Friday, October 30, 2009

RP Data reports drop in Perth house prices

SEPTEMBER NATIONAL HOME VALUE RESULTS
RP Data‐Rismark Index
MEDIA RELEASE

Released Friday 30 October 2009
Growth in home values flat in month of September; Quarterly result lowest in 2009
Australia's housing recovery moved sideways in the month of September with national home values flat after quarterly capital gains peaked in the March quarter

According to the 'market-leading' RP Data-Rismark National Capital City Home Value Index - which is the only monthly index published by the RBA in the Statement on Monetary Policy - home values were largely unchanged in September, increasing by just 0.1 per cent. This is the lowest monthly result to date in 2009.

On a quarterly basis, Australian home values rose by a healthy 2.5 per cent, largely driven by gains in the months of July (+0.7%) and August (+1.8%).* Contrary to some other claims, the September quarter result was actually slightly less than the first two quarters of the year.

According to rpdata.com's Research Director, Tim Lawless, "the strong first quarter rise of +2.8 per cent was followed by slightly lower results in the second quarter (+2.6%) and the third quarter (+2.5%). This is consistent with the winding back of first time buyers and a return to more sustainable growth outcomes."

Rismark International Managing Director Christopher Joye said, "The growth in Australian home values in 2009 has been remarkably consistent since their nadir in December 2008 with cumulative capital gains in the first nine months of 2009 of 8.1 per cent following on from the 3.8 per cent peak-to-trough falls in 2008."

Tim Lawless said that the buoyant market conditions in the first half of the year should be superseded by more normal growth rates.

"In all likelihood, the national market will return to more sustainable growth rates as rising mortgage rates dampen the recent exuberance," he said.

Christopher Joye added, "We are projecting materially lower and more durable rates of house price growth going forward as home loan rates rise towards 7 per cent and beyond over 2010."

"Since the RBA was aware of our August numbers when they lifted rates by 0.25 per cent one would think that the flat house price growth in September and the lower overall quarterly rate reduces the probability of a more aggressive 0.50 per cent hike at the RBA's next meeting. The most important take-away here is that there is no evidence of accelerating house price growth" he said.

While the index results reveal that the national market was flat in the month of September, this conceals very different city-by-city stories that have played out over the course of 2009.

Melbourne, Sydney, Darwin and Canberra all experienced significant capital appreciation in September while Brisbane, Adelaide and Perth registered flat to negative outcomes.**

For the three months of the September quarter, Melbourne (+4.8 per cent), Canberra (+3.8 per cent) and Sydney (+2.8 per cent) home vales all outperformed the national market (+2.5 per cent). In contrast, Perth (-1.4 per cent), Brisbane (0.0 per cent) and Adelaide (+2.4 per cent) all underperformed. The standout in the third quarter has once again been Darwin with impressive 6 3 per cent growth.

Tim Lawless pointed out that the underperforming cities in 2009 have been some of the best performers over the long-run.

"Over the last seven years, which is the average hold period for a property, Perth values have recorded an annual gain of 13.5 per cent, Brisbane values are up 10.1 per cent per annum and Adelaide values have increased 9.7 per cent each year. In contrast, the overall national rate of growth has been 7.1 per cent per annum."

The RP Data Rismark National Home Value Index results show that while the performance of detached houses and units have been similar over the September quarter, units have outperformed houses over the last nine months consistent with the impact of first home buyers earlier in the year.

Over the September quarter Australian house values gained 2.5 per cent while unit values were up 2.4 per cent. Over the nine months to end September, unit values increased by 8.8 per cent while detached house values rose by 7.9 per cent.

Mr Lawless said that the stronger capital gains associated with units may be related to the ongoing scarcity of new unit developments, coupled with lower entry costs to the market that units provide to price sensitive buyers.

Australian rental yields were unchanged in the September quarter with the gross annualised rental yield for units equal to 5.1 per cent. Rental yields on detached houses have also been static at a slightly lower 4.3 per cent.

The RP Data-Rismark National Home Value Index was the first index to identify the recovery in Australian house prices at the start of 2009. Other less sophisticated 'median price' indices have lagged behind. For example, the ABS index did not record a rebound in Australian home values until the second quarter of 2009. Analysts should be wary of inferring too much into the high growth recorded by alternative indices in the second and third quarters of 2009 as they are likely to be catching up to the more consistent appreciation registered by the RP Data-Rismark Index since January 2009.

In this context, Christopher Joye commented, "Other house price indices tend to be lagging indicators. They trailed the RP Data-Rismark Index by a good quarter as the market recovered in January 2009 and the booming growth they are now claiming relate more to past than present conditions. The best publicly available guide to real-time house price conditions is the RP Data-Rismark hedonic measure."

In a speech two weeks ago, the Governor of the RBA, Glenn Stevens, was asked whether he thought Australia was suffering from a house price bubble. His response is enclosed as follows:

"Well, a lot of people have bandied the word "bubble" around; I'm not one of them, let me be clear. Even though I'm often interpreted as having said that, I haven't said that. It is a fact, though, that housing prices have started to rise again...That is part of the economic picture - the general economic picture - that monetary policy looks at...That's not the same as saying that, because housing prices are rising, that itself is going to drive a rate increase. We haven't said that. In fact, I've said that I wouldn't expect that, per se, to be the case."

On the subject of whether Australian housing is unduly expensive, the IMF commented in its October 2009 World Economic Outlook Report: "In the case of Australia, if the impact of long-term migration on housing demand is taken into account, the results do not produce evidence of a significant overvaluation of house prices."

The IMF also concludes that: "If past is prologue, these estimates suggest that...the [housing market] corrections in Australia and the United States are close to complete..."

IMF analysis released earlier this year showed that between 1997 and 2009 real house price growth in Australia had been no greater than the median comparable country selected by the IMF in a survey of Australia's peers. The IMF also found that growth in Australian house price-to-income ratios over the period 1997 to 2009 had actually been less than the same metrics in the UK, Ireland, Spain and NZ. Indeed, Australia's ratio is no greater than it was at the beginning of this decade;

*RP Data-Rismark's previous "indicative" estimate for the month of August of +1.9% has hardly changed (now +1.8%) based on the latest data.
**The indicative "monthly" estimates for Brisbane, Adelaide, Perth and Darwin are somewhat more volatile than the bigger cities such as Sydney and Melbourne on a month-to-month basis due to the lower underlying liquidity in these markets (think of it as akin to comparing the volatility of a small cap stock with a blue chip company).
**Readers should be aware of three technical points. First, the monthly RP Data-Rismark Hedonic Index compares month-to-month index results. For example, the first quarter of 2009 index results compare the end of March index with the end of December index. Another way to measure index returns is to combine all the months together in a quarter and compare them to the previous quarter's pooled index. So you would combine all sales in January, February and March and compute an index value. You would then compare this to the pooled October, November, and December index value. The problem here is that because many home sales are reported by the Valuer Generals offices with a 1-3 month delay, the sample sizes in the more recent months are smaller than the earlier month. So in the first quarter of 2009, January's sales will dominate because there are more January sales than February and March. In practice, however, there will in the end be a much higher number of sales in February and March. This is the approach used by the ABS. To overcome this problem, RP Data-Rismark treats each month separately. The other issue is that the ABS uses a stratified median price index. If more lower-valued homes are selling because of an increase in, say, first time buyer activity, median price indices can report lower returns when in fact house prices may be rising. RP Data-Rismark's hedonic regression method overcomes this problem. Finally, unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.

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