First taste of a housing recovery

As I have flagged here before, the ‘flash' or preliminary estimates around December and January can be difficult to interpret due to two factors: firstly, the volume of sales is seasonally much lower than normal, which makes measurement immediately following the month in question trickier; and secondly, some cities' valuer generals' offices can be a bit tardy in transferring transaction information over the holiday season, which gives rise to more volatile numbers that are subject to material revision.

While the flash estimate of the seasonally-adjusted December dwelling value index is -0.2 per cent, this is being heavily influenced by two outsized (negative) results for Melbourne and Perth. It just so happens that these cities' valuer generals are probably the worst offenders when it comes to the timely transmission of data. What makes the Melbourne and Perth numbers especially suspect is that they come on the back of solid seasonally-adjusted gains in November, which have been reconfirmed with RP Data-Rismark's latest index analysis.

I expect to see future index revisions cast a more positive light on the price action in Melbourne and Perth over December, which could kick the national result back up into positive territory (following on from the encouraging November gain).

As an aside, a flash index estimate a few days ago did precisely that with more benign numbers for Melbourne, Brisbane and Perth generating a seasonally-adjusted national gain. At this stage, however, the standard errors are too large to arrive at any definitive conclusions as to where the hard-to-handle December month data will actually end up.

Notwithstanding these wrinkles, the data does tell us some interesting things.

The November result for capital city dwelling values has been revised up from 0.1 per cent (s.a.) to 0.4 per cent (s.a.) based on additional sales information. This marks the largest month-on-month improvement in Australian home values since May 2010.

RP Data-Rismark's ‘rest-of-state' index, which covers all regional markets, has also revised up in November from 0.3 per cent to 0.5 per cent (s.a.). This is the most significant increase in regional house values since November 2010.

Australia's biggest city, Sydney, currently has the largest volume of reported sales in December. In seasonally-adjusted terms, Sydney dwelling values increased by 0.4 per cent in the month of December. In the December quarter, Sydney dwelling values were up a total of 0.7 per cent (s.a.).

So it would seem that Sydneysiders are leading the recovery.

There is also some good news for property investors. Weekly rents across the capital cities were up 1.0 per cent over the December quarter and are now 6.3 per cent higher than at the same time last year. These stronger rental rates combined with the recent correction in property values have improved investors' overall yields. The average capital city apartment is now offering a gross rental return of 5.1 per cent after a consistent trend upwards since mid-2010.

Over the course of last year, Australian capital city dwelling values experienced a total capital loss of about three and a half per cent. Regional house values fared a little better, correcting by around three per cent. This compares to the 14-15 per cent decline in Australian shares. Adding in rents, the gross total return realised by Australian property investors was slightly less than one per cent (up) over 2011.

Finally, we know that housing affordability in Australia has experienced a striking improvement. While disposable household incomes grew by nearly 7 per cent over the year to September 2011, Australian dwelling values have declined by a total of 3.3 per cent since May 2010. As a result of the Reserve Bank's generous rate cuts in November and December, borrowers can today get fixed- and variable-rate home loans as low as 5.9 per cent and 6.14 per cent, respectively. The bottom line is that Australian home loan rates are stimulatory.

Rismark's research shows that disposable incomes per household have risen about 15 per cent further than (hedonically-measured) capital city dwelling values since the end of 2003. This helps account for the decline in Rismark's national dwelling price-to-income ratio, which is as low as it's been since 2003.

On the outlook for the year ahead, Rismark's Ben Skilbeck commented: "We expect that the RBA's interest rate cuts in the final two months of 2011 will lend further momentum to housing activity as transaction volumes pick up over February and March after the seasonally slow months of December and January. If financial market pricing for substantial additional RBA rate cuts proves accurate, we could see a stronger-than-expected bounce-back in housing conditions.”

RP Data's Tim Lawless added: "While global uncertainty and a stagnant local labour market could weigh on the consumer's mindset, we are nevertheless observing improvements in monthly housing finance commitments. RP Data's leading indicators on average selling times and vendor discounts are also starting to look healthier. There is no doubt that additional interest rate relief in 2012 would afford a very welcome cushion to the housing market.”

This article first appeared Property Observer on January 31. Republished with permission.