[Commse Research]House prices slide to near 2-year lows

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House prices slide to near 2-year lows

House Prices

¾ Capital city home prices were unchanged in seasonally adjusted terms in February after a 1.5 per cent slide in the prior month according to the RP Data-Rismark Hedonic Australian Home Value Index – the largest property database in Australia. Outside capital cities, prices fell by 0.5 per cent in February.

¾ Capital city home prices are up just 0.8 per cent on a year ago – the slowest growth rate in 23 months. Prices in the ‘Rest of State’ markets were up down 0.2 per cent in annualised terms.

¾ Prices rose in just three of the seven capital cities in February with Canberra prices up 1.9 per cent, followed by Sydney up 0.6 per cent, and Melbourne up 0.1 per cent).Prices fell most in Darwin (down 6.7 per cent), followed by Brisbane (down 1.2 per cent).

¾ Prices are higher than a year ago in all capital cities except Perth, Darwin and Brisbane.

What does it all mean?

· Australian home prices are effectively going nowhere. In March 2010, prices were seemingly going gangbusters with annual growth standing at 14.1 per cent. But home prices are now tracking at a 0.8 per cent annual rate – the lowest growth rate in almost two years and well below the long-term average pace of 8.0 per cent.

· Effectively you can strike another item off the Reserve Bank’s worry list. The rate hikes delivered over 2010 have taken the heat out of the housing market ensuring that the normal supply-demand fundamentals are ruling the roost across capital city housing markets.

· Interestingly there are marked differences in home prices across the nation and it is a similar story when you look at rental yields. States like NSW has seen a significant amount of under building compared to the likes Victoria however the lack of supply – lower vacancy rates – in NSW has resulted in higher rental yields on offer.

· It is likely that housing conditions will remain soft in the near term, however the long term fundamentals certainly look more attractive Importantly the longer term fundamentals for the housing sector remains sound. More importantly as the Reserve Bank Governor has highlighted on many an occasion housing affordability has remained relatively stable over the last decade. And RP Data & Rismark has also added further weight to this argument noting that real wage gains over the past decade has ensured that affordability remains sound. In fact Australia’s dwelling price-to-disposable income ratio was at 4½ times at the end of 2010 and has not significantly changed since the end of the last property cycle in 2003.

· It is important to highlight that while the housing sector is cooling it is not about to collapse in a heap. Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5 per cent. The Reserve Bank is likely to remain on the interest rate sidelines in the near term, while healthy jobs growth, rising population and sliding rental vacancy rates will support housing activity in the medium term.

What do the figures show?

House price prices

· The RP Data-Rismark Hedonic Australian Home Value Index was unchanged in February after a 1.5 per cent fall in the previous month.

· House prices fell by 0.4 per cent in the month while apartments rose by 0.5 per cent.

· Capital city home (dwelling) prices are up 0.8 per cent on a year ago, the slowest growth rate in 23 months. House prices are up 0.2 per cent and apartment prices are up by 2.4 per cent.

· Prices rose in three of the seven capital cities in February with Canberra prices up 1.9 per cent, followed by Sydney (up 0.6 per cent), and Melbourne (up 0.1 per cent). Across the other cities prices fell most in Darwin (down 6.7 per cent), Brisbane (down 1.2 per cent), and both Perth and Adelaide (down 0.4 per cent). In Hobart, prices fell by 7.4 per cent in January (February data not yet available).

· Home prices are higher than a year ago across all capital cities except in Brisbane (down 5.3 per cent), Darwin (down 5.2 per cent) and Perth (down 4.1 per cent). Prices are up most in Sydney (up 3.3 per cent), followed by Melbourne (up 2.5 per cent), Canberra (up 0.7 per cent), and Adelaide (up 0.6 per cent).

· February home prices aren’t available yet for Hobart. In the year to January, home prices in Hobart were down by 4.1 per cent.

What is the importance of the economic data?

· The RP Data-Rismark Hedonic Australian Home Value Index is based on Australia’s biggest property database covering more than 340,000 sales during 2010. Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.

· The monthly RP Data-Rismark Hedonic Index compares month-to-month index results. Quarterly results are measured comparing end months rather than averaging each month in the quarter. For example, the first quarter of 2009 index results would compare the end of March index with the end of December index..

What are the implications for interest rates and investors?

· The rate hikes have certainly taken their toll on the housing sector over the past year and unfortunately for the sector it is unlikely that a turnaround is going to take place anytime soon. Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5 per cent.

· A softening in home prices combined with the prospect of interest rates remaining unchanged until mid year is clearly positive for budding home buyers. Less doom and gloom stories about interest rates and unsustainable home prices will be beneficial for consumer sentiment more generally.