Inflation remains contained within the RBAs target range

The Australian Bureau of Statistics (ABS) released Consumer Price Index figures for the March 2014 quarter earlier today.  The data showed that over the first quarter of the year inflation was recorded at 0.6%, down from 0.8% over the final quarter of last year.  Over the past year, inflation has been recorded at 2.9%.  The Reserve Bank (RBA) has an annual inflation target of between 2% to 3% over the medium term and although the reading is at the higher end of that band it is still within the range.

Chart 1

Chart 2

Interestingly, non-tradable (or domestic inflation) was outside of the target range at 3.1% but has fallen from 4.2% a year ago. On the other hand, tradable (or imported inflation) was recorded at 2.6% up from -0.2% a year ago.

Chart 3

Turning the focus specifically to housing, the housing component of CPI has increased by 3.6% over the 12 months to March 2014, its lowest annual reading since June 2012.  Across the housing sub-categories, new dwelling purchases by owner occupiers rose by 2.4% over the year with relatively tame growth also recorded for: maintenance and repair of the dwelling (2.5%), rents (2.9%) and other housing (4.7%).  Water and sewerage recorded the greatest annual rise at 10.8% followed by: property rates and charges (7.9%), gas and other household fuels (6.9%), utilities (6.8%) and electricity (5.2%).

The 2.9% annual increase in rents was the lowest reading since June 2006.  Similarly, the 5.2% annual increase in electricity was the lowest annual rise since June 2007.  On the other hand, the 10.8% annual increase in water and sewerage was the greatest rise since the 12 months to June 2011.

Another important consideration is the impact of inflation on home values.  Calculating ‘real’ home values by adjusting the RP Data-Rismark Home value Index for inflation provides valuable insight.

Chart 4

As the above chart highlights, once you adjust for the impact of inflation the level of capital growth over the longer term is much lower.  In fact, when you adjust for inflation, combined capital city home values peaked in the September 2010 quarter and are still -1.8% lower than that level.

Chart 5

Over the 12 months to March 2014, combined capital city home values have increased by 10.6% however, when you adjust for inflation the rise has been a lower 7.5%.  Across each city the rate of capital growth over the year is somewhat lower when you adjust for inflation and markets such as Hobart and Canberra which have recorded low levels of value growth have actually recorded value falls.

Chart 6

Home values across the combined capital cities are currently 7.2% higher than their previous peak according to the RP Data-Rismark Home Value Index.  However, as mentioned above, when values are adjusted for inflation the story is quite different with values -1.8% lower.  Across every capital city except for Sydney home values are lower than their previous peak in inflation adjusted terms.

Chart 7

Looking at the compound annual rate of value growth over the past five, ten and 15 years in inflation adjusted terms you can see some interesting trends.  Sydney home values have increased at an annual rate of 3.6% over the past 5 years, but earlier soft market conditions have resulted in value growth of just 0.4% pa over the past decade. Brisbane home values have fallen at a rate of -2.3% pa over the past five years and over the same period Adelaide home values are -1.0% lower pa, Perth values have fallen by -0.2% pa and Hobart values have declined by -3.1% each year.  Over the past decade, Darwin has been the standout performer with values rising by 5.9% pa and the weakest market has been Hobart where values have fallen at a rate of -0.1% each year.

With mortgage rates at such low levels and the 10 years of no ‘real’ growth in Sydney home values it goes some way to explaining the rising demand and surging home values.  Melbourne is also seeing strong capital growth but when compared to Sydney has been a much stronger capital growth performer over the past decade.  Despite a weak five years in terms of capital growth we are yet to really see the housing market heat up in Brisbane and Adelaide.  In Perth the housing market was strong early in this growth phase however; capital growth is now fading despite the fact that values are still lower in real terms than they were 5 years ago.

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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