How fast are house prices falling?

Slow melt, slippery slope or touching bottom? Can’t decide ? Maybe the ABS can help with today’s capital city house price index:


Quarterly Changes

  • Preliminary estimates show the price index for established houses for the weighted average of the eight capital cities decreased 1.2% in the September quarter 2011.
  • The capital city indexes decreased in Melbourne (-1.7%), Brisbane (-2.5%), Perth (-1.3%), Sydney (-0.2%), Adelaide (-0.9%), Canberra (-2.0%), Hobart (-1.0%) and Darwin (-0.4%).

Annual Changes (September Quarter 2010 to September Quarter 2011)

  • Preliminary estimates show that the price index for established houses for the weighted average of the eight capital cities decreased 2.2% in the year to September quarter 2011.
  • Annually, house prices decreased in Brisbane (-5.2%), Darwin (-4.4%), Perth (-4.2%), Adelaide (-3.2%), Canberra (-2.2%), Melbourne (-2.1%), Sydney (-0.3%) and Hobart (-0.3%).

Below is the previous two quarters for a bit of context. June Qtr:

And March Qtr:

From that it looks as though we had a bit of upwards revision for the March Quarter and some downward revision for the June Quarter. Once again I am finding it hard to see a bottoming here, every city recorded a negative value in the latest index for the first time ever. However, the falls are still relatively small which supports the slow melt meme.

Let’s try comparing the ABS indexes with the R.P.Data-Rismark Index. Here’s the chart courtesy of Data Sword:

Obviously R.P.Data hedonic index is opening a pretty serious lead over the ABS in tracking the downward price shift.

The ABS uses a stratification metholodology which it defines as:

The stratification approach involves grouping the observations for the ‘most similar’ dwellings into clusters, to enable the derivation of a representative sale price for the cluster (usually the median price). The objective is to optimise the physical homogeneity of dwellings within each cluster, while ensuring a sufficient number of observations to produce a reliable median price.

The effectiveness of the stratification approach is determined by the degree of stratification possible and the availability of stratification variables. It may not be feasible to employ fine level stratification if there are insufficient observations to produce reliable movements for each cluster.

This is a fancy way of saying that the ABS uses medians, which are obviously subject to the usual composition biases. Meaning that they can’t take account of changes in individual property variables such as renovations, position or aging.

The R.P.Data index is also median stratified but is hedonically adjusted, which means it takes account of individual or qualitative property variables. Here’s how they describe it:

The hedonic-regression is a method that attempts to overcome the issue of compositional bias associated with median price measures. The premise for this lies in hedonic theory which suggests that the value of a composite good – such as a house – is the sum of its components. Thus, by decomposing the sample of houses into their various structural and location attributes, the differences in these qualitative factors across houses can be controlled.

Whatever the differences, the two indexes track each other closely in terms of the amplitude of price movements but the R.P.Data Index is clearly more responsive to changes. I think of it as the better gauge.


  1. “Slow melt, slippery slope or touching bottom?”
    Are you excuding a crash? Or is that included in slippery slope?

    Stratification is not “a fancy way of saying that the ABS uses medians”. Stratification does take account of compositional changes where the weight of “clusters” changes. A simple median is unstratified.

  2. Record property supply levels and demand in the tank for a year – who knew that’s lead to falling property prices? smh

    If the final quarter of 2011 has similar across the board falls then market sentiment is going to get worse not better.

    Today’s rate cut won’t do much for demand this year. If past market behaviour is a guide vendors will raise their price expectations higher than potential buyers will!

    • + I concur – they are all Kenny Rogers fans as they think “they know when to hold’em” and know doubt in 2012 it will be “know when to fold’em” on-mass with the Minksy Moment.


      *”tips hat to MB’s opinions for the slow melt meme”

      But a bubble is a bubble and we have more than one elephant in the Australian Housing room!

