Latest NewsHousing recovery firms in JulyThursday, 08 September 2016

Based on Australia’s largest property database, which includes around 145,000 sales for the first seven months of 2009 (and over 129m data records in total), Australia’s housing recovery has continued in the month of July with solid across-the-board capital gains.

According to the RP Data-Rismark National Capital City Hedonic Index, Australian home values rose by 0.9 per cent in July 2009. This brings total capital growth in the first seven months of 2009 to 5.9 per cent.

Underpinned by historically low mortgage rates and only small rises in unemployment, Australian home values have now risen 1.8 per cent past their February 2008 peak (see chart).

Source: RP Data-Rismark

Most capital cities recorded solid gains in the month of July with every single city experiencing growth during the first seven months of the year.

Melbourne and Sydney home values have led the charge in 2009, rising by 8.5 per cent and 6.6 per cent respectively. Darwin is the strongest of all the capitals, with home values increasing by 10.8 per cent. Brisbane (+3.8 per cent), Canberra (+5.4 per cent), Perth (+2.5 per cent) and Adelaide (+1.9 per cent) have also seen gains. Perth is no longer the laggard of Australian housing having outperformed Adelaide in the year to date.

Continuing the trend observed in the second quarter of 2009, houses (+1.1 per cent) realised higher returns than units (+0.5 per cent) in the month of July. In the three months to end July, house values increased by 2.4 per cent while unit values rose by 1.6 per cent.

Throughout the global financial crisis, Australia residential real estate has outperformed almost of its peers overseas. It has also outperformed superannuation, Australian and global shares, commercial property, hedge funds, and private equity as a store of wealth.

One of the secrets to Australia’s housing market success is our very low mortgage default rates. The RBA recently showed that Australian mortgage default rates are just 0.6 per cent compared to 5 per cent in the US and 3 per cent in the UK (see chart).

Notwithstanding headwinds associated with the withdrawal of the first time buyers boost in December, a steepening yield curve that is gradually driving up the cost of fixed rate loans, and the RBA’s shift to a tightening bias, Rismark expects the housing market to grind out further modest gains over the course of the next 12 months.

Home values are now increasing steadily in all areas including Australia’s most expensive suburbs. This has eviscerated the popular myth that the recovery was being driven exclusively by first timers at the cheaper end of the market. While first time buyers did initially furnish the early momentum, upgraders and investors have now taken over the baton as we anticipated.

After a long delay, the ABS’s house price data has belatedly fallen into line with the RP Data-Rismark findings. According to the ABS, detached houses experienced 4.2 per cent growth in the second quarter of 2009. As expected, the ABS was also forced to make substantial upward revisions to its first quarter estimates as well. The ABS’s 'compositional bias' – whereby record numbers of first timers buying cheaper homes gave the appearance of a big house price decline in the first quarter based on their stratified 'median price' index – reversed out in the second quarter with the large 4.2 per cent (positive) correction.

In contrast, the RP Data-Rismark Index, which removes these compositional biases using a hedonic regression approach and includes all property types (the ABS excludes apartments, semis and terraces, which are up to 30 per cent of sales), showed that Australian dwelling prices actually rose in the first quarter by 2.6 per cent and by a lesser 2.3 per cent in the second quarter of 2009.

The RP Data-Rismark Index was the first to identify the recovery of Australia’s housing market in February 2009. All other index providers have now fallen into line.

National rental yields have remained largely unchanged with the gross annualised rental yield for units being 5.2 per cent while house rental yields are slightly lower at 4.4 per cent.

The highest (lowest) rental yields for units are in Darwin (Perth) where rental yields are 6.1 per cent (4.6 per cent).

While there has been some media reporting that the RBA was concerned about a house price bubble, Glenn Stevens, the Governor of the RBA, poured cold water over these allegations in recent testimony to Parliament.

Following a series of questions about whether Australia was in the grip of a house price bubble, Governor Stevens responded: “I never used the word “bubble” [in his previous speech]…but I noticed it has been freely used by various other people who reported the speech.”

Stevens continued: “Relative to mean income, [Australian] dwelling prices have actually declined since about the end of 2003…I thought that showed that you could have an adjustment here in a way that was not really disruptive – unlike some of other adjustments that we are seeing in other countries.”

Dr Malcolm Edey, Assistant Governor of the RBA, reinforced these remarks in a subsequent speech, commenting: “Australia experienced its last major housing boom in the 2002–2003 period. For a number of years after that, the market went through a period of correction, when house prices were mostly either falling or were rising more slowly than incomes. This was also a period when construction of new housing was fairly subdued. Hence, the twin problems of overpriced housing and overbuilding that occurred in the United States in the run-up to the crisis were avoided in Australia.”