Inflation adjusted home values lower than previous peaks in all cities other than Sydney and Melbourne

The Consumer Price Index (CPI) data was released by the Australian Bureau of Statistics (ABS) for the March 2016 quarter earlier this week.  The headline measure of CPI was extremely weak over the quarter, falling by -0.2% to be just 1.3% higher over the past 12 months.  The -0.2% quarterly fall was the weakest result since December 2008 and the 1.3% annual increase was the weakest reading in a year.  The annual change in CPI is also well below the Reserve Bank’s (RBA) target range of between 2% and 3% annually over the cycle. The RBA likes to look at measures of underlying inflation which strip out the more volatile items.  The two measures of underlying inflation at the trimmed mean and the weighted median and over the past year they have increased by 1.7% and 1.4% respectively over the past year.

Chart 1

The housing component of CPI, which has the largest weighting, increased by 1.7% over the year which is the lowest reading since December 1998.  It shows that housing costs are increasing at a faster pace than headline CPI but at a very low rate on an historic basis.  Importantly, the housing component of CPI does not include all property transactions, only including owner occupier purchases of new dwellings.  As a result it does not take into consideration the inflation of costs associated with purchasing established properties by owner occupiers or purchase of both new and existing properties by investors.  Over recent years the established and investor markets have been quite active and resulted in some strong home value growth particularly in Sydney and Melbourne. The housing component of CPI also includes measures of change for rental prices, utilities and other housing costs such as maintenance and government charges including rates.

Chart 2

Combined capital city home values have increased by 7.2% in nominal terms over the 12 months to March 2016 while in real terms values have increased by 5.0%.  Across individual cities, real home values have fallen in Perth and Darwin and have increased by less than 3.5% in all capital cities other than Sydney and Melbourne.

Chart 3

Taking a longer term look over the past 5, 10 and 15 years shows that real home value changes has been mixed.  All capital cities outside of Sydney and Melbourne have recorded declines in real home values over the past 5 years.  Even pushing the analysis to 10 years shows values are lower in Hobart, while in Brisbane, Adelaide, Perth and Canberra real home value growth has been less than 1.5% per annum over the period.  While Sydney has seen the highest value growth over the past 5 years and amongst the highest over the decade, over the past 15 years it has actually seen the lowest real value growth of all capital cities due to the weak market conditions that were evident in Sydney between 2004 and 2009.  It is noticeable that across each capital city, real home value changes have been stepping down over time with the 15 year timeframe showing stronger growth than the 10 year timeframe which is in-turn higher than the 5 year rate of inflation adjusted growth.

Chart 4

Another way to look at real home value changes is to look at the change in values since their previous market peak.  The above chart shows that real values have breached their previous peaks of March 2004 in Sydney and September 2010 in Melbourne.   In all other capital cities real home values continue to languish below their previous peaks.  In markets like Brisbane (March 2008 peak), Perth (September 2007 peak) and Hobart (December 2007 peak) it has been an extremely long period of time since real home values have increased.  While this would is likely to be disappointing for home owners, for those looking to purchase it indicates that the cost of housing has been becoming more affordable, notwithstanding the fact that mortgage rates are close to record lows and household incomes are relatively flat.

Just because real home values outside of Sydney and Melbourne continue to become more affordable doesn’t necessarily mean that purchasers will jump into these markets.  Despite ongoing increases in home values across Sydney and Melbourne, these cities have continued to see housing demand rise.  Some of this is due to increasing demand from offshore buyers but it largely has to do with the much better economic performance of these two cities compared to other regions around the country.  More affordable housing alone is not enough to drive people to buy outside of Sydney and Melbourne; solid economies, good job prospects, a desirable lifestyle and housing offering are all major considerations as to whether or not someone will purchase a property rather than just price alone.  Although we are anticipating a slowdown in value growth in Sydney and Melbourne it won’t necessarily result in increasing demand elsewhere.  However, with some cities showing improving economic conditions and higher yield profiles, those with significant equity in their Sydney and Melbourne properties may look to start investing in other cities.  Furthermore, those prospective buyers being priced out of Sydney and Melbourne housing may be attracted away from these cities to the regions with more affordable housing however, securing employment will for many, be a significant consideration in any move.

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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