Inflation suprisingly strong while adjusted home values below previous peaks

The Australian Bureau of Statistics (ABS) released the Consumer Price Index results for the December 2013 quarter earlier this week.  The December results provide a timely summary of consumer price rises up to the end of last year.

Chart 1

Headline inflation was recorded at 0.8% over the final quarter of the year and was 2.7% over the year.  Perhaps most interesting is the fact that the final two quarters saw inflation of 1.2% and 0.8%, an annualised rate of 4.0%.  The current annual inflation of 2.7% sits within the RBA’s target band of 2% to 3% however, the strong level of inflation over the past two quarters lessens the prospect of interest rate cuts for the time being.  The RBA prefer to look at underlying measures of inflation; the trimmed mean and weighted median each recorded quarterly rises of 0.9% in December.  Both measures have annual inflation recorded at 2.6% which is only slightly below the 2.7% headline figure.

From a residential property markets perspective the effects of inflation are also important to consider.

Chart 2

Based on the RP Data-Rismark Home Value Index, combined capital city home values increased by 9.8% in 2013 however, when you adjust for inflation the growth was a lower 6.9%.  Although home values rose over the year across all capital cities, when the impact of inflation is considered, home values actually fell in Hobart (-0.6%) and the rate of growth across all other cities was also lower.

Over time the impact of inflation on housing markets should also be considered.  The raw capital growth figures show that combined capital city home values at the end of 2013 were 3.5% higher than at their previous peak.  When these figures are adjusted for inflation, values are still -4.6% lower than their previous peak at the end of the September quarter in 2010.

Chart 3

Across each individual capital city market, inflation adjusted home values remain below their previous peak.  This includes Sydney and Perth where unadjusted figures show values are 10.9% and 3.6% higher than their previous peak respectively.  When adjusted for inflation, values across these two cities are currently -0.1% lower than their previous peak and Perth values are -8.9% lower.

If we look at the time of the previous market peak in inflation adjusted terms across each city, it goes some way to explaining why there has been such a pick-up in demand for housing and subsequently an increase in home values.  Sydney’s market peaked in the first quarter of 2004 and across other capital cities the market peaks were: Melbourne (Q3 2010), Brisbane (Q1 2008), Adelaide (Q2 2010), Perth (Q3 2007), Hobart (Q4 2007), Darwin (Q3 2010) and Canberra (Q2 2010).

With the relative costs of other goods rising at a faster pace than home values over recent years it is no surprise with mortgage rates at historic low levels that buyer demand and home values have now been rising.  From here, if inflation continues to climb that may result in the need to lift interest rates which would likely dampen investor activity and slow levels of capital growth.  The important thing to keep in mind however is that when you consider inflation, dwelling values remain lower than their previous peaks in every city.

Cameron Kusher is senior research analyst at RP Data.


Cameron Kusher

Cameron Kusher

Cameron Kusher is senior research analyst at CoreLogic RP Data.

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