Yesterday the Australian Bureau of Statistics (ABS) released its quarterly Consumer Price Index (CPI) data for the December 2015 quarter. The data showed that inflationary pressures remain very low with headline inflation rising 1.7% over the year and core inflation (underlying inflation) increasing by 2.0% over the past year, which is right at the lower end of the Reserve Bank’s (RBA) target range for inflation of 2% to 3%. Of course across most developed nations there are very few inflationary pressures currently despite record low interest rates.
As a follower of the residential housing market I always like to have a look at the impact of inflation on Australian capital city home values by adjusting the CoreLogic RP Data Home Value Index for the impact of inflation. As you’d expect with inflation so low it is having minimal impact however, over the longer term it has had an impact on the real increase in capital city home values.
With nominal home values increasing by 7.8% in 2015 across the combined capitals, when adjusted for inflation growth is somewhat lower at 6.0% over the year. In terms of the individual capital city performances the four cities which recorded nominal value increases have still seen values rise in real terms albeit the rate of growth is lower. Alternatively, the cities which recorded value falls have seen larger value falls in real terms.
The trends across the capital city housing markets have shifted substantially since the financial crisis after home values declined during 2008. Since the financial crisis home value growth has surged in Sydney and Melbourne, while elsewhere the rate of value growth has generally been comparatively modest. The chart above shows nominal and real home value changes over the seven years from December 2008 to December 2015. While Hobart was the only capital city to record a nominal value fall over that time, in real terms values are lower over the past seven years in Brisbane, Adelaide and Perth while they have barely moved in Darwin and Canberra.
To further highlight the previous point, the above chart shows the change in real home values across each capital city since their previous cyclical peak. Sydney and Melbourne are the only two capital cities in which home values are higher than their previous peak. After Sydney home values hit a previous peak in March 2004 they are currently 21.1%, in Melbourne home values peaked in September 2010 and are currently 6.5% higher. Elsewhere home values are -11.0% lower than the March 2008 peak in Brisbane, -9.8% lower than their June 2010 peak in Adelaide, -13.5% lower than their September 2007 peak in Perth, -21.8% lower than their December 2007 peak in Hobart, -19.3% lower than their September 2010 peak in Darwin, and -8.5% lower than their June 2010 peak in Canberra. Despite historic low mortgage rates over recent years, home value growth in real terms over recent years has been soft.
Of course most people don’t think about the ‘real’ growth in home values, we tend to operate in a nominal world. We see the value of our assets rising and we are generally quite happy with that however, it is important to at times consider the impact of inflation and if our asset values are rising at a faster pace than prices more broadly. The data shows that even with historic low mortgage rates, real home value growth has failed to show any substantial or sustainable pick-up outside of Sydney and Melbourne. This suggests that other economic factors are impacting on demand for housing. Furthermore, the drivers of housing demand in Sydney and Melbourne are somewhat different to the rest of the country. Some suggestions as to what these factors are would be the rise in demand from overseas purchasers, greater demand due to better jobs growth and employment prospects as well as the fact that these cities already have more than 4 million people compared to our next largest city at around 2 million people. The much higher population results in substantially more housing demand than elsewhere in the country.