House prices continue rising in March: Christopher Joye

Today I am going to dive into the latest affordability and daily house price data.

According to Rismark International analysis, Australia’s “all regions” dwelling price-to-disposable household income ratio stabilised at four times in the final quarter of 2011. This represents a 12% fall from the ratio’s post-GFC peak of 4.6 times in June 2010.

The December dwelling price-to-income ratio of four times is the lowest the benchmark has been since June 2003, and is yet another indication of the substantial improvement in housing affordability that materialised over 2011 (see chart).

Beyond the favourable conjunction of rising incomes and declining house prices, affordability has been boosted by the RBA’s bold decision to cut its cash rate twice in November and December 2011.

While banks subsequently clawed back circa 10 basis points of this interest rate relief in February, housing conditions nevertheless appear to be stabilising. This has been evidenced in better home loan approval volumes, with Australia’s largest mortgage broker, AFG, reporting its biggest February month on record.

There have also been some tentative signs of solidity in the new daily house price index data published by RP Data-Rismark in concert with the ASX. Following a fall in prices during the seasonally soft month of January, home values have staged a rebound in February and March (see chart).

In 2011 the median Australian dwelling price fell by 4.8% from $420,000 to $400,000, based on Rismark’s analysis of Australia’s largest database of home sales. In contrast, disposable incomes on a per household basis advanced by 5.3%.

In order to calculate total disposable income on a per household basis (i.e., accounting for multiple income earners per household as opposed to simply average earnings per individual), Rismark takes the ABS National Accounts’ aggregated estimate of disposable household income and divides by the number of households each quarter.

To compare like with like, Rismark produces a “trimmed mean”, or “average” dwelling price in addition to its standard median dwelling price (the household income estimates are quarterly averages rather than medians).

There are some non-cash line items in the National Accounts computations of disposable household incomes that may not be relevant to purchasing power. One of the principal non-cash variables is “imputed owner-occupied rents”. Stripping these out as best it can, Rismark’s research implies that the dwelling price-to-income ratio has fallen from a peak of 5.2 times to 4.5 times today (see final chart below).

Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.