Devoid of property gloom in June

Australian house prices are back on the up as the Reserve Bank's rate cuts take effect and strong fundamentals prevail. Although you might not know it if you read the broadsheets.

Property Observer

Guess what? Contrary to the silly claims of some, Australian house prices are not falling through the floor. In fact, Aussie dwelling prices surged back by a surprisingly strong 1 per cent in the month of June assisted by a tailwind in the form of the RBA’s generous rate cuts over the preceding 60 days. And these gains (not losses) were experienced by around 90 per cent of the nation’s capital city owners.

Over the entire month of June, RP Data-Rismark’s "daily” hedonic index, which RBA remarks imply is its preferred benchmark, documented healthy capital growth in Sydney, Melbourne, Brisbane and the Gold Coast (1 per cent), Perth and Canberra (2 per cent), and Hobart (2.7 per cent). Only Adelaide and Darwin (down 1.1 per and 0.7 per cent respectively) suffered losses.

The first chart below illustrates the change in the value of homes situated in the major east coast cities while the second includes the remaining conurbations. As I correctly anticipated in this column two weeks ago, it would appear that the RBA’s 75 basis points worth of rate cuts over May and June, which have translated into about 55 basis points worth of variable lending rate reductions, has had a rapid impact on housing conditions.

Indeed, the commonality in the recovery in home values across most cities since the end of May is arresting.

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Whereas at the end of May the year-to-date change in Australian dwelling values was estimated to be -2.2 per cent, this has now fallen to just -1.2 per cent as at 30 June. It is entirely conceivable that the Australian housing market could end the year in the black.

Rismark’s quantitative forecasting models, which are used by banks, insurers, and various government agencies, imply that national dwelling values will be flat over the next 12 months, which would be a materially better outcome than the 3.8 per cent nominal loss experienced in 2011 (according to RP Data-Rismark’s eight capital city index).

One of the most significant insights from the June data release was the exceedingly sharp improvement in Melbourne conditions. Melbourne home values have jumped 1.7 per cent since June 11 alone (refer to the back line in the first chart above). Regular readers will recall that Melbourne dwelling values appreciated by a remarkable 35 per cent between January 2009 and December 2010. Yet the indigestion caused by this boom – and Melbourne’s unusually low rental yields – arguably contributed to a circa 8 per cent correction in the period since.

The June data offer the first preliminary signs that the RBA’s preparedness to slash rates may have helped break-the-back of Melbourne’s housing malaise. And the sensational auction results garnered by Channel Nine’s The Block show last night do nothing to dispel this possibility.

RP Data-Rismark’s June findings are also impressive because their daily index numbers represent actual changes in dwelling values; that is to say, there has been no "seasonal-adjustment”. We know that the winter months of May through August, and June and July especially, are typically very weak. So in "seasonally-adjusted” terms, the capital gains recorded in June would have been larger again.

Dispassionate analysis reveals that Australian housing market fundamentals look increasingly benign. The national dwelling price-to-income ratio is at its lowest level since March 2003. (In fact, applying Rismark’s hedonic adjustments, disposable household incomes have grown more quickly than house prices for the past nine years.) As the RBA’s Dr Guy Debelle pointed out last week, mortgage arrears remain low, and there is no evidence of overbuilding. Indeed, most credible experts, such as the government’s independent National Housing Supply Council, have concluded that there is a structural housing shortage. The labour market is purportedly close to being fully-employed while wages have been expanding at a healthy clip. Finally, all-important mortgage rates are way below their long-term averages. Banks are offering discounted variable rates and three-year fixed rates today as low as 5.62 per cent and 5.75 per cent per annum, respectively.

It will be fascinating to see how the Sydney and Melbourne broadsheets cover the June house price results given their predilection for peddling gloom in favour of more sober analysis. This persistent bias in popular reporting has led the RBA governor, Glenn Stevens, and other senior media commentators, such as Ross Gittins, to argue that some in the media are misleading the community as to the true state of our economy. This may help explain why many confidence surveys depart so dramatically from the real economic data.

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.

This article first appeared Property Observer on July 2. Republished with permission.