Residex: House prices rose in September

By Leith van Onselen

Following Australian Property Monitor’s lacklustre result last week for the September quarter, Residex has released its house and unit price results for the month of September. According to Residex, house prices nationally rose by 0.94% over the month, although results were mixed across the capital cities:

Results were worse for the unit market, with prices essentially flat (-0.01%), again with mixed results across the capitals:

As usual, the most interesting aspect of Residex’s release is John Edward’s commentary on the market. This month Edwards outlines why he unconcerned about the emergence of a house price bubble, as housing affordability is still relatively poor, consumer confidence is low, and the employment market is deteriorating:

The improving market and the interest rate cuts have led to suggestions that this could be the makings of a housing bubble. Residex does not believe this is likely for the following reasons:

1) Affordability is still not terrific in the major capital cities, even with the interest rate reduction. In the table ‘Affordability’, the position is presented. The data is based on the current median value of properties with consideration given to the rate cut, an assumed household tax rate of 17.2%, a net deposit of 20% after all purchase costs are paid, and the home loan interest rate is 5.75% pa effective. Remaining cash flow, after tax, for the typical family after making loan repayments is also displayed.

In my view, reasonable affordability is achieved once the percentage of loan repayments is less than about 35% of after tax income. This suggests that the unit market is affordable, the house and land market in Melbourne, Sydney, Perth and Darwin are unaffordable, and some of the others are marginally affordable.

2) For a market to move forward strongly there has to be consumer confidence and optimism. Currently, market sentiment is poor and there are more pessimists in the population than optimists. The Westpac Melbourne Institute of Consumer Sentiment increased by 1% in October, to 99.2. This is positive news but it remains below the important marker of 100. The poor sentiment will be due to a number of things including:

  • The concern about future economic prospects given the press reports on the difficulties in Europe.
  • The reporting on reducing commodity prices that are causing mining projects to be cancelled.
  • The reported proposed significant losses of public servant jobs in both Queensland and NSW.
  • The reported slowdown in China.
  • The current disquiet about current Federal Government’s handling of some particularly difficult situations and a general feeling that it is time to sort the problems in Canberra.

3) The percentage of the population employed is likely to deteriorate as the Australian economy slows. There is already evidence of this, which is a consequence of the flow-on effects of the problems in Europe and the United States (see graph ‘Unemployment to Population Ratio’). Further, the resource sector will naturally reduce its labour demand as projects are brought into operation also and the number of projects under development reduces due to the lower demand for commodities.

The high Australian dollar has had a very deleterious impact on manufacturing and tourism. As the resource industry slows there needs to be an alternative employment industry, but these have now reduced in number. It is this economic slowing and the need to stimulate new employment industries that is behind the reasoning of the Reserve Bank’s last rate cut. The ABS Seasonally Adjusted number of unemployment for September increased 0.3 pts, to 5.4%. The male unemployment rate increased 0.3 pts, to 5.6% and the female unemployment rate increased 0.3 pts, to 5.3%. These numbers will potentially cause the RBA to make a further rate cut in November.

4) To generate employment, the obvious area of the economy to stimulate is the building industry. In my view, Governments have recognised the poor outcome from offering unfettered grants to home buyers (rising house prices). Hence, the arrangements put in place by the NSW Government is a $35,000 grant for new homes for first home buyers from 1 October 2012, where the purchase cost is less than $550,000. I expect other State Governments to follow this lead sometime in the next year. This will have the required effect by increasing employment in an industry that is currently at a very low point in its cycle, and increasing dwelling supply which will dampen house price growth due to increased supply.

Overall, if there is a housing bubble risk, the markets to watch are unit markets, in particular those where there is currently a stock shortage. In essence, the main risk is Perth and to a lesser extent, Brisbane.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

Leith van Onselen
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  1. If buyers have $500k to spend on a house, they’ll spend $500k. The figures will show us just that. But it’s what they get for that amount that’s as important as the amount they spend. If time is money, an aging population, and negative real return rates will see more and more higher quality house start to trickle down into the ‘affordability’ range to get transacted. The value-for-money aspect of property buying is likely to turn more in favour of buyers as time marches on.

    • It looks like another Storm Financial style fraud, just more brazen, with the active involvement of big 4 banks:

      A teenager was given a National Australia Bank loan to buy a rental property when he had already borrowed the deposit. He later went bankrupt (see breakout).

      Yep, catch em young and bankrupt em.. fiduciary duties be damned.

      Three examples of Commonwealth Bank loans for Cairns properties funneled through its Gunnedah branch, despite the investors living in Toukley and two Sydney suburbs.

      Questionable documents for loans being accepted by the banks, including non-existent assets being reported to support loans, without the knowledge of borrowers.

  2. Eek! Rents up more than 10% nationally, and sales volumes up 5% nationally, over the past year. What the housing speculators aren’t making in capital growth they’re making up for in skyrocketing rents. And Perth rents up 20%, Sydney unit rents up 20%. Gee whiz, that sure isn’t looking like a housing slow melt to me, despite what I’d like to happen, with interest rates so low and rents surging like that, aren’t we going to see a flood of buyers coming back? Who the heck wants to rent if your rent is going up 20% a year while interest rates are at historic lows??? Not good.

    • Those rental growth figures are a joke. So we are to believe that there was a 12% increase in rents in Melbourne?

      APM’s rental data strongly conflicts with Residex’s and shows rents growing strongly in Perth and Darwin only, with solid growth in Sydney.

          • How about data from the Victorian Department of Human Services.

