Rents robust, but house prices slide slightly

The Aussie housing market remains a tale of two superficially conflicting dynamics. On the one hand, prices are continuing to slip, albeit at a relatively benign rate. On the other hand, very low rental vacancy rates are fuelling impressive growth in rental returns. Total returns are, therefore, likely to be in positive territory, which compares well with other asset classes, such as shares.

This morning we get the latest RP Data-Rismark house price index results, which are the benchmark that economists and the RBA watch most closely.

Drawing on more than 110,000 home sales nationally in 2011, the RP Data-Rismark Home Value Index for Australia’s capital cities declined by 0.3% (seasonally adjusted) in the month of May (or by -0.5% in raw terms). The flash April estimate was revised down slightly from -0.3% to -0.4%.

Capital city home values have now fallen for the last five consecutive months, with by far the worst seasonally adjusted result coming in the month of January (-1.2%), which accounts for 45% of the 2011 decline.

The softening in Australian home values is delivering a valuation dividend, with Australia’s dwelling price-to-disposable income ratio falling to 4.2 times (see chart), which is its lowest level since June 2003, according to Rismark’s analysis.

 

RP Data-Rismark’s Index shows that gross Australian yields have now touched the 5% threshold. The best rental yields can be found in Darwin (5.7%), Canberra (5.4%), Brisbane (5.2%) and Sydney (5.2%). The worst yields are in Melbourne (4.2%), Adelaide (4.6%) and Perth (4.9%).

 

Over the three months to May 2011 dwelling values in Australia’s capital cities have retraced by 1.2% on a seasonally adjusted basis. In raw terms, dwelling values have fallen by 1.3%. The quarterly rate of decline has, however, moderated since the end of March when home values were off by 2.0%, care of a flood-affected January.

Over the 12 months to end May, Australian capital city dwelling values are now down 2.3% (seasonally adjusted). If we just look at the first five months of 2011, Australian home values have stepped back by 2.7% (seasonally adjusted). However, in raw terms, actual dwelling prices are only off 1.2% in 2011. The difference between these latter two estimates is a mostly a function of the fact that the first few months of the year are normally very strong, but this year we got hit by the floods. Accordingly, the seasonally adjusted numbers look especially bad.

Across the capital cities performance has been varied, and have run against the grain of what one might expect if focusing purely on Australia’s nascent capital expenditure boom. Sydney is the only market to have recorded a modest capital gain over the last year (up 1.0%). Homes in Canberra have also held ground (-0.1% over the year). All other capitals have slipped into the red, with some down by significant margins.

 

The two weakest conurbations have been Perth, where dwelling values are down 7.5% year-on-year, and Brisbane, where capital growth is -5.9% over the year.

 After extraordinary capital gains in recent years, Darwin (-3.2%) and Melbourne (-2.9%) have also both experienced small corrections. Interestingly, in the last three months the laggards have again been Perth (-4.2%), Melbourne (-1.8%), and Brisbane (-1.4%).

 


 

RP Data-Rismark’s Rest of State Index captures the 40% of all homes not located in the capital cities. The Rest of State areas have had smaller peak-to-trough swings in value since 2007. Over the three months to end May, Rest of State house values were down 0.9%. Year-on-year, the Rest of State markets capital growth was -1.4%.

The national median dwelling price in capital cities is $470,000, based on sales over the three months to May. Sydney is the most expensive market, with a median dwelling price of $522,000, followed by Melbourne ($500,000). The cheapest cities remain Hobart ($315,000) and Adelaide ($382,500). In the Rest of State markets, the national median dwelling price is a far lower $325,000. Across all Australian regions, the median dwelling price is currently a very reasonable $420,000.

 

The trend of premium markets taking the brunt of the correction has continued, with the top 20% of capital city suburbs ranked by price recording a fall of 3.9% over the 12 months to end May compared with a fall of 0.9% across the cheapest 20% of suburbs and a fall of 2.3% within the broad “middle” 60% of the market.

Demand for luxury homes has likely been sapped by a combination of Australia’s abysmal share market performance and a surging currency. The former has dampened the ability of financial services professionals to bid for high-priced homes, notwithstanding Jonathan Chancellor’s revelation yesterday that an ANZ banker bought an $8.4 million holiday home.

The Aussie dollar’s ascendancy has made local housing much more expensive for expats located in Europe, North America and Asian countries (with US dollar currency pegs) to buy.

Financial markets are currently pricing in a decent chance of an interest rate cut over the next six to nine months. If the RBA does indeed reduce rates, this would provide substantial support to the market. However, our central case remains that rates are heading up, not down, and thus we are not looking for any capital gains in 2011 with the risk to the downside if rates do rise. That said, total returns will be boosted by very solid growth in rents.

Note: Some of the information above derives from today’s RP Data-Rismark media release, which is available on request.

Christopher Joye is a leading financial economist and works with Rismark International. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice. You can follow Christopher on twitter at @cjoye or read his blog.

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