, Australian households remain understandably cautious about the economy given the global uncertainty.
“This is likely to weigh down on consumer demand for high commitment purchases,” he says.
Rismark CEO Ben Skilbeck described the Melbourne rebound as “perhaps the most significant insight from the daily index”.
“Between January 2009 and December 2010 Melbourne dwelling values rose by a remarkable 35%.
“Since that time they have corrected by just over 8%. After reaching a trough on 11 June, Melbourne dwelling values have now recovered by an impressive 1.7%. But they are still off about 4.1% in 2012,” Skilbeck says.
Skilbeck also notes the impact of lower interest rates on house prices.
“The rebound in capital city home values during June indicates that the RBA’s relaxed monetary policy stance may have reached the point of inflating asset prices despite households remaining cautious about the economy,” says Skilbeck.
He says housing market fundamentals are increasingly solid, with asset prices likely to respond to further monetary policy stimulus.
The only major capital city to record a fall was Adelaide, with dwelling prices down 1.1% to a median of $370,000.
Among the smaller capital city markets, Canberra dwellings rose 2% to a median of $485,000 and Hobart up 2.7% to a median of $342,000.
Darwin dwelling prices fell 0.7% in June to a median value of $468,000 – but it remains the only capital city market alongside Canberra to be up over the past 12 months.
The highest rental yields are Darwin houses and units. Both have a gross rental yield of 6.1%.
The lowest rental yields are Melbourne houses at 3.7% and Melbourne units at 4.5%.
Recovering house prices across most Australian capitals buck the typically weak June trend: Christopher Joye
By Christopher Joye
Monday, 02 July 2012
Guess what? Contrary to the silly claims of some, Australian house prices are not falling through the floor. In fact, Aussie dwelling prices surged back by a surprisingly strong 1% in the month of June assisted by a tail-wind in the form of the RBA’s generous rate cuts over the preceding 60 days. And these gains (not losses) were experienced by around 90% of the nation’s capital city owners.
Over the entire month of June, RP Data-Rismark’s “daily” hedonic index, which RBA remarks imply is its preferred benchmark, documented healthy capital growth in Sydney (+1%), Melbourne (+1%), Brisbane and the Gold Coast (+1%), Perth (+2%), Hobart (+2.7%), and Canberra (+2%). Only Adelaide (-1.1%) and Darwin (-0.7%) suffered losses.
The first chart below illustrates the change in the value of homes situated in the major east coast cities while the second includes the remaining conurbations. As I correctly anticipated in this column two weeks ago, it would appear that the RBA’s 75 basis points worth of rate cuts over May and June, which have translated into about 55 basis points worth of variable lending rate reductions, has had a rapid impact on housing conditions. Indeed, the commonality in the recovery in home values across most cities since the end of May is arresting.
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Whereas at the end of May the year-to-date change in Australian dwelling values was estimated to be -2.2%, this has now fallen to just -1.2% as at June 30. It is entirely conceivable that the Australian housing market could end the year in the black.
Rismark’s quantitative forecasting models, which are used by banks, insurers and various government agencies, imply that national dwelling values will be flat over the next 12 months, which would be a materially better outcome than the 3.8% nominal loss experienced in 2011 (according to RP Data-Rismark’s eight capital city index).
One of the most significant insights from the June data release was the exceedingly sharp improvement in Melbourne conditions. Melbourne home values have jumped 1.7% since June 11 alone (refer to the back line in the first chart above). Regular readers will recall that Melbourne dwelling values appreciated by a remarkable 35% between January 2009 and December 2010. Yet the indigestion caused by this boom – and Melbourne’s unusually low rental yields – arguably contributed to a circa 8% correction in the period since.
The June data offer the first preliminary signs that the RBA’s preparedness to slash rates may have helped break the back of Melbourne’s housing malaise. And the sensational auction results garnered by Channel 9’s The Block show last night do nothing to dispel this possibility.
RP Data-Rismark’s June findings are also impressive because their daily index numbers represent actual changes in dwelling values; that is to say, there has been no “seasonal adjustment”. We know that the winter months of May through August, and June and July especially, are typically very weak. So in “seasonally adjusted” terms, the capital gains recorded in June would have been larger again.
