It may be a moot point whether home prices are rising or not, but the latest results from the APM PriceFinder team shows that nationally 76.3% of property for auction sold, compared with 68.6% last week, and 75.1% last year. However, the total number for sale was lower at 1,177, compared with 1,288 last week, and 1,989 last year.
Sydney led the way with 79.4% clearance from 393 listings, but there was more activity in Melbourne, with 676 listed, though 77.9% cleared. Both are higher that a year ago, when 74% cleared in Sydney and 71.7% in Melbourne.
The latest data from the IMF Global Housing Watch says shows that, on average, prices are almost back up to where they were at the start of 2007. That said Australia and a number of other countries have had much stronger growth over this period.
There is a fair bit of cross-country variation, however. While house prices have increased over the past year in most countries in the sample, the pace of increase varies quite a bit. And there are still a dozen or so countries where house prices have fallen over the past year, including Brazil, China and Russia.
Both real house prices and real GDP growth in the 2007-2015 period were well below the boom experienced during 2000-2006. In the earlier period, global real GDP grew by over 4% per year while real house prices surged by about 9% on average. In the more recent period, these grew by just 2% and 1% per year, respectively. The simple correlation between real growth in house prices and GDP growth was very similar in the two periods at about 0.6.
The pace of credit creation also fell sharply between the pre- and post-crisis periods from 17% to 6%. The correlation between growth in house prices and credit expansion fell substantially from 0.8 to 0.3. Given that many countries sharply eased monetary policy during the post-crisis period, it seems reasonable to posit that slow credit growth was a result of diminished investment opportunities, reduced risk appetites on the part of lenders, and the adoption of macroprudential policies designed to reduce the probability of boom/bust cycles in the future. Moreover, the decline in the correlation between house prices and credit expansion suggests that other country-specific factors may have played a role in determining house prices.
One such factor is fiscal policy. We use as our indicator the change in the cyclically-adjusted primary fiscal balance as a percentage of GDP during each sub-period. The correlation between the change in the policy stance and home prices went from nearly zero to almost -0.5, suggesting that country-specific policy developments have played a role in determining the development of real estate prices.
Over the last quarter, there have been discussions of housing sector developments in IMF staff reports in over a dozen cases. One feature of the discussions has been a growing emphasis on the role of supply constraints in driving house price increases—this was flagged for instance in the case of Denmark and Germany. Another is the continued active use of macroprudential policies in several countries, among them Canada and the United Arab Emirates. Concerns about the extent of house price growth were flagged in the cases of the Czech Republic (“a strong housing market is becoming a potential source of risk”), Denmark (“rapid house price increases call for early policy action”) and Norway (“high and rising house prices and household debt in Norway pose important macro-financial stability risks”).
The latest Corelogic data shows that their hedonic eight capital city aggregate index rising 0.8 per cent over the month to reach a new record high. But the movements varied considerably across the capital cities and rental yields fell again.
The annual rate of growth, which hit a recent peak at 11.1 per cent across the combined capitals index in October last year, is now tracking at 6.1 per cent; the slowest annual rate of appreciation since September 2013.
Sydney and Melbourne have also seen the annual rate of growth slip back to below 10 per cent, with the July indices showing a respective 9.1 per cent and 7.5 per cent capital gain over the past twelve months. Darwin and Perth remain as the only two capital cities to record a negative movement in dwelling values over the past twelve months, with values in Darwin down 7.6 per cent and Perth values falling by 5.6 per cent.
Capital city rental yields have fallen to a new low of 3.3 per cent, with Melbourne down to 2.6% and Sydney 3.9 per cent.
APM PriceFinder’s residential auction summary for Saturday 30 July 2015 continues to underscore momentum in the property market, especially in Sydney and Melbourne.
Nationally, clearance rates were 73.1% on 1,285 properties, compared with 66.9% on 989 listing last week. A year ago, there were 1,488 listing and 74.9% cleared.
In Sydney, clearance was 75.7%, compared with 70.3% last week, and 76.1% a year ago, though on lower volumes. Melbourne cleared 75.7% of 675 listed, compared with 67% last week, and 76.9% on 651 properties a year ago. Adelaide achieved a 60% clearance on 83 listings. Brisbane listed 101 properties and cleared 50%.
Looking briefly at those wanting to buy, but are not able to at the moment (about 1.1 million households, down from 1.3 million last year), whilst fear of unemployment and interest rate rises continue to dissipate, home prices are just too high relative to their income, to consider market entry. This is also influenced by their costs of living, and an inability to get finance. We also note a rise in “other factors”, which include needing to get finance help from family or friends.
Turning to those actively seeking to enter the market in the next year for the first time (about 312,000 households), we see that more are motivated by potential future capital growth than needing a place to live. In addition, tax advantage was cited by around 15 per cent of first time buyers as a key driver, whilst access to the first home owner grant has become ever less important.
