As we can see from the chart above, Australian home values weakened noticeably from mid-April through to the end of May. This is not overly surprising. While the RBA cut rates by a super-sized 50 basis points on 1 May, the major banks did not respond until the end of the second week of the month. And many lenders delayed the introduction of the actual rate reductions until the end of the month.
Rightly or wrongly, the RBA followed up the May cuts with a third in June. And we can see in the chart that it was at this time – or, more exactly, at the end of May – that Australian home values started grinding out capital gains again. The fact that house prices have been rising in June is especially encouraging given the typically adverse seasonality that grips during the winter period.
What about the individual capital cities? My second chart displays the index data for Sydney, Melbourne, Brisbane, Canberra, the Gold Coast and Perth.
There are probably three things to take away from this. First, far and away the worst performer has been Melbourne, which as our second largest city, has been dragging down the national numbers. There are, however, some tentative signs that Melbourne values are stabilising.
The second point of note is that all cities included in the chart, and notably Brisbane and the Gold Coast, have recorded synchronous recoveries since in or around the end of May. As I have highlighted before, Sydney’s market led the charge, reacting most quickly to the May rate cuts.
Crucially, home values in the Gold Coast, Sydney and Canberra are all higher than they were at the end of 2011. Brisbane and Perth home values are down very slightly, while Melbourne is evidently still digesting the extraordinary 35% growth in capital values over 2009 and 2010. In the year-to-date Melbourne values are down a chunky 5%, although they have started inflating again in June.
Rismark’s latest forecasts for the national housing market imply that home values will be broadly flat over 2012, albeit with some cross-sectional diversity. Rents, in contrast, are expected to rise at a healthy pace, which means that yields should also continue to increase.
There are grounds for optimism over the remainder of the year. Today borrowers can avail themselves of historically very low mortgage rates: lenders like UBank are offering 5.62% per annum variable rate loans, while you can fix your rate for three years at just 5.75% per annum.
As I have demonstrated in previous columns, the vast bulk of the overall losses in Australia’s housing market since the start of 2011 have been concentrated in the “luxury” segments. This is in turn being driven by the permanent downward shift in the earnings expectations of financial services employees, who benefited from 20 years of extraordinary growth prior to the onset of the GFC.
This dynamic is akin to a company that suddenly downgrades its future cashflow projections – the stock price will fall accordingly. In the ultra-luxury $3 million-plus markets, participants are witnessing very steep valuation adjustments. Eventually asset prices in these areas will find a base.
Yet the median home owner in Australia is buying a property worth about $400,000 while more than 80% of all sales are for dwellings priced less than $700,000. Across the mass housing market, capital losses since January 2011 have been very modest at less than 3%.
Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
This article first appeared on Property Observer.
