Residex: House prices rose in December

By Leith van Onselen

Residex has just released its house price indices for the month of December, which registered a 0.53% rise in national house prices over the month and a -0.67% fall in unit values. Over the year, house values nationally lifted by 0.49%, whereas unit values fell by -0.40%  (see below table).

As with APM’s house price index, released earlier today, the housing market is two-speed, with solid annual growth experienced in Darwin, Perth and Sydney, but weaker growth or price falls experienced elsewhere.

As always, the commentary from Residex CEO, John Edwards, is worth checking out. In this month’s release, Edwards explains how poor affordability is likely to hold the market back, despite expected further interest rate cuts, which should lead to only modest house price growth:

On an Australia wide basis, capital growth in the house and land market achieved its best performance in the last 18 months. Weekly rentals also increased, with rentals for houses and land maintaining real value while units outperformed inflation by about 3%. Rental increases are good news and much needed as the sector’s capital value is either stagnant or just maintaining real value. This should be expected to continue…

As expect in an improving market, sales activity also increased in 2012. What is interesting from the sales figures is the fact that the unit market has now become almost as important and significant as the house and land market. Market share of unit sales is now in the order of 44%. In Sydney, unit sales are now almost equal in importance with the difference between volumes only being about 4,000 dwellings for the full year.

In my opinion, strong growth in the next few years is unlikely despite low interest rates and the likelihood of further rate reductions simply due to affordability issues. I believe the RBA will be forced to reduce the cash rate to as low as 2.25%, or perhaps even 2% over the next 12 months due to a slowing economy and a need to maintain employment in an environment where the resource sector moves from a development phase to a production phase. I am hopeful that the RBA will recognise the need to cut rates in one significant move in the immediate future rather than via a number of small cuts throughout 2013. I take this view as consumer sentiment is currently driving the economy and retail economies. Multiple reductions simply reinforce the fact that an economy is in trouble, which in turn undermines consumer sentiment.

My overall view for 2013 is that, with any luck, average growth across Australia will be above inflation. Given the state and position of the housing cycle and normal trends from here, this growth outcome should be easily achievable. However, it will depend on the unfolding global economic developments in the next 12 months and consumer sentiment. This year also brings a significant amount of distraction as a period of political exaggeration and cross claims are entered in preparation for the late year Federal Election. The recent past political environment has been one of the most self-interested, venomous and arguably politically driven part-truth manipulated periods in the last 50 years. Naturally, the public has and continues to react to this and the outcome of the election will impact on the confidence in our future.

The year ahead will be driven by:

  • Affordability in housing markets
  • Employment conditions
  • Consumer Sentiment

Over the course of the next few months, I will look at the above issues closely. In this newsletter, I focus on the first issue; Affordability.

Despite the interest rate reductions, affordability is still an issue for many Australians. Even at current interest rate levels, a large proportion of people cannot afford to make the loan repayments needed to allow them to compete for and buy a property that suits their needs, let alone their dreams. Competition for property has been reduced and with that there has been a reduction in demand. This is not the case in all Australian markets. It is, however, most certainly true for houses and land in major markets.

Graph 1 displays the House Price Growth Rate (HPI) on an annual basis compared to a measure of affordability (Affordability Indicator) for Australia’s largest market – Sydney. The measure of affordability is the percentage of gross income it takes for a household’s income to make home loan repayments. It assumes that the home loan interest rate is as quoted by the Reserve Bank for each year, and assumes an 80% loan to fund the median house value for each year.

There are a number of relationships evident in the graph:

  • The current measure of affordability (MA) is quite high by historical standards and has been increasing for the full term of the data set.
  • The median MA over the last 50 years is about 30%
  • Once the MA exceeded 50% (1987) HPI has gradually become lower.
  • Once MA exceeds 50% the market retreats and negative HPI eventuates in most cases.
  • For the last decade, MA has been at or above 40%. During this period it is clear that capital growth has been at its lowest level. In fact, Sydney HPI was the lowest on average of any capital city in Australia, providing an annual average rate of growth of just 3.46%.

Affordability issues flow across the total market as different income groups purchase different properties in terms of price and location. For example, those who would normally aspire to purchase a house given their income level would not easily move to purchase a unit, therefore the affordability of each category and area is important. Table 1 demonstrates this; even though units are around $200,000 less in cost and hence the median income takes MA to a realistic level of 32%, this segment still failed to produce capital growth that was better than the more expensive house and land segment in the last decade. Growth on average over the last 10 years for units was just 3.35% pa.

It seems to me that the MA has to be in the low 30% band for there to be reasonable levels of capital growth. We have some way to go to get to that yet.

[email protected]

Leith van Onselen


  1. I heard that there is some key information that only these property companies such as APM can get that the regular JoeBlogs can’t get, that government only allows registered business related to property to gain access to. Can anyone tell me what those details are ?