Looking at the barriers to purchase, first time buyers say that high home prices remains the most significant barrier, and as a result just finding a place to purchase is a challenge. Whilst fear of unemployment and the impact of rising interest rates have reduced, more are saying that availability of finance is an issue now as lending criteria are tightened.
Well over 20 per cent of first time buyers are not sure what, or where they will buy. More are likely to buy a unit than a year ago, and less likely to buy a house.
We also continue to see a proportion considering buying an investment property, perhaps a cheaper property in an area they do not want to live in, as a way to enter the market, and participate in potential capital growth. This may be the key to an owner occupied purchase later.
We publish monthly data on the number of first time buyers who go direct to the investment sector from our surveys and overlay this on the ABS data. Around 4,000 are buying each month. The ABS data also shows the number of first time buyers is rising, to May 2016, though still well below the peak.
Next time we will do a deep dive on the investment property sector.
Home values have fallen in real terms (after adjusting for inflation) in all capital cities over the past five years except Sydney, Melbourne, Brisbane and Canberra.
Adjusting capital city home values by headline inflation provides interesting insight into the performance of the housing market. Of course, people mostly analyse the housing market in nominal terms but looking at inflation-adjusted or real changes provides some valuable insight, particularly from an affordability standpoint. While inflation has increased by 1.0% over the year to June 2016, combined capital city home values have risen by 8.3%.
Adjusting for inflation lowers the change in home values. As you can see in Perth and Hobart it results in larger value declines. In all other capital cities, real home values have increased over the past year with Sydney and Melbourne still recording double-digit value increases.
Over the past five years, real home values have increased by a compound annual rate of 3.7% compared to 3.1% over the past decade and 4.6% over the past 15 years. While the headline figure indicates stronger annual growth over the past 5 years than the past 10 years, this is all being driven by Sydney with all other capital cities recording lower real home value changes over the past 5 years compared to the past 10 years. In fact, home values have fallen in real terms in all capital cities over the past five years except Sydney, Melbourne, Brisbane and Canberra.
Britain’s housing market is in a sorry state. With house prices forecast to fall, house building grinding to a halt and buyers pulling out of purchases amid job security fears, post-Brexit uncertainty has been worsened by the contrasting “visions” that won the vote.
These opposing visions are now evenly represented in Theresa May’s cabinet. The more liberal Leave campaign wanted greater economic freedom, with less government and “Brussels bureaucracy”. Its supporters have quickly retreated from any pledge to bring down immigration, which would compromise access to the EU single market.
The others in the Leave side, however, are happier to resist market forces, even accepting some short term sacrifice of living standards to restore “sovereignty”, and a sense of community they view as eroded by too much free movement. For these “grassroots” Leavers, concerned about social cohesion and quality of life, lower house prices are a key Brexit bonus. Controls on arrivals from the EU and strict barriers against refugees are intended, in part, to reduce the demand for homes and related public services.
This could, in turn, make housing more affordable to existing residents, with wages rising as fewer compete for available jobs. And if the economy slows, interest rates will fall further, potentially improving mortgage affordability.
Will Brexit lead to a buyers market?Toby Melville/PA Archive/Press Association Images
Houses could well become easier to buy if, as both factions promised, average incomes now rise due to “unshackled enterprise” and less competition for jobs. Those pursuing homes to live in may also find there are fewer rival buyers treating property as just another investment. Rule changes in April had already quelled buy-to-let demand. Absentee foreign buyers who had inflated prices in and near London might now look to buy in other capitals that will remain within the EU.
Making housing more expensive has been central to economic recovery strategy since 2010. This is because rising prices benefit homeowners, who are still a large majority of voters. Many younger voters priced out of the market will now hope that affordable housing can be part of May’s version of Conservatism. But while her swift installation might dispel the uncertainty that stalled pre-referendum investment – including housing starts – her new economic plans will have to rule out a sustained drop in prices, as this would hit household spending too hard at a time when other sources of demand are also weakening.
Households are already approaching a level of borrowing which proved unsustainable before 2008. So longer-term house price growth is unlikely to exceed national income growth, which most forecasters calculate will slow down as the UK starts its slow path out of the EU.
And even if Brexit does not restrain production and income growth, it is likely to weaken house buying demand by hitting the profitability of banks, whose recovery from crisis is still being slowed by tougher regulation, new entry and alternative forms of business borrowing.
So while many landlords suspect that Brexit will end the long escalation of housing costs both for buyers and renters, this is unlikely to make it any easier for the average household to find an affordable home.
The housing market has felt the immediate effect of Brexit chill.David Cheskin/PA Archive/Press Association Images
This is because although rising investment might speed up residential building and renovation, it would leave house builders vying for resources with commercial construction and other industries – even if the general labour supply is not constrained by lower immigration.