            RP Data-Rismark, Residex and Australian Property Monitors (APM) all have conflicted interests, IMO, when it comes to reporting accurately and dispassionately on the residential housing market.

            It’s very reminiscent of what happened in the USA, where similar organisations produced similarly rosy reports as the market slowly went tits-up.

          • RP Data and APM have each shown minimal rental growth in Melbourne and only modest rental growth nationally (Perth and Darwin the obvious outliers). Residex is certainly on its own when it comes to rents.

        • No, not quite. You missed the detail.

          Housing rents went up in the June quarter.
          Unit rents went up in the September quarter.

          If you actually looked at the rents for the last year from APM, they barely moved.

          I will see if I can dig up the pdf for you from APM, saw it linked elsewhere. The press release in SMH is an amazing peice of disinformation.

          On that topic, anyone else notice how little air time the latest quarterly house price release from APM got?

        • My GF is in the inner Sydney rental market, if anything it’s gone down in the past twelve months. This is also confirmed by her flatmate (a property manager).

      • Had to take a 2nd and 3rd look at the ACT rentals being up 10.6% for the year. Bullshit. They’ve come down that much. Alot of $390-420 p/w 3 beddy houses and townhouses now available when a year ago these were in the minority.

    • TheRedEconomistMEMBER

      Yeah agreed … rents have risen near me.

      And those rentals are still empty.

      Would hate to be a speculator with an empty place earning no income.

      I am happy renting… whilst the landlord wears the Maintenance, Rates, interest repayments to the bank and anaemic growth.

      For the landlonrd…It aint fun watching your capital melt.

      Whereas as a tenant.. I watch the savings I am putting away at 5.75% above the the rent I pay… ri$e and Ri$e and Ri$e..

      End of month soon… and another $500 in interest paid into the wife accout at lowest margial tax rate…

      $150K deposit here I come!!!!

      • Mine just rose for the year. 3%. In Sydney. Nor have I heard from any of my friends who rent complaining about massive rises in the last year or two.

        I think rents are too high in Sydney at the lower to median end of the market, but those claims of 10-20% rises yoy sound way off the mark.

    • My rent aint going up. Negotiated 22% off asking rent 14 months ago, no increase on renewal this year.

      • TheRedEconomistMEMBER

        Agreed TNA.

        My rent is the same as what I paid when I moved in over 3 years ago.

        The place is quite old, but fix what i can and keep the gardens and lawn in tip top condition.

        Place across the road is up for rent. They are asking to much for what it is. Has been vacant for two weeks.

        I thought there was a scarcity or rentals?

        • There’s no scarcity of rentals in Manli ™, there’s just a scarcity of realistic asking rent.

          Many landlords in ex-pat heavy areas haven’t yet come to terms with the fact that LAFHA has ceased. They’re the ones experiencing long rental-void periods.

          We’re paying $250 pw less than the Americans were who lived next door (exactly the same size place and view). When they moved out, it remained empty for 5 months until they dropped the asking rent.

    • innocent bystanderMEMBER

      Who the heck wants to rent if your rent is going up 20% a year while interest rates are at historic lows

      yep. for Perth anyways. rents up and people are buying houses at the low $ end of the range. around me everything less than $500k sells, higher priced houses languishing.

  3. One thing that strikes me about their view on affordability, (as well as others) is that they completely ignore payment of principal and more specifically in this case assume a 20% deposit. There is no mechanism to take into consideration ( of the effect on affordability) that most newer home buyers don’t come close to this and also the effect of having to save 3-4x as much as previously in deposit.

    Not being an expert but what is wrong with some kind of present value style calculations relating to wages (in manhrs) that includes all predictable cashflows over the lifetime of a mortgage including the desposit and principal payment?

    • What would be wrong with calculations of that sort is that their outcome would not follow the narrative of “it’s always been difficult to buy property, you under-30s are just whingers, so toughen up and buy our property”

      • Quite right, guess I was confusing these real estate statisticians with someone who knows mathematics relating to business and finance 😛

  4. I have a minor quibble with those saying “I’ve been living in my place for x years and the price hasn’t gone up.”

    All my rent increases have come with house moves. Up until now (and times may change) landlords will often hold back on rent increases to keep someone they trust ticking over the rent while the house price appreciates. When I have to move house is where I find out what the market is really doing.

    It will be interesting to see what happens as the various inputs come into play: employment, salaries, population. My guess is that the government will continue to push up migration rates as high as they can while no one’s looking.

  5. Strange, but I notice houses selling for less than the price paid only a few years ago.

    9 Stanley Street LEABROOK SA
    (Sold 06/08/2008 for $838,000)
    (Sold at auction 27 October 2012 for $750,000)

    6 Williams Avenue Dulwich SA
    (Sold 10/02/2010 for $1,150,000)
    (Sold at auction 27 October 2012 for $995,000)

    Asking prices for many homes in Adelaide are also being reduced by considerable amounts.

    • Charles, it’s happening quite a bit in dulwich, rose park and around these suburbs. Someone did about 250k on a purchase in 2007 and sold 2012-plus stamp duty etc. I live one street over from Williams st and was watching the auction with interest. They would have lost 200k once all said and done. I guess prices are at about mid 2007 levels in these areas at the moment. Prices peaked mid 2008 dropped significantly at the end of 2008,re-peaked mid 2010 probably in line with the all time peak in 2008.
      Strange times

  6. I have a mate that has lost money over the last 3 years in Darwin …. Its a unit … so I’m hearing not all is well in NT
    questionable data