  3. China hard landing and/or european meltdown will turn the slow melt into a torrent.

    European meltdown is a very high probability, probably coming no later than the end of 2012 as huge amounts of european debt need to be rolled by then.

  4. Roubini and many others think China is on the cusp of a multi-year downturn with who-knows-what consequences. Nevermind the debt monsters in US and Europe, this alone will be enough to cause any thinking person to steer well clear of the Oz RE market for the next several years. Period. No arguments.

  5. “Obviously R.P.Data hedonic index is opening a pretty serious lead over the ABS in tracking the downward price shift.”
    Really? R.P.Data picks the first decline in ’07, but ABS picks it up first in ’10. You need to look at the first derivative not the absolute values.

  6. I was at a Melbourne Cup party today and I spoke to a lovely lady I hadn’t seen in three years (friend of a friend). She said that her and her husband were really struggling with their mortgage even with the rate cut announced today and that they were considering selling up and renting for a few years or moving away from Melbourne because they realised they couldn’t afford to live here any longer (they live in Williamstown). She was also worried that they were throwing money into a (possibly) declining asset as their neighbours recently had failed auctions and I think THAT’S the nub of the problem – it’s a confidence thing. People are s-t-r-e-t-c-h-e-d to the limit and they are looking for ways to reduce their exposure (get into cash) just in case the whole thing really does go to crap like it did overseas.

    • Interesting priorities and here’s the real problem – entitlement. If they were in such financial folly why were they out partying, presumably having a few Stellas as yups from Willi are inclined to do? There’s the reason why yesterday’s rate cut was a mistake – too many people with a large servicing capacity not willing to sacrifice a little lifestyle. Greece v Germany on a smaller scale.

      • Well it is not really the problem as far as I can see things. House prices are too high – you should be able to go out and have a couple of beers and maintain a mortgage at the same time. Why should such a large portion of someone’s wage have to be devoted to shelter?

        • Agreed, it’s one thing to be frivolous but IMO if one can’t have a beer on Mebourne Cup day then the price paid to avoid being “just a renter” is too high.

        • if the market as a whole are willing to sacrifice things such as lifestyle, by paying a high % of income, then prices will be high.. as soon as CG expectations erode I wonder how willing people/the market will be to make such sacrifice

  7. Some of you may be familiar with the game theoretic notion of the Nash equilibrium. Without going into to much details the Nash equilibrium in a game is a situation when each player knows the strategies of all the other players and uses his/her best response i.e. it’s a game where in some cases there are no losers or everyone is a loser.

    If you have a few spare minutes you can watch an interesting video on youtube in which a Yale Uni lecturer in economics plays a mockup investment game with his students and their strategies quickly converge to a Nash equilibrium. Watch the whole thing or just scroll to the 32-nd minute [].

    Now let’s have a look at the housing market. As we all know when house prices were growing we had almost daily very enthusiastic MSM updates and spruiking dressed up as expert analysis. The “lucky” home buyers were doing their bit in reinforcing the message that you can’t go wrong with buying a house whether to live in it or invest. At that particular point in time buying a house was a winning strategy. Unfortunately there was something quite ominous quietly happening in the background, namely the constantly growing level of debt which like a vampire was sucking out more and more blood from the rest of the economy through interest payments. Then the game stopped. Obviously MSM could not hide it especially that they can’t fudge the data so now it is becoming a common knowledge among the players that buying a house is not a sure winner and there is a high risk involved in buying. More and more players decide to hold and they can see through diminishing sales and growing stock numbers that more and more other players have the same strategy which slowly converges towards the other Nash equilibrium.

    I suspect that the change in the number of individuals who adopt the holding strategy is governed by the diffusion model that describes product adoption life cycles and spread of information among investors i.e. it looks like the logistic stretched S-shaped curve with slow growth at the beginning, almost exponential growth in the middle and flattening at the end. We are probably only at the beginning of exponential-like buyers withdrawal from the market and are quite likely to see even higher housing stock next year and ultimately vendor capitulation.