A Sydney-Melbourne house price stand-off

While house prices in Melbourne have tanked since mid-April, dragging down national averages, Sydney prices have staged a recovery.

The daily RP Data-Rismark dwelling value index released today tells some interesting stories. The charts enclosed herein all work off the "daily” (as opposed to monthly) data and give us unprecedented insights into the "intra-month” movements in house prices that we’ve never seen before.

My first chart simply portrays the daily changes in the eight capital city "all dwellings” index. We can see that Australian home values declined by about one per cent in January followed by a full recovery over February, March and part of April, as I’d previously discussed here.


On the 15th of April – coincidentally at the same time ANZ announced an out-of-cycle, 15 basis point hike in home loan rates – overall dwelling values commenced a steady slide again to the point where we are actually down about two per cent over the year-to-date.

This begs the question as to whether there are any specific markets or seasonal factors driving the overall effect.

It is true that the months of May, June and July are seasonally very weak to the tune of about 0.3 per cent per month or nearly one per cent cumulatively. However, the May seasonal factor is only about 0.3 per cent, and would not change the directionally downward pulse in values that we have recorded since mid-April.

A big explanation for the national weakness since mid-April has been a strikingly sharp fall in Melbourne dwelling values, which you can see illustrated as the red line in the next chart below.


As at the end of May, Melbourne dwelling prices are off about five per cent this year. But most of this decline has materialised since the middle of April. Specifically, home values in Melbourne have declined by 4.2 per cent since the April 15.

In contrast, the Sydney housing market, which is denoted by the black line, has rebounded nearly one per cent since the second week of May. In seasonally-adjusted terms, this would be an even stronger outcome. Likewise, we can see some recent stabilisation in raw Brisbane dwelling values, which are illustrated by the orange line in the chart above.

Looking through these intra-month movements, which I would reiterate we have never been privy to before, I am relatively sanguine about the outlook. With an incredibly weak supply-side and supportive monetary policy, sentiment should improve as the year passes (barring global economic disasters). We’ve already seen this in the auction clearance rate data, which has tended to be better in 2012 than what we observed in 2011.

The double RBA rate cut in May resulted in an average 37 basis point reduction in lending rates. While there is little doubt that there have been some net valuation adjustments as bidders revise down their expectations of future capital gains, these are being offset by substantially improved rental returns and a much lower cost of debt.

In the owner-occupier market, where rents are not as explicit a part of the investment equation (they are "imputed”), this total return argument may take longer to grip.

But the bottom line is that today you can get 5.83 per cent variable rates and sub-six per cent 3-year fixed rates. Fixed rates may come down even further given the record slump in long-term Australian interest rates. Naturally any additional easing of monetary policy will only improve bidders’ purchasing power.

Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark. The author may have an economic interest in any of the items discussed in this article.

These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.

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