Inflation adjusted home values are still lower than their previous peak

According to the RP Data-Rismark Home Value Index, combined capital city home values fell by -0.2% over the second quarter of 2014. 

With the Australian Bureau of Statistics (ABS) releasing their Consumer Price Index (CPI) data last week, we can see that in ‘real’ terms home values across the combined capitals fell by -0.7% over the second quarter of the year.

CPI is important to consider because raw or nominal figures don’t adjust for the impact of inflation. At a headline level, combined capital city home values have increased by 10.1% over the 2013/14 financial year.  The latest CPI data showed that inflation was recorded at 0.5% over the second quarter and at an annual rate of 3.0% throughout the 2013/14 financial year.

Focusing on the ‘real’ home value growth across individual capital cities we can see some significant variation in value growth, with values actually falling over the year in some cities. 

The above chart details the annual change in capital city home values both in terms of raw change and inflation-adjusted changes.  Although according to the RP Data-Rismark Home Value Index, dwelling values have risen over the year across all cities, when you adjust for inflation values are lower in real terms in Adelaide, Hobart and Canberra.  Not to mention that growth in most other cities starts to look a lot more moderate.

Home values have been rising across the combined capital cities since June 2012 following falls over most of the previous two years.  Across the individual capital cities the timing and magnitude of the falls has varied greatly however, with values rising across the board, home values generally remain well below their previous peak (in real terms) across the capitals. 

In non-inflation adjusted terms home values are higher than their previous peak in: Sydney, Melbourne, Canberra and Perth.  Once you account for inflation, Sydney is the only city where values are currently higher than their previous peak.

The above table highlights the previous quarter in which home values peaked in inflation adjusted terms, the maximum falls in values and the difference in values from the previous peak to June 2014. As you can see, the previous peaks vary dramatically across each city. 

As already mentioned, Sydney is the only city where real values are now higher than their previous peak although it’s important to note that Sydney’s previous peak was all the way back in the first quarter of 2004.  Perth’s market peaked in September 2007 and values are still -9.9% lower, Hobart peaked in December 2007 and values are currently -18.8% lower and Brisbane peaked in March 2008 with values currently -14.5% lower than that level. Across all other capital cities values are below their peak however, the real peak in values occurred following the financial crisis.

It is important to consider the impact of inflation because it highlights the real purchasing power. 

In most cities, despite extremely low mortgage rates and value growth throughout the past two years, values still remain well below their peaks.  For home owners this means the real capital gain from residential property have been quite poor in recent years outside of Sydney and Melbourne.  For people who don’t yet own a home it means that you should be able to purchase relatively more for you money now than you could at the market peak.

The data also shows that interest rates are not necessarily the main driver of why values are currently rising.  If that were the case you would probably expect cities where values peaked much longer ago like Brisbane, Perth and Hobart to have recorded stronger levels of growth. 

Mortgage rates are but one consideration for the home buyer and obviously considerations such as employment, cost of living and housing demand driven through population growth are equal as important of a consideration as mortgage rates when considering whether to purchase or not.