Housing market recovery remains precariously balanced

The July 2012 results of the RP Data-Rismark Home Value Index were released earlier this week and the results showed capital city home values rose by 0.6% over the month and by 0.2% over the three months to July.

The growth in capital city home values over the month followed a 1.0% increase in home values over June 2012.  It is important to note that the improvement in home values over July were nowhere near as broad based as the improvements in June with Sydney (1.2%) and Melbourne (1.4%) driving about 99% of the rise (even though Darwin values were up 6.5% over the month, due to the size of the city it contributes a bit less than one percent to the combined capital city aggregate weighting) responsible for the monthly improvement.

The methodology used to calculate the RP Data-Rismark Home Value Index was called into question by some media commentators following the release of our June 2012 results.  It is important to note that those results showed a 1.0% increase in home values over the month however, they indicated that home values were still down by -1.2% over the quarter and by -3.6% over the year.

An analysis of index results for June from two other major providers (Australian Property Monitors (APM) and the Australian Bureau of Statistics (ABS)) shows that the RP Data-Rismark figures are actually indicating a more conservative measure of the housing market than both of these providers, albeit our measure is a much more timely indicator of market conditions.

It’s worthwhile having a look at how the two indices (RP Data-Rismark and ABS) compare.  The graph below tracks the movement in capital city house values/prices on a rolling quarterly basis (ABS only produces an index for houses).  The two methodologies are quite different; RP Data-Rismark results are calculated using a hedonic regression method which aims to compare apples with apples by utilising attribute data of properties such as the number of bedrooms, number of bathrooms, land area etc.  Both APM and the ABS use a stratified median index which aims to overcome compositional bias in the market by grouping similar regions together to calculate price changes.  The ABS methodology only looks at established houses and excludes new houses whereas the RP Data-Rismark and APM methodologies include units and new sales.  Additionally, the RP Data-Rismark series produces an all dwellings index which combines houses and units to provide an overall view of value movements across each capital city.

As you can see from the above graph, the RP Data-Rismark Home Value Index results for houses and the ABS stratified median series tend to track one another fairly closely over time.  The RP Data-Rismark Index tends to pick the turning point in the market somewhat earlier than the ABS Index which can be attributed to the hedonic methodology as well as the more timely market measure.

According to the RP Data-Rismark Home Value Index, capital city house values fell by -1.4% over the three months to June 2012 while APM’s index rose 0.4% and ABS index rose by 0.5%.  Over the 12 months to June 2012, the RP Data-Rismark Home Value Index recorded an annual fall of -3.8% compared to falls of -1.6% and -2.1% respectively.

It is important to remember that the June results of the RP Data-Rismark Home Value Index were available a full month before the ABS figures (in fact we reported a month-on-month rise of 0.6% over July the same day as ABS were reporting the quarterly figures for June) and almost a month before the APM results.  Of course being the most timely and the first to report changes in housing market conditions always comes with a risk of criticism, however, our figures, although positive over the months of both June and July, have been nowhere near as strong as other measures in the market place.

The results for June and July 2012 have been quite strong with capital city home values increasing by a total of 1.6% over the two months.  It is our belief that the improvement in market conditions can mostly be attributed to to the fact that variable mortgage rates are 100 basis points lower than since the cash rate started falling in November last year.  Improved affordability is  beginning to have some positive flow through on the housing market.

From here it will be interesting to see whether or not the positive results, at least at a macro level, can be sustained.  There are still a range of barriers in place that are likely to stymie the speed of a market recovery.  Buyers are still light on the ground, with the number of home sales at lower levels than last year (we estimate national house and unit sales were 14% below the five year average and 4% lower than a year ago) along with other factors such as the low growth in housing credit, a high household savings ratio and greater levels of pessimism than optimism by consumers it is difficult to reconcile how this growth can continue.  Additionally there is the fact that effective supply levels remain high; despite a fairly consistent reduction in total listing numbers, the total number of homes available for sale remains significantly higher than what would be considered normal.

Other indicators are supporting the green shoots theory.  Retail sales were up more than expected in June, dwelling approvals have shown some life, the average number of days it takes to sell a home is reducing and vendors are now discounting their initial asking prices by less. The trends are pointing in the right direction, however the signs of a recovery are quite fresh and as we have seen on several occasions since the start of the GFC, conditions can change quite quickly.  Another positive month-on-month result in August will provide more confidence that a housing market recovery is underway.

Looking at the daily movements in the RP Data-Rismark Home Value index over the past seven days (to 03/08/2012) shows the combined capitals index is up by 0.5% over the week, mostly being driven by a rise in Sydney and to a lesser extend Brisbane and Melbourne.

Let me know what you think, can the early signs of the housing market be maintained?  If so why and if not, what factors will hold back the market?

About Cameron Kusher

Cameron Kusher is Head of Research at CoreLogic, specialising in primary and secondary data analysis, property market commentary and consultancy. Cameron has a thorough understanding of the fundamentals such as demographics, trends, economics and spacial analysis and is a regular keynote speaker for property-related groups, regulated industry bodies, corporations and the government sectors. Follow Cameron on Twitter @cmkusher

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