Signs of house price life

RP Data and Rismark have reported their March quarter house price index results today, and the findings were encouraging. They certainly dispel any predictions of precipitous price falls.

Across Australia's eight capital cities, dwelling values actually increased by a modest 0.2 per cent in the month of March with Sydney (0.4 per cent), Brisbane (0.8 per cent), Perth (1.4 per cent), Hobart (1.4 per cent), and Darwin (1.1 per cent) also registering decent capital gains. In contrast, home values fell in Melbourne (0.2 per cent lower), Adelaide (falling 1.4 per cent), and Canberra (slipping 0.3 per cent).

Over the first three months of the year, Australian dwelling values are unchanged (0 per cent) across the eight capital cities. In fact, RP Data-Rismark's hedonic index data suggest that Australian dwelling values have not budged at all since the end of October 2011, which makes sense given the RBA's shift to a much more accommodative policy stance.

As regular readers will recall, I previously forecast that we would see a cessation to the house price declines that were characteristic of 2011, and an improvement in activity during the first quarter of 2012. This appears to have panned out.

While housing conditions naturally vary across the individual cities, RP Data-Rismark report a consistent pattern of stabilisation across the three major conurbations (see chart below). Since the end of November 2011, Sydney and Melbourne dwelling values are basically unchanged (-0.1 per cent and 0.1 per cent, respectively) while Brisbane values have actually edged up a touch (rising 0.5 per cent).

The standout performer in the year-to-date has been Sydney real estate, with dwelling values realising robust capital growth of 1.1 per cent over the first quarter. Needless to say, it is rare that Sydneysiders read much that is positive about house prices given the proclivities of local journos keen to grab headlines by peddling doom-and-gloom.

The subsiding of material price falls since the RBA's first rate cut in November is also clear across the smaller cities. With the exception of Adelaide (down 4.1 per cent), home values in Perth ( 2.2 per cent), Darwin ( 5.2 per cent), Canberra (-0.6 per cent) and Hobart ( 0.5 per cent) are all around their November 2011 levels, or higher.

The stability in conditions is also evident in other indicators. Auction clearance rates have gradually improved with the national rate now regularly printing above 50 per cent (see chart below). Housing credit, which is a key demand-side proxy, is also expanding – not contracting – at a pace that would be expected given the growth in disposable household earnings.

In the final chart below I have illustrated the RBA's analysis of Australia's housing debt-to-disposable income ratio. For the best part of the last six years, the growth in Australian housing credit has tracked household incomes almost exactly 1:1. This is why the line in the chart has moved sideways. It is also what we've predicted for years now: that is, a deceleration in the double-digit household credit growth rates to a new normal of single digit rates in line with incomes.

Reflecting on today's results, Rismark's Ben Skilbeck added, "While the housing market remains soft, the fact that values did not change over the first quarter of 2012 suggests that it is consolidating its position following a weak 2011. In addition, the ratio of national house prices to incomes is currently below its decade average, which implies that affordability is better than it has been. Finally, we note that the share of first time buyers as a proportion of all loans approved is back to levels not seen for two years. First time buyers are typically a good weathercock for changes in affordability.”

Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.