Inflation adjusted home values put housing markets into context

Inflation adjusted home values put housing markets into context
Inflation adjusted home values put housing markets into context

Earlier this month the Australian Bureau of Statistics (ABS) released its quarterly Consumer Price Index (CPI) or inflation figures.  

The data showed that over the September 2014 quarter, inflation was recorded at 0.5% and over the 12 months to September 2014 it was recorded at 2.3%.  The Reserve Bank has a target range for annual inflation of 2% to 3% and inflation is currently at the lower end of this range. 

It is important to note that inflation appears to be slowing, recorded at an annualised rate of just 1.8% over the past six months.

Chart 1

With the release of CPI data we can also get a picture of what is happening with home values when adjusted for the effects of inflation. 

Over the 12 months to September 2014, combined capital city home values have increased by 9.3% in nominal terms according to the RP Data CoreLogic Home Value Index, in ‘real’ terms home values have risen by 6.8% over the past 12 months. 

The impact of inflation is important to consider, as you will note from the above chart.  For example in nominal terms home values recorded no annualised falls from September 1998 until December 2008. 

In real terms, values were falling from December 2004 to December 2005.  Of course when you adjust for inflation, real growth in home values is more moderate than in nominal terms.

Chart 2

Across the combined capital cities, home values have increased by 9.3% over the past year, 3.8% per annum over the past five years, 4.7% per annum over the past decade and 7.4% per annum over the past 15 years in nominal terms. 

Adjusting for inflation shows that real gains have been significantly lower.  Over the past year real capital city home values are 6.8% higher, over the past five years they are 1.2% per annum, over the decade they have risen by 1.9% per annum and over the past 15 years they are up 4.3% per annum. 

Home values rose at a rate well above inflation between 1999 and 2004 and again over the past 12 months however over the past five and 10 years overall home value growth has been less than 2% greater than the rate of inflation.

Chart 3

Sydney and Melbourne have been the strongest capital cities for value growth over the past year and consistently over recent years. In nominal terms, values have increased by 14.3% and 8.1% respectively over the past year. 

As the above chart shows, when you adjust the growth in values for the effects of inflation, the level of growth is lower. Note that real home values have still increased in each capital city except for Canberra over the past year.  Although, outside of Sydney, Melbourne and Darwin the rate of growth has been 4.0% or less in all cities.

Chart 4

As we have already highlighted, real home value falls are much more frequent than falls in nominal terms. 

This is also the case across the individual capital city markets.  As you can note from the chart below, outside of Sydney and Melbourne, real increases in home values over the past two years have been minor.

Chart 5

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Combined capital city home values began to recover from the financial crisis at the beginning of 2009 after reaching a low point in December 2008. 

Since that time, nominal home values have increased by 34.0% across the combined capitals, largely driven by increases of 51.2% in Sydney and 44.9% in Melbourne.  Notably, Brisbane (6.0%), Adelaide (10.9%), Perth (14.5%) and Hobart (-1.6%) have all recorded nominal gains of less than 15% since December 2008. 

In real terms, between December 2008 and September 2014, combined capital city home values have increased by a much lower 16.5%. Across the individual capital cities, real changes in home values between December 2008 and September 2014 have been recorded at: 31.6% in Sydney, 26.1% in Melbourne, -8.0% in Brisbane, -3.7% in Adelaide, -0.6% in Perth, -14.7% in Hobart, 11.0% in Canberra and 5.1% in Darwin.

The next time you hear someone talk of the booming national housing market remember these statistics.  

Yes combined capital city home values are rising and this is due to the influence of the Sydney and Melbourne housing markets where values are rising.  Real home values in Brisbane, Adelaide, Perth and Hobart are still lower than they were before the financial crisis and have seen no real growth in more than six years.

The data also seemingly indicates that low interest rates are not necessarily the driving factor behind the current growth in the housing market.  If this was the case we would more than likely be seeing a more broad-based rise in home values.  The growth in home values has been contained to Sydney and Melbourne and to a lesser degree Darwin and Canberra. 

No wonder the Reserve Bank has flagged that monetary policy has largely done all it can and now fiscal policy has to do some of the heavy lifting.

Lower interest rates have encouraged rises in values in Sydney and Melbourne accompanied by a substantial lift in activity by investors.  However, outside of Sydney and Melbourne the housing market response, in terms of value growth, has been quite muted. 

Supply is responding across most cities which is certainly a desirable outcome. Yet despite real value falls over a number of years in Brisbane, Adelaide, Perth and Hobart, low mortgage rates and increasing new supply has not yet resulted in an ongoing rise in home values.  Of course this is not necessarily a bad thing but is somewhat surprising given the experience in Sydney and Melbourne.

I think what we are seeing is a case whereby our largest capital cities are further separating themselves from the rest of the pack. 

Sydney has pretty much always been the most expensive capital city market and this remains the case but we are now also seeing Melbourne separate itself from the remaining cities. 

Another factor driving the rising demand are potentially a greater number of overseas buyers investing in our two largest cities (unfortunately data capture is such that we don’t really know for sure). Furthermore both New South Wales and Victoria are experiencing a much lower outflow of residents to other states than they have in the past. 

Finally, the economies of Sydney and Melbourne are much more diversified economies than those of the other capital cities which tend to be much more narrowly focussed.  This is likely to be a key driver of higher housing demand and stronger value growth in these cities compared to the other capitals with a greater variety of job options available in these cities.

As home values continue to rise in Sydney and Melbourne lower income families and first home buyers may find it more difficult to enter the market.  This may result in some buyers looking to other capital cities in which to purchase homes. 

Of course, if the purchase is for owner occupation, the narrower economies may make it more difficult for these home owners to find appropriate employment in their new cities.

Cameron Kusher

Cameron Kusher

Cameron Kusher is senior research analyst at CoreLogic RP Data.

Cameron Kusher


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