A Portrait of Australian Home Prices

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1 A Portrait of Australian Home Prices October 2014 Key Points: Recent pronouncements from the Reserve Bank of Australia (RBA) and some media commentators have indicated that a continuation of dwelling price growth at its current pace heightens the risk of a significant housing price correction. This note reviews latest developments in prices across all of Australia s markets, considers price to earnings developments, and examines the type of buyer active in the market; In real terms, dwelling price growth has been at a single-digit rate in every capital city over the past year, with the exception of Sydney. Outside of Sydney and Melbourne, real dwelling price growth was just 2.2 per cent in the year to June 2014; Dwelling prices in Sydney have been the fastest growing over the past year, followed by Melbourne. This follows a decade during which Sydney saw the second slowest price growth of the eight capital cities. The pace of price growth in Sydney and Melbourne considerably exceeds income growth in both cities. Outside of these two markets, price has been less than 5 per cent over the past year; The breadth of the current dwelling price upturn has been narrower than during previous periods. During September 2014, eleven of the nation s sixteen market segments saw dwelling prices increase. Four of these markets saw growth of less than 1.5 per cent in quarterly terms; Housing Industry Association Ltd 79 Constitution Ave Campbell ACT 2612 p f hia.com.au It is important to keep any risk assessment in perspective. For example, in Sydney the dwelling price to household earnings ratio is about the same as a decade ago, but has increased over the past two years. In Melbourne and the other six capital cities, the ratio is lower than it was four years ago.

2 Jul-99 Dec-99 May-00 Oct-00 Mar-01 Aug-01 Jan-02 Jun-02 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 HIA Economics Research Note October 2014 A Portrait of Australian Home Prices Introduction The growth rate of nominal dwelling prices in Australia has been the subject of much discussion over the past year. In the twelve months to September 2014, Sydney and Melbourne dwellings experienced the fastest price growth, with rates of 14.3 per cent and 8.1 per cent, respectively. The overall profile of price growth in the remaining six capital cities was relatively modest. A more useful comparison of dwelling price pressures is obtained by looking at the rate of real price growth, which measures price growth over and above general price inflation in the relevant city up to June 2014 (the latest period for which inflation data are available). The table below provides an overview of developments in real home price growth across the eight capital cities. With the exception of Hobart, Sydney was the slowest growing market in real price terms over the past decade at just 0.5 per cent annually. Real dwelling prices in the other six capital cities saw growth of 2.1 per cent over the same period, with 3.1 per cent growth in Melbourne. Annualised Real Dwelling Price Growth in Capital Cities to June 2014 Sydney Melbourne Other Capitals (excl. Sydney, Mel) How widespread are dwelling price pressures? Brisbane Adelaide Perth Hobart Darwin Canberra 6 MONTH 9.4% 5.5% 2.2% 4.2% 2.8% -0.4% 12.9% 5.0% 2.2% 1 YEAR 13.1% 6.9% 2.3% 3.2% 0.5% 2.8% 0.0% 3.2% 0.0% 3 YEAR 3.4% -0.7% -0.7% -1.4% -1.9% 0.6% -3.6% 0.9% -0.4% 5 YEAR 3.3% 2.5% -1.2% -2.5% -1.0% -0.5% -2.9% 0.9% 0.5% 10 YEAR 0.5% 3.1% 2.1% 0.6% 1.3% 4.3% -0.2% 5.3% 0.7% Source: RP Data Hedonic Price Indices; ABS In addition to the magnitude of price change, it is also useful to establish how widespread home price growth is across each of Australia s residential property markets. We have divided Australia s urban dwelling market into sixteen components, comprising the house and unit sectors in each of the eight capital cities. The geographic breadth of dwelling price developments can then be gauged. The chart below shows how many of these sixteen markets have recorded growth in nominal dwelling prices each month compared with three months earlier between 1999 and As inflation data are published by the ABS on a quarterly rather than monthly basis, it is not possible to replicate this chart in real dwelling price terms on a monthly basis. Number of Urban Dwelling Markets (of 16) Experiencing Quarterly Price Growth, 1999 to Source: RP Data Page 2

