New vigour in house prices
Despite the silly predictions of some commentators – forecasts of up to a 50 per cent decline in house prices have made it into the media in the past year – Australia’s residential property market delivered a resilient performance during the first quarter of 2009, with the RP Data-Rismark National Dwelling Value Index rising a robust 1.6 per cent.*
Over the three months to end March 2009, Australian capital city house values increased by 1.5 per cent, whereas unit values rose by 2 per cent reflecting the relative affordability of the latter.
Of the mainland capitals, Darwin (+2.8 per cent), Sydney (+2.4 per cent), Melbourne (+2.4 per cent), Canberra (+1.4 per cent) and Brisbane (+1.3 per cent) led the charge during this period. The laggards were Adelaide (-0.3 per cent) and Perth (-0.7 per cent).
The stronger performance of Australia’s housing market follows on from modest 3 per cent falls in home values during 2008 (according to both the ABS and RP Data-Rismark Indices) primarily as a result of mortgage rates peaking at 9.6 per cent in August 2008. Inclusive of rents, Australian residential returns were actually positive in 2008.
In comparison, the ASX All Ordinaries Accumulation Index has fallen by -31 per cent over the 12 months to end March 2009 while the ASX Listed Property Trust Accumulation Index has declined by -58 per cent. The global equity hedge funds research index is also down -22 per cent. And the default Australian super fund, which still has a ridiculously high 55 per cent weight to Australian and offshore equities (even after the correction), is down by about 20 per cent over the last year with its three year return also in negative territory.
The stabilisation in house price has been driven by the 40 per cent plus fall in mortgage rates to 5.7 per cent, which is their lowest level since July 1968 (over 95 per cent of all new borrowers are on variable rate loans).
The RBA’s cuts to its cash rate have seen the ratio of total household interest payments to disposable income fall rapidly from 15 per cent to 10 per cent (does that sound like much?). Households are also voluntarily deleveraging through higher levels of savings with Australia’s savings rate now at its strongest level since the mid to late 1980s. This augurs well for the ability of future home buyers to service their debt.
These market outcomes are positive news for the government since they should further encourage the construction industry to ramp up new building (which has a 1.85x economic 'multiplier') in a much needed attempt to remedy the housing shortage that ANZ and Westpac estimate will hit over 200,000 homes by 2010.
The key risk to the housing market is now credit rationing. Yet with the major banks benefiting from rising net interest margins combined with super low 15-25 per cent risk-weightings on home loans (versus a 100 per cent risk-weighting for business lending), it is hard to see them pulling back hard in this area. As I explained here, doomsday claims about the impact of rising unemployment also don’t stack up.
While the boost to the first home owners grant has certainly helped support demand, the hyperbole around this subject ignores the fact that 70-75 per cent of all buyers in the market are not first timers.
The most expensive houses are in Sydney (median value $565,928) and the cheapest in Adelaide ($410,442). The most expensive units are in Perth (median value $439,042) and the cheapest in Brisbane ($330,390).
National capital city gross rental yields for houses are 4.6 per cent and for units 5.4 per cent.
Assuming that an investor has an 80 per cent loan with a discounted 5.3 per cent rate, gross rents cover all mortgage repayment costs (ie, positively gear) for units across Australia.
The RBA has been at pains to highlight the fact that Australia’s housing market has actually led the US and UK by three years with our boom ending in late 2003. Here, the RBA’s Dr Tony Richards recently commented: “The growth rate of house prices in the past five years has been well below the 8 per cent average annual nominal growth in household disposable incomes.”
While there has been some critical commentary around the level of mortgage debt in the community, we estimate that the average Australian home loan-to-property value ratio is just slightly north of 50 per cent. That is, the average home owner with a mortgage has around 50 per cent equity in their home (NB: according to the 2006 census, only around half of all home owners have any mortgage debt at all).
Although the growth in mortgage debt during the 1990s did significantly outpace GDP, this came about because of a radical reduction in its cost. Home loan rates averaged a remarkably high 13.2 per cent during the 1980s. Over the 10 years to December 2008, home loan rates averaged just 7.3 per cent. This was a result of the RBA’s move to an “inflation-targeting” regime in the early 1990s (and central bank independence), which has been accompanied by a structural shift downwards in long-term inflation expectations and interest rates. Another consequence has been a once-off shift upwards in Australia’s house price to income ratio, as the RBA has observed (p 49).
The RP Data-Rismark Index, which is reported by the RBA and was recently selected by the ASX as its preferred housing benchmark, benefits from Australia’s largest property database that captures information from 25 different government agencies that ultimately account for 100 per cent of all Australian home sales.
Yet Crikey’s Adam Schwab, who likes to opine on housing matters, has claimed that: “Despite the importance of dwelling assets to many Australians, there is no accurate and transparent body which provides historical price information about property to investors or home-owners. Unlike publicly traded companies…price data regarding residential property is generally provided by real estate bodies.”
Schwab is way wrong.
First, the ABS provides historical house price index data going back to the mid 1980s on a city-by-city basis (as do many other index suppliers).
Second, since state governments levy stamp duty on all residential transactions, Australia is in the fortunate position where government agencies – typically Valuers General offices – collect 100 per cent of all property sales data and make this available to index providers (who in turn purvey it to the public).
Accordingly, Australian house price indices normally reflect 100 per cent of all sales.
In contrast, most US and UK indices typically only collect a small share of the transactions in the market and therefore suffer from non-trivial biases.
In private communications, the RBA has commented to me that it believes that Australia has the best house price data in the world.
*Important note: On a quarterly basis (ie. comparing the first quarter of 2009 with the fourth quarter of 2008), which is the method used by the ABS, Australian residential property
