The confusing signals coming out of the housing market have continued, with the release of the January dwelling price data from Residex showing that house price nationally fell by -0.88% over the month and by -0.38% over the quarter, but were 0.82% higher over the year. By contrast, unit values rose by 0.50% in January and by 0.77% over the year (see next table)
Losses in house values were concentrated in Melbourne and Sydney, which fell by -1.93% and -1.49% respectively in January. By contrast, Brisbane experienced strong house price growth, with values rising by 1.98% over the month.
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Below is the market commentary from Residex’s founder, John Edwards:
I was hoping to be able to report a strong start 2013 with a very positive newsletter about the January outcome in our housing markets. Perhaps I can!
The Brisbane house and land market was the best performer for the month of January. Growth was strong at 1.98%. If this were to continue each month throughout the coming year, the outcome to January 2014 would be an outstanding 26.5%. However, it is not rational to suggest this growth will continue at this rate for the balance of the year.
The trend for Brisbane houses is presented in Graph 1.
Graph 1
Residex data indicates that there is a stock shortage in Queensland. However, research leads us to believe that people who desire a house and land package will not necessarily alter their preference when affordability issues present. They will instead put off a purchase and rent until they can afford what they want. They do not move to purchase the affordable alternative (a unit) easily. This seems to be a reasonable decision as home purchasing is a very long process that generates financial risk and often hardship. Hence, the difficulties are generally only accepted when the person is happy that the property purchase meets their desires.
My above point probably explains why the Brisbane unit market is performing poorly in contrast to the house and land market. The unit market will be where there is surplus stock, but it is not where the current demand is generally.
Graph 2 presents the position of the Brisbane unit market up to the end of January.
Graph 2
Rental increases are occurring in both market segments in Brisbane, providing confirmation that my above statement is correct. The weekly rent for houses increased by 10.8% to the year ending January 2013, while units rose 18.32% during the same time period. There is clearly rental competition for both types of dwellings but only house and land stock presented capital growth. Further, the unit market is the main domain of the tenant. As expected, this market presented the most demand and the highest increase in dollar weekly rentals.
The most disappointing result is Perth. The quarterly growth rate was negative and it would appear that this market is reacting to the much publicised slowing in resource projects more quickly than expected.
The unit market is a small component of the overall housing market in Perth, so its small nature means that it may not be a good indicator of what is happening. Graph 3 provides the trend for Perth Houses.
Graph 3
The Melbourne market is reacting as expected. Residex estimates indicate that this market is in a surplus stock position (approximately 13,000 dwellings), which is most likely to be found in the unit market. It is reasonable to expect that this market will correct with this level of stock overhang.
The adjustment in the Melbourne market was -2.52% for units in the last quarter and -0.25% for houses. Investor activity is unlikely to assist this market as rental yields are the lowest in the nation at 3.9% for houses and 4.7% for units.
Graph 4 presents the Melbourne trends.
Graph 4
Given the stock overhang and the recent price adjustments, the Melbourne market is expected to hover around the zero growth position until the overhang has been absorbed and rental yields increase.
Overall, housing markets did not perform as I expected in January, or how many industry commentators indicated. Interest rate adjustments are having some impact and can perhaps be said to be the cause of recent growth experienced in many markets. However, further interest rate adjustments will need to occur before markets present real growth on an Australia wide basis. I remain hopeful that the next RBA adjustment will be significant (more than 0.25%) and that it will be sufficient enough to make it the last cut in this cycle.
The early announcement of the Federal Election date was not what we needed as it causes those who are more cautious to “sit on their hands” and await the outcome, even though the election outcome seems fairly clear.
On a positive note, there is better news on the global front. This will assist in generating positive sentiment in the community, which may in turn help drive house prices. There has been less negative press in both traditional and new age media.
The Italian election coming up next week (24 – 25 February) is important. There seems to be a chance that former Prime Minister Silvio Berlusconi will return to power. Should this happen, the European Union could again become a financial market flash point for global markets.
Given all of the above, markets that are currently showing the most promise are northern Australian markets and Sydney housing. I continue to recommend renovation opportunities in these markets. In the Sydney market, older style units will be under some price pressure and offer renovation opportunity.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
