Flat-lining 2012 Australian housing prices no longer falling: Christopher Joye

The new daily house price index launched by RP Data and Rismark in concert with the ASX affords some timely insights into the latest market dynamics. Based on the daily index values through to the March 27 (inclusive), we can arrive at several insights. 

First, Australian home values stopped falling in 2012 and look to be treading water. During the first three months of the year, dwelling values across the eight biggest Australian cities are, on average, unchanged. Drilling down into more detail, home values declined during the seasonally tepid month of January, but have recovered these losses in February and March. 

You can see from my first chart below that once the end-2011 “high watermark” was reclaimed in the third week of March, Aussie home values have tended to track sideways. (Note that the resolution of the y-axis in the next two charts has been boosted to make it easier on your eye: while the changes look large, they are, in truth, small.)

The good news is that Australian house prices are not falling, which makes a change from the deflationary conditions that prevailed during much of 2011. In fact, we’ve had no substantive cumulative decline in Australian home values since late 2011. To prove this point, my next chart stretches this same data back over the last four months (note again the high-resolution y-axis, which optically exaggerates the index movements).

What is perhaps more interesting is that if we go back a little further in time to, say, the beginning of 2010, we find that the capital gains and losses over 2010 and 2011, respectively, have cancelled each other out. As my final chart illustrates, the cost of Australian housing has not increased at all over the last two and a bit years (values are up slightly, and certainly not down in actual, or “nominal” terms). This image, of course, looks nothing like the hysterical pictures painted by doomsayers such as Steve Keen, who has variously prophesised 20% to 40% falls in Aussie house prices. 

If we account for the rise in the cost of living (i.e., inflation) and the growth in disposable household incomes over this same period, we find that there has been an inflation- or income-adjusted “real” decline in housing costs. Put differently, Australian housing has become cheaper when we deflate its price by our earnings. This is why Rismark’s dwelling price-to-household income ratio has fallen to its lowest level since mid-2003. This is a positive development for those who aspire to one day be owner-occupiers.

Peering ahead, there are reasons to be optimistic. While the mix of the total returns real estate investors realise has probably changed (with more income and less capital growth), and the total returns themselves will be lower than those that manifest during the 1990s and early 2000s, it is unlikely that we will see another significant slump in prices unless the RBA changes its policy stance. 

Recent auction data has been encouraging, with clearance rates in the two most popular auction centres, Sydney and Melbourne, oscillating around the 60% threshold.  And contrary to some reporting, leading-indicator data on new home loan approvals over both February and March suggest that housing demand has bounced back, as we expected following the RBA’s (net) 40 basis-point reduction in mortgage rates. 

One of the more significant signals apropos the health of the market is the fact that the share of first-time buyers as a proportion of all loans approved printed at a historically high 20% in January. This was well above the 17.5% average recorded during 2011, and also better than the long-run average since the ABS began collecting this data. It tells me that would-be buyers are starting to act on the improvement in their purchasing power.

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.