    It was something about not been able to make it public domain because of privacy issues or something ?

  2. Not a surprised, December has been very good on the street, is it investors paradise at this moment, and with ZIRP on the way, everything get CF+.The only big issue is the stock on the market, frankly poor, plenty of crap at the outskirt far from everything( or shitty apartments), but who would want that.

    If house prices stabilize at 3% pa, which is happening, it would be perfect and sustainable.Rent increase overtime by the lack of good supply and crazy high immigration.

    But the govs should really get serious about building or it s going to be painful very soon.

        • Good on ya, Dam. You are well on the way to become the Nathan Birch property millionaire of Brisbane.

          You should get a picture taken with The Donald soon. If not The Donald, at least his Aussie alter ego, Mark Bouris.

          • not really, he works hard I dont 😉
            seriously different matter, I do not expect much gain from property, I just use it to park my cash flow, long term investment, low leverage, that s all, they are CF+ but it s not material.I dont trust gold/Shares, land is always good, no matter what.

          • Dam classic as usual: “land is always good, no matter what”.

            Except in Ireland, Spain, Japan, Detroit (or Grafton on the flood plain, for that matter).

        • General Disarray

          Dam, you wrote on January 22, 2013 at 9:23 am

          …rents will increase steadly and interest rates are most probably stay very low or ZIRP for one or two generations.( note : i personaly rent )

          You need to take some astroturfing lessons.

          • General Disarray

            What is wrong here?

            Here’s the quote again “…rents will increase steadly and interest rates are most probably stay very low or ZIRP for one or two generations.( note : i personaly rent )”

          • yes I rent, I pay $900 pw for an awesome waterfront nest that is worth close to $2M.I m not stupid.I m fine with renting when it make sense, I do not invest where I would live and in the type of property I would live in, also by renting I do not have to pay 5-% transaction cost each time I move to another PPOR but I plan to keep my IPs for 20 years+( and they will be fully paid well before), no transaction costs on it. all fine.

          • yes but PPOR is not all about money and renting is mainly a good deal only for premium properties, for the low end it s not clear cut when you add the externalities.

          • Dam, you say renting at the lower end isn’t as clear cut when you add in the externalities. I’m not sure what you mean by this. Once I factor in the rates, land tax, utility charges, maintenance, insurance costs… that my landlord pays, it is pretty easy to see that renting is a much cheaper option. My home could only be described as low end.

          • $900/wk for something “worth” $2 m?

            Was it the house-proud owner that attached that “value” to it? Tell ’em they’re dreamin’….

            The old rule of thumb used to be (in very rough terms) that a fair value for residential property is around 1,000 x the weekly rent…. so I’d suggest the home is “worth” something more like $900k.

            That, or the investor is stupid. $900/wk is a gross yield of around 2.3%…deduct expenses and they’d be lucky to walk away with a pre-tax yield of 1.5% (for which they all the usual risks; tenancy, floods, locusts, acts of god…)

            Even after accounting for inflation, they could get a better return from term deposits.

          • my case is slightly special( far a property purchased for 1.7M in 2006) but yes, yield for premium properties are ridiculously low hence the value of renting them.It is probably due to the fact that most renters are at the low end, there is far less competition in renting high end.

          • My point was in relation to the “value” assigned to properties. You’re right that the differential b/n what I consider reasonable (return for investment) versus actual prices is much greater for “premium” properties.

            I would assert that it’s not that the return on value is lower, it’s that the perceived value is higher than should be expected.

            Remember that your average “house & land” is simply that: a house (depreciating structure) and land.

            If it costs me $450k to build my dream home, or $150k to build a crappy McMansion, the difference in value (on two identical plots of land) should be roughly $300k.

            The fact that it isn’t, suggests an imbalance in the market. It it didn’t reflect an imbalance, every McMansion owner would be levelling their homes/IPs and building the “premium” home to re-sell

  3. Not one word about the role of price as a factor influencing affordability and that reductions in price will make housing much more affordable.

    No surprise there.

    Standard calls for even lower interest rates as the only remedy for low affordability but a distinct note of pessimism about the prospects for growth.

    Lower prices in an efficient housing market will stimulate plenty of activity for real estate agents, mortgage brokers, builders etc.

    Guess we will just have to grind along the bottom for a decade, trying to prop up asset values, before the message sinks in.

    Hopefully our ANZAC cousins across the ditch will show their dopey cousins in Oz how to fix the problem.

  4. One thing is for sure, with an election now called for September there all stops will be pulled out to ensure a buoyant housing market over the next 9 months no matter what the cost to the rest of the economy. So for housing I reckon it’s like the Lone Ranger ‘up up and away!’

  5. Brisbane and Melbourne are interesting

    Prices flat but sales volumes well up. 17% increase in Bris unit sales YoY. Mel not far behind. FHBs on strike, so who’s buying? Local or OS investors? SoM falling. Rents flat. New dwelling sales falling. Still building new dwellings at long term averages.
    Dicounts galore on new dwelling prices.

