Comparing house price declines, again

On Friday at its blog, R.P.Data produced an interesting comparison of house prices across a number of Anglosphere markets.

The first three years of US home prices coming down could be characterized as a reasonably steep downwards trajectory. Using a compounding growth rate, between April 2006 and April 2009 the annual rate of decline averaged 11.4% or 30.5% overall. Most of the home value destruction was over and done with in the first three years directly after the market peaked. Home values have come down a further 1.9% year on year (on average) since that time. Note, if you would like a complete run down on the US housing market, you can’t go past the ‘Market Pulse’ report from CoreLogic (January’s report was released last week).

Similarly, in the UK (based on the Halifax Index) the initial period of decline showed the steepest trajectory with home values falling by 10.5% per annum over the first 24 months post peak.

Using Property IQ’s House Price Index for New Zealand we can see a similar trend with the steepest trajectory of decline being recorded across the first 16 months after price peaked (down 9.6% over that period or 7.7% on an average annualized basis).

Looking at Australia, while there isn’t a long time series of data since the market peaked back in October 2010, values are down 3.8% in total (3.5% on an average annualized basis). The downwards trajectory in Australian dwelling values fits reasonably closely with the US trajectory over the same 13 month time frame (US prices were down 4.4% over the first thirteen months post peak compared with the 3.8% fall in the Australian market). Six months later the US market was recording falls of 1-2% month-on-month as the US banking sector imploded, unemployment and mortgage defaults rose swiftly and the GFC spread around the world.

If the November results from the RP Data – Rismark Hedonic Index remain consistent (November month on month result was +0.1% s.a.) and we see another flat result for December, it may provide the best indication yet that the Australian housing market is flattening out. The risk of a US style housing meltdown are looking increasingly remote. The key factors to watch will continue to be interest rates and the labour market data. With inflation tracking lower than expected, speculation about further rate cuts is likely to improve market sentiment. In balance, unemployment is ticking upwards and the banks are looking unlikely to pass on any cash rate cuts in full. Overall I think we can expect market conditions to remain reasonably flat over the first six months of 2012 at least.

This is quite a reasonable exercise, as regular readers will know, we’ve been doing for some months, from November:

You’ll note that in our chart Australian declines are well ahead of comparable US declines. This is because we used the US’s leading house price index, Case-Shiller, whereas R.P.Data used the less know Corelogic Index, which is hedonic (that is it adjusts for changes to individual properties). That’s fair enough, too, given R.P. Data is owned by Corelogic and the Halifax Index used for the UK is also hedonic. Case Shiller is based on repeat sales weighted for property changes.

I only have one point. As the R.P. Data chart shows, different markets deflate at different speeds depending upon the trigger and prevailing conditions. Australia will deflate in its own way, too. R.P.Data may be right that the market will flatten and the losses accumulate in real terms (much like New Zealand even accounting for recent price rises), though this risks a run by the negatively geared. It may be as it has been for the past year, a combination of nominal and real losses. It may be that the massive oversupply emerging in Melbourne pushes it all down faster.

The only certainty is that one way or another, the conditions that supported over-valued house prices – cheap and abundant finance, debt-complacent central bank, favourable demographics – are features a world that has passed.