Inflation adjusted home value growth changes the narrative: Cameron Kusher
The Australian Bureau of Statistics (ABS) released Consumer Price Index (CPI) data for the March 2015 quarter recently.
The data showed that over the quarter, headline inflation was recorded at 0.2% taking annual inflation to 1.3%. The Reserve Bank’s (RBA) preferred measures of underlying inflation, the trimmed mean and weighted median, were recorded at an annual rate of 2.3% and 2.4% respectively. Headline inflation is well below the RBA’s target range of 2% to 3% however, underlying inflation is towards the bottom of the RBA target range.
From a housing market perspective, it is useful to understand the real change in home values. We all know that the Sydney market is recording strong rates of value growth at the moment while most other capital cities are seeing more moderate growth. When you take the impact of inflation into consideration, growth is generally much more tepid.
Over the 12 months to March 2015, nominal home values across the combined capital cities increased by 7.4% however, including inflation, real home value increases have been recorded at 6.0%.
Across the individual capital cities, real home value growth over the past year has been below 1.5% in all cities except for Sydney (12.5%) and Melbourne (4.2%).
When you compare the annual change in real capital city home values to the 10 year real annual change it shows that only Sydney, Melbourne and Brisbane are outperforming the decade average. Elsewhere real home values have increased at a rate which is below the decade average.
Over the past five years, real combined capital city home values have increased by 1.2% per annum compared to 2.2% per annum over the past decade and 4.3%pa over the past 15 years.
Over the past five years, real home values have increased at a rate of 4.0% per annum in Sydney and by 1.3% per annum in Melbourne. Every other capital city has recorded real value falls over the period with values down -2.3% per annum in Brisbane, -1.3% per annum in Adelaide, -1.0% per annum in Perth, -3.9% per annum in Hobart, -1.6% per annum in Darwin and -1.2% per annum in Canberra.
Even over the past 10 years home values have fallen in real terms in Hobart whilst they have recorded gains elsewhere. Over the longest time frame shown, 15 years, Perth has recorded the strongest annual value increases at 5.5% per annum, followed by: Melbourne (5.0% per annum), Brisbane (4.8% per annum), Hobart (4.7% per annum), Canberra (4.6% per annum), Adelaide (4.5% per annum), Darwin (4.2% per annum) and Sydney (3.5% per annum).
One of the features of the capital city housing market has been the strength of growth in home values across Sydney and Melbourne since the end of 2008 following value falls during the financial crisis in 2008. From December 2008 to March 2015 nominal home values have increased by 40.2% however, in real terms value growth is much more moderate at 18.2% over the period. Over this period real home values have recorded falls in Brisbane, Adelaide and Hobart while Perth, Darwin and Canberra have each recorded real home value growth of less than 10%. Only Sydney (42.0%) and Melbourne (26.9%) have recorded any significant real increases in home values over the period.
Earlier this week RBA Governor Glenn Stevens noted that there is generally too much attention on the Sydney housing market which ignores the 80% of Australians that don’t live in that city. Looking at the real change in home values really highlights this point; value growth has been comparatively very strong over recent years in Sydney, while most cities have actually recorded real declines in values.
What’s also interesting is that although Sydney is seeing a strong rise in both nominal and real home values currently, over the past 15 years it has been the overall weakest performing capital city housing market.