    Somethings got to give.

    • Local or OS investors? yes investors, and for what I am witnessing a significant bunch of overseas buyers ( i dont know if it s for investing or “kid’s PPOR” ), from the point of view of someone from Singapore/Shanghai/HK/KL, properties are really good value and dirt cheap here even with the exchange rate.Lot of them made a killing with the increased value of the AUD.

      • Apartment sales may be up in Brisbane as people try to escape the high tide mark.

        All jokes aside, do we know how property is being propped up by foreign investors?

          • Numbers from FIRB suggest that claims of foreign investors “propping up” the market is massive red herring…. When it comes to residential real estate approvals & investment, the numbers suggest that the average price of purchase is way above the national median (FY2011 it was about $970k). What’s more, foreign investment into projects averaged a bit over $3 million in FY11. This suggests they were actually creating supply (presumably these $3 million developments were more than 1 or 2 studio apartments). As much as it makes a good story to blame current prices on some kind of influx of foreign dollars, the numbers don’t support it

          • I m not sure the the FIRB numbers are worth much, they seem pretty stable but the reality on the street is obvious.Something does not show up here, new residents buying or International buying by their kids (student) or even Residents buying for syndicates in china.
            honestly I dont know.

          • Fair point, the data is questionable in it’s transparency.

            That said, I know which barometer I’d favour if asked to choose between FIRB data and observations of who is turning up to auctions.

            For “big picture” stuff the FIRB data is almost certainly more accurate than using a local example and extrapolating it out across the whole nation

      • An anecdote. Close observers will know I rent a 4 bed 2 bath ~$1.2m house for $600pw in leafy Balwyn 3103 (and I am negotiating a rent reduction). An 85 sq 5 bed 7 bath 4 living 4 car rendered polystyrene monstrosity has been built next door. It is in execrable taste and the Chinese vendors want $3.5m. A perfect example of market-top speculation.

        No Western buyer would consider it. The ‘investor’ is gambling the CCCP allows the Chinese money exodus to continue.


        • yes, last October I have been outbidded ( by a Chinese national) by a straight $250k !!! like the property’s value did not matter (my bid was $412k ). Ridiculous

          • So, according to your own spuriking on this website, you bought 3 IPs in Brisbane last year and ALSO got outbid by 250K on a property in Melbourne?

            My, my… ‘Mad’ appears to be getting a little loose with the truth.

            Next thing we know, he’ll be telling us that he sold out at the exact property top for several million in clean profit and can now retire at age 28 to his personal island in the Pacific.

            Mad – here’s a challenge. Give us your income stream against your three IPs, all relevant loan details (total, prevailing rate) etc so that we can assess your claims. Better still, tell us the suburbs of Briz so that we can calculate the average capital gain/loss over the period etc also.

            If you are unwilling to do this, then why are you here posting 1000 words a day of mindless drivel, when you could PROVE that there is still money to be made in property?

          • Good catch, Bobby! Though I must say he gave the game away to me a long time ago.

            Anyway, Dam got a good workout today from all and sundry 🙂

          • Melbourne ???? not really, QLD
            I suppose Melbourne has much more internationals.But yes that was a strange/weird one.

          • I’m glad to see you back Mav to give this place a bit more balance.

            Yes, dam’s MB performance reminds me a bit of Moe from the Simpsons when he discusses his not so glamorous fighting career:

            (Season 8, Episode 3 – “The Homer They Fall”)

            Moe: Back when I was Gorgeous, everybody wanted a piece of me. But somehow, I just never made it to the big time.

            Homer: Why not?

            Moe: ‘Cause I got knocked out forty times in a row. That, plus politics. You know, it’s all politics.

            Homer: [glaring] Lousy democrats.

        • Another anecdote, my landlord didn’t even bother to try to raise my rent when I renewed my lease. The response from the agent when I asked about this was that they had advised all landlords against it this year because of market conditions.

        • So an ordinary house rents for $600 per week. That’s about 2 or 3 pensions I think.
          And the ordinary house sells for $1.2m and next door a $3m house is built.
          All this in a country where there is no shortage of housing (according to many posters). Imagine what the rent and prices would be if there was a actual shortage!

          • Claw – I think the difference of opinion between you and many of us (shortage deniers) is that we are defining “shortage” differently.

            Nationally there is no “shortage” of physical properties.

            There is a shortage of affordable prices.

            In the first scenario the landowner holds the lion’s share of the bargaining chips. In the second the customer (renter, in this case) holds the cards.

          • reusachtigeMEMBER

            Just average for the knock down rebuilds in Strahfield nowadays. Isn’t that what old federation big blocks are for, to fill up totally with a house for Chinese immigrants?