Dispassionate analysis reveals that Australian housing market’s fundamentals look increasingly benign. The national dwelling price-to-income ratio is at its lowest level since March 2003. (In fact, applying Rismark’s hedonic adjustments, disposable household incomes have grown more quickly than house prices for the past nine years.) As the RBA’s Dr Guy Debelle pointed out last week, mortgage arrears remain low, and there is no evidence of overbuilding. Indeed, most credible experts, such as the government’s independent National Housing Supply Council, have concluded that there is a structural housing shortage. The labour market is purportedly close to being fully employed, while wages have been expanding at a healthy clip. Finally, all-important mortgage rates are way below their long-term averages. Banks are offering discounted variable rates and three-year fixed rates today as low as 5.62% and 5.75% per annum, respectively.
It will be fascinating to see how the Sydney and Melbourne broadsheets cover the June house price results given their predilection for peddling gloom in favour of more sober analysis. This persistent bias in popular reporting has led RBA governor Glenn Stevens and other senior media commentators, such as Ross Gittins, to argue that some in the media are misleading the community as to the true state of our economy. This may help explain why many confidence surveys depart so dramatically from the real economic data.
Christopher Joyeis a leading financial economist and a director ofRismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
Australian housing at its most affordable level for nine years: Christopher Joye
By Christopher Joye
Thursday, 28 June 2012
In encouraging news for prospective property owners, Aussie housing continues to get cheaper when deflated using disposable incomes. According to Rismark, Australia’s all regions, average dwelling price-to-average disposable household income ratio has fallen to around four times, which is its lowest level since March 2003 (abstracting away from a temporary dip during the GFC).
This analysis is based on both “average” and “median” dwelling prices calculated using all home sales recorded across the country during the March quarter. The quarterly income estimates are extracted from the ABS’s National Accounts data, which publishes a regular “disposable household income” aggregate. To translate this figure into a “per household” unit, Rismark divides through by the number of households each quarter. It is important to remember here that this income estimate reflects that there are multiple income earners per household, and is an “average”, not a “median”, and likely to be biased upwards somewhat due to right-skew in the distribution of incomes.
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The second chart below seeks to remove one of the main “non-cash” items that is captured in the ABS’s disposable household income series: “imputed” owner-occupied rents, or the rents you effectively save by buying a home rather than renting it. As you can see, this boosts the dwelling price-to-income ratio to about four and a half times.
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The exact levels of the price-to-income ratio are relatively trivial: it is thechange in the ratio over time that affords much more useful insights.
From the analysis above we can infer several things. First, disposable household incomes in Australia have grown as quickly, if not more quickly, than nominal Australian house prices over the last nine years. Indeed, when we measure changes in house prices more precisely using a “hedonic regression” technique, we arrive at even lower house price inflation numbers. In particular, we find that disposable incomes have actually out-paced house prices by about 15% over this period.
A second learning is that the price-to-income ratio seems to have risen by about one-third from circa three times to four times since 1993. In fact, there was a very distinct regime change in the late 1990s and early 2000s.
There is a sound explanation for this innovation: the long-term cost of mortgage debt in Australia declined by north of 40% between 1980 and 1995, and 1995 and today. This was largely a function of the long-term reduction in realised inflation and measured inflation expectations, which in turn allowed Australia’s central bank, the RBA, to permanently lower its cash rate.
The radical reduction in the day-to-day cost of mortgage debt permitted Australian households to significantly increase the amount of debt they were servicing without a noticeable rise in underlying mortgage default rates. Notwithstanding a peak in headline mortgage rates of around 9.5% in August 2008, system-wide arrears have remained no higher than their last spike in 1994-95.
Here we are able to document another development. The striking rise in Australia’s household debt-to-income ratio from the mid-to-late 1990s onwards ceased altogether in about 2006, a year or two prior to the onset of the GFC. That is, credit growth started tracking income growth, which is what you would expect through the cycle. Households evidently discovered that they had maxed out their debt servicing capability, and rationally stopped leveraging up.
Rismark’s price-to-income ratio analysis does not, of course, account for changes in interest rates. Today mortgage rates are well below their long-term averages. You can get discounted variable rates as low as 5.6% per annum, and three-year fixed-rates at about 5.8% per annum.
Factoring in the change in both incomes and interest rates is important. As one exercise, Rismark took the median Australian dwelling price in 1985 and indexed it up by changes in per household disposable incomes and adjustments in borrowing capacity afforded by changes in mortgage rates (i.e., holding the repayment-to-income ratio constant).
Rismark found that they could explain 93% of the actual increase in median Australian house prices over the 1985 to 2011 period simply referencing these two variables.
Christopher Joyeis a leading financial economist and a director of Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
Linda & Carlos Debello
LJ Gilland Real Estate Pty Ltd
http://www.facebook.com/pages/LJ Gilland Real Estate Pty Ltd
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