3 HIA Economics Research Note October 2014 A Portrait of Australian Home Prices Compared with previous periods of home price growth, the current upturn is quite modest in its breadth. During 2002, six months were recorded during which price growth occurred in all sixteen markets. During 2007, ten consecutive months saw price growth in every one of the sixteen markets. As recently as December 2012, only three of the sixteen markets saw dwelling prices rise compared with three months earlier. Since then, price growth has picked up and broadened, particularly during The first four months of 2014 saw quite a broad base to the dwelling price upturn, with fifteen of the sixteen markets seeing growth in both January and April. The breadth of dwelling price pressure has narrowed over the past six months. In June, just six of the sixteen markets experienced growth. The latest data for September 2014 show that eleven of the sixteen dwelling markets recorded price rises compared with three months earlier. Sydney and Melbourne accounted for four of these eleven markets. In the case of an additonal four markets, growth was 1.5 per cent or less compared with three months earlier. Other markets experiencing growth faster than 1.5 per cent during the quarter, but growth that was still relatively modest, included Adelaide, and the Darwin detached house market. Dwelling prices relative to earnings One of the key metrics of sustainability in home price growth is the ratio of prices to household income. Deviations of this ratio from its long-run average can, arguably, provide evidence of over- or undervaluation in the particular market. For the 1995 to 2014 period, the ratio of home prices to household earnings is shown in the chart below for Sydney, Melbourne and a weighted average for the other six capital cities, with the number of dwelling transactions used to weight the series for each of the six cities. Household earnings were estimated based on the ABS Average Weekly Earnings (AWE) series for each state, and through estimates of the number of earners per household. Based on ABS demographic data, it was assumed that there were 1.50 earners per household in 1995, with this figure rising to 1.65 by 2014 in a straight-line manner. Home prices are based on the RP Data median dwelling price series for each city. During May 2014, Sydney s price to earnings ratio was the highest of the capitals at The Melbourne equivalent was 5.59, with the other six capital cities ratio at The overall Price to Income ratio for Australia was 4.69 in May It is important to distinguish between the household earnings data used in our analysis and the household income-based ratios employed in some other analyses of Australian dwelling prices over the past year, some of which estimated the ratio at 8 or higher for the Sydney and Melbourne markets, and at 5.8 for Australia overall. Our ratio calculation takes account only of earned income derived from economic activity, such as wages and self-employment. In contrast, household income-based ratios include income components such as retiree pensions and social security payments, as well as economic earnings. The fact that almost all homebuyers are economically active means that it is earned income which is the key determinant of buyers ability to pay. This is the rationale for our choice of assessing dwelling prices relative to household earnings rather than total household income. Other research in this area has found that the dwelling price-to-income ratio in Australian cities is high compared with other countries around the world. It is important to bear in mind that differences in areas including income tax, mortgage interest deductibility polices and stamp duty rates can make cross-country comparison of price-earnings ratios unreliable. The price to earnings ratio in Sydney reached a decade-high during May A further significant increase in the ratio would be of some concern. Melbourne s price to income ratio has declined over the past few years, from a peak of 5.86 in November The other capital cities have seen largely stable price to earnings multiples over the past few years, and are lower than the 5.28 recorded in May The latest ABS data on Average Weekly Earnings runs to May 2014, meaning that price to income ratios can only be calculated up to that date. Average Weekly Earnings data is published twice per year, with the next update due for November Page 3

4 Jul-1994 Jan-1995 Jul-1995 Jan-1996 Jul-1996 Jan-1997 Jul-1997 Jan-1998 Jul-1998 Jan-1999 Jul-1999 Jan-2000 Jul-2000 Jan-2001 Jul-2001 Jan-2002 Jul-2002 Jan-2003 Jul-2003 Jan-2004 Jul-2004 Jan-2005 Jul-2005 Jan-2006 Jul-2006 Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009 Jul-2009 Jan-2010 Jul-2010 Jan-2011 Jul-2011 Jan-2012 Jul-2012 Jan-2013 Jul-2013 Jan-2014 Jul-2014 May-1995 Nov-1995 May-1996 Nov-1996 May-1997 Nov-1997 May-1998 Nov-1998 May-1999 Nov-1999 May-2000 Nov-2000 May-2001 Nov-2001 May-2002 Nov-2002 May-2003 Nov-2003 May-2004 Nov-2004 May-2005 Nov-2005 May-2006 Nov-2006 May-2007 Nov-2007 May-2008 Nov-2008 May-2009 Nov-2009 May-2010 Nov-2010 May-2011 Nov-2011 May-2012 Nov-2012 May-2013 Nov-2013 May-2014 HIA Economics Research Note October 2014 A Portrait of Australian Home Prices Dwelling Price to Earnings Ratios in Australia, 1995 to Sydney Melbourne Other Capitals (excl. Sydney, Melbourne) Source: RP Data, ABS [assumes number of earners per household increased from 1.50 in 1994 to 1.65 in 2014 at constant rate] Who are today s homebuyers? The Reserve Bank of Australia s latest Financial Stability Review (September 2014) described the composition of housing and mortgage markets as becoming unbalanced, with the share of home purchases accounted for by investors far greater than the proportion of the dwelling stock made up of rental properties. The chart below provides a breakdown of the value of home loans paid during the past two decades. In the year to July 2014, owner occupiers accounted for 52.9 per cent of the value of home loans paid compared with a 47.1 per cent investor share. Since the beginning of 2013, the value of loans paid to both trade-up owner occupiers and to investors has increased considerably. It is important to stress that this breakdown does not account for home purchases made without recourse to lenders. Along with investors purchasing with cash, some home purchases conducted by owner occupiers in the process of trading down are also missed out on by the home loan radar. Consequently, it can be argued that a reliance on home loan data overestimates the proportion of home purchases conducted by investors. Value of Lending for Dwelling Purchase by Buyer Category (12m Moving Total), 1994 to Source: ABS FHBs Trade-Upper Investor Page 4