In short supply
The long run up in house prices reflects a chronic failure to build enough new homes, often traced to restrictive planning laws that reflect local concerns much more than eurocratic meddling.
To ensure profit, developers always have an incentive to release new homes more slowly than the market needs them. And neither local authorities nor housing associations are currently able to fill the gap. So while the estimated 11m adults and 3m children in inadequate accommodation in England indicates a real need for more houses to be built, the market is far from ready to deliver them.
How will a change in borders impact the labour market?Shutterstock
Although, this influx of people might actually help to boost labour supply and allow construction to quicken – but only if building firms can hire them. Housebuilders’ sagging share prices in the wake of the referendum suggest they might not.
And although lower immigration from the EU would eventually ease demand for housing, it would also reduce access to those legendary Polish builders, who will be hard to replace with local labour.
Always hazardous, economic forecasting is especially uncertain in relation to housing because buyers’ and suppliers’ finances are in line for both positive and negative shocks, on an uncertain timescale. But as a sharp fall in prices will only occur if the economy turns downwards, it would not bring the boost to affordability that Generation Rent awaits.
Author: Alan Shipman, Lecturer in Economics, The Open University
The latest blog from CoreLogic makes an interesting point about home price growth. It is concentrated in Sydney and Melbourne – and will it continue? Take the two largest centres away, and overall growth is much less impressive.
From May 2012 to June 2016, combined capital city home values have increased by 37.3% while official interest rates fell by 200 basis points to 1.75%. Although home values have increased over the period, Sydney and Melbourne have recorded a substantially higher rate of value growth than all other capital cities.
Total change in capital city dwelling values
May 2012 to June 2016
The data indicates that since the financial crisis the capital city housing market could be described as being extremely interest rate sensitive. Digging deeper into the data shows that in reality it is only Sydney and Melbourne that have really responded to the stimulus of low interest rates. The relative strength of the Sydney and Melbourne economies and the much greater employment growth has clearly assisted drive housing values higher in these cities.
Until the economic performance improves outside of Sydney and Melbourne it seems unlikely that sustainable growth will return in these areas despite the extremely low interest rates which are set to potentially move even lower over the coming months. For Sydney and Melbourne although affordability is increasingly becoming stretched home owners have experienced a substantial increase in equity. With historically weak rental markets and record low yields it will be interesting to see if investors and upgraders in the two largest capital cities continue to show a thirst for housing in these cities given the growth phase has now been running for more than four years.
The HIA Housing Affordability Index shows affordability for home buyers eased back in the June 2016 quarter, according to the latest Affordability Report from the Housing Industry Association.
According to the HIA, affordability fell by 3.7 per cent during the June 2016 quarter and was 2.1 per cent less favourable than the same period a year earlier. The capital city housing affordability index fell by 4.3 per cent during the quarter, while regional market index experienced a 1.9 per cent improvement.
During the June 2016 quarter, improvements in affordability were observed in three capital cities with the largest improvement in Perth (+3.2 per cent), Darwin (+2.9 per cent) and Hobart (+2.2 per cent). Affordability worsened in the remaining five capital cities during the March 2016 quarter with the largest decline recorded in Melbourne (-7.4 per cent), followed by Canberra (-5.7 per cent), Sydney (-1.6 per cent), Adelaide (-1.3 per cent), and Brisbane (-1.0 per cent).
“Home price growth moderated in the early part of the year and the HIA Housing Affordability Index showed an improvement in affordability during the March 2016 quarter. However, in the June quarter dwelling price growth returned and the index reverted to the level we saw at the end of 2015,” explained HIA Economist, Geordan Murray.
“While there was a decline in the headline index tracking the national picture, there was substantial variation around the country – with substantial differences between states, and also differences between capital city markets and regional markets.”
“The geographic variation in affordability is most evident in the comparison between Melbourne and Perth. Over the last year, the median dwelling price in Perth has fallen by 4.7 per cent while Melbourne’s has grown by 11.5 per cent. This has seen the affordability index for Perth increase by 6.2 per cent over the last year, while the index for Melbourne has fallen by 6.2 per cent.”
“These differences in affordability align with the relative economic performance of these two states. The Western Australian economy is navigating the tail end of the mining boom which has seen conditions in the local labour market deteriorate and consequently the rate of population growth has fallen quite sharply. In contrast, Victoria has experienced a healthy level of growth in the labour force and continues to record the strongest rate of population growth in the country.”
The results from the APM PriceFinder residential auction activity for Saturday, 16 July 2016, shows continued strong momentum. Nationally, clearances were at 75.5%, compared with 69.8% last week, which is the same as a year ago, though on lower volumes. Melbourne was above 80% this week, higher than this time last year. In comparison, Adelaide was just 47% and Brisbane 51%.
