Analysing home value changes in real terms allows greater insight into housing market performance: Cameron Kusher

Analysing home value changes in real terms allows greater insight into housing market performance: Cameron Kusher
Analysing home value changes in real terms allows greater insight into housing market performance: Cameron Kusher

Home values are typically looked at in unadjusted or nominal terms, however, adjusting for the effects of inflation can provide a useful insight into how the housing market has performed and why home value growth has picked up since the middle of 2012.

While often measured in unadjusted or nominal terms, it’s important to note that home value growth highlights the true change in values however, having an understanding of ‘real’ movement in home values.

This is done by adjusting value changes for the effects of inflation.

Analysing home value changes in real terms allows greater insight into how the housing market has performed relative to the level of inflation in the economy.

The RP Data-Rismark Home Value Index results showed that home values across the combined capital cities rose by 2.8% over the first quarter of 2013 while CPI was measured at just 0.4% which in real terms means that home values increased by a slightly lower 2.4% over the quarter.

As Mr Kusher points out, home value growth was significantly lower over the period of March 1996 to March 2013 when inflation is taken into consideration.

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He found that combined capital city home values increased by 241% over the period in nominal terms, but in real terms they have increased by a significantly lower 121%.

Although nominal values have risen over recent years, in real terms, capital city home values are currently at a similar level to what they were in September 2007.

Quarterly capital city house values were -3.3% lower than their September 2010 quarter peak over the first quarter of 2013.

Unit values across the combined capital cities also peaked over the September 2010 quarter and at the end of the first quarter of 2013 they were -0.9% lower.

If the results are adjusted for inflation, each peak was also recorded in September 2010 however, house values are currently -8.9% below their peak and unit values are -6.6% lower.

In nominal terms, all cities and product types have recorded an increase in values since their respective lows, highlighting the pick-up in home value growth since the second quarter of 2012.

When adjusted for inflation the results are quite dramaticallydifferent in some instances.

Sydney, Brisbane, Perth and Hobart had the most notable differences.

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When adjusted for inflation, the Sydney market peaked in the first quarter of 2004 and house values remain -8.7% lower than their peak and unit values are -3.4% lower.

 


In Brisbane, house values peaked in the first quarter of 2008 and are -16.7% below their peak, and unit values peaked in the final quarter of 2009 and are -12.8% lower.

House values in Perth peaked in the third quarter of 2007 and are currently -11.8% lower while unit values peaked in the final quarter of 2009 and are -10.5% lower.

Finally, Hobart house values are currently -17.0% lower than their fourth quarter of the 2007 peak while unit values are -13.8% lower than their second quarter of 2009 peak.

According to Mr Kusher, over recent years, rising costs across the economy have outstripped the increase in home values.

As a result, the relative affordability of home values has shown some subtle improvement over this time.

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This would also seem to indicate why there has been an increase in home values over recent months given that in inflation-adjusted terms values are at asimilar level to what they were at the end of the September 2007 quarter.

The fact that ‘real’ home values have remained below their peak for a much longer period of time in Sydney and Perth is a reflection of why these two housing markets have recorded some of the strongest rebounds in home values of all capital cities over recent times.

Looking forward, RP Data analysts have already seen that the rate of home value growth has slowed throughout April.

It’s important to keep in mind that value growth is typically strongest over the first quarter of the year.

Given this, we would expect that increases in home values will continue to track fairly closely to inflation, or perhaps slightly higher based on the low mortgage rates, over the coming year.

Cameron Kusher is senior research analyst at RP Data.

 

 

 

Cameron Kusher

Cameron Kusher

Cameron Kusher is senior research analyst at CoreLogic RP Data.

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