5 HIA Economics Research Note October 2014 A Portrait of Australian Home Prices The growth of investor participation in the market reflects the strong growth in rental prices over much of the past six years, as well as the acceleration of dwelling price growth over the last year or so in some markets. Both of these factors ultimately reflect insufficient volumes of dwelling stock in the rental and home purchase market. Consequently, supply conditions are a critical determinant of price developments. Current policy configurations weaken the ability of the residential construction industry to provide increased supply on a sustainable basis when demand conditions so merit. These current policy configurations include restrictions around land supply, planning delays, a disproportionately high taxation burden, and excessive red tape. Conclusion In summing up the state of Australian home prices, it is important to remember that significant price growth is largely confined to the Sydney and Melbourne markets. In the case of Sydney, this follows a decade during which home prices were flat relative to inflation. The geographic reach of the current price upturn is markedly narrower than during and Apart from Sydney, price to income ratios are within normal ranges in the capital cities, although Melbourne is creeping towards the high end by this measure. This profile for Australia s housing prices is not always reflected in commentary and debate on the subject. It would not be a desirable outcome for the rate of growth in Sydney and Melbourne median home prices to continue at its current pace. However, much of the public discourse around the current housing price cycle tends to over-generalise and imply that strong growth is considerably more widespread than is actually the case. There is no doubting that price growth in Sydney and Melbourne is strong and the transactions volumes in these two cities are historically high. It is also the case that these two capitals combine to account for around 40 per cent of Australia s population. That leaves about 60 per cent of the population where home price growth is relatively modest, as exemplified by the analysis in this paper. This generalisation seems to be reflected in some commentary around macro prudential tools also, implying that should such a measure be implemented it would apply in a broad, rather than targeted manner. Yet the RBA itself in its active jawboning on the subject of Australian home prices has singled out Sydney and Melbourne markets in relation to investor activity. That s a very small target to hit without having some form of adverse impact on the wider housing market, as we have been noting for some time. However, targeting these segments is not the same as a sweeping lending restriction being applied to the entire housing market, as has recently been implied in some commentary. It may be that generalisation about the potential implementation of macro prudential tools is already dampening sentiment in parts of the housing market that are not in strong growth mode. That is an undesirable outcome which runs the risk of bringing elevated levels of new housing supply to an end sooner than would otherwise be the case. There needs to be certainty around what, if any macro prudential tool will be implemented and when, because current uncertainty around this subject is unhelpful. HIA remains of the view that the implementation of any macro prudential tools is not required. Over the past year, the output of Australia s residential construction industry has exceeded 180,000 new homes for the first time in two decades. HIA Economics estimates that the demographic structure of Australia requires an ongoing output of new dwellings to average, at a minimum, approximately 180,000 each year over the long term in order to ensure adequate provision of housing stock to accommodate Australia s growing and ageing population. Given that activity has only ever risen briefly to this level on two occasions, deep and meaningful reforms are required to ensure that supply can consistently meet this requirement over the long term. The risk of excessive price growth and housing shortages will only increase in the absence of such reform. Page 5

6 HIA Economics Research Note October 2014 A Portrait of Australian Home Prices Quarterly Price Growth by Market Segment, 2000 to 2014 Transactions in ,228 Sydney Houses 42,586 Sydney Units 57,885 Melbourne Houses 24,562 Melbourne Units 34,203 Brisbane Houses 11,505 Brisbane Units 16,778 Adelaide Houses 6,104 Adelaide Units 31,803 Perth Houses 10,229 Perth Units 3,290 Hobart Houses 1,076 Hobart Units 1,776 Darwin Houses 1,384 Darwin Units 5,012 Canberra Houses 3,001 Canberra Units The mosaic chart above provides an overview of dwelling price developments in each of Australia s sixteen housing markets. A dark orange colour indicates that quarterly price growth in that market was strong, with dark blue indicating a significant price decline during the quarter. A white shade indicates that prices were unchanged in quarterly terms. A bird s eye view of the chart shows how dwelling prices underwent widespread and substantial decline during 2011 and 2012, evidenced by the predominance of blue colouring during that period. The market today shows quite a number of areas of subdued price activity outside of Sydney and Melbourne. Page 6

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