Residex has released its April housing market update, which showed that house/unit values rose by 0.83%/0.32% nationally in the month of April. However, performance was mixed, with house values in the two biggest markets – Sydney and Melbourne – recording solid falls.
The price results for the major capital city markets and nationally are listed below:
Looking forward, Residex’s founder, John Edwards, sees an ongoing moderate recovery in home prices. While interest rates are at low levels currently, and are expected to fall a little further, affordability remains stretched according to Edwards, which should hold back the rate of capital appreciation.
Below are the key extracts from Edwards’ housing market update, which explain his outlook in greater detail.
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The latest interest rate decision, where the RBA lowered the cash rate by 25 basis points to 2.75 per cent, will help home owners and will increase affordability for those wanting to get into the housing market. Each rate reduction also has a negative impact on the retired population and those in the community who rely on interest earning investments.
I pose the question, have rate reductions in recent months been sufficient enough to allow significant house price growth or cause house price growth of such significance that could cause the RBA feared housing market bubble?
Personally, I think not simply because most markets remain constrained by affordability.
Table 1 presents the analysis based on median house prices and median household income. The table has been developed assuming:
The home loan rate is 5.4% pa, convertible monthly
The term of the loan is 25 years
The family has an average tax rate of 17.5%
A 20% deposit is available to buy a home
The purchaser has sufficient funds to cover the initial costs of buying a home – eg: legal and stamp duty costs etc.
Table 1
The column titled Weekly A/T Spending Power refers to the remaining cash after rent or home loan repayments. The % of A/T Income columns represent the percentage of after tax income that loan or rent payments take. I believe the “Spending Power After Payment” figures are more important as they are easily related to by most of us.
I am sure that most of us with a small family would consider living on $1,000 per month somewhat difficult, having to use this to make car repayments, pay energy bills, telephone costs and at the same time buy food and clothing. When looking at the table in this light, the median family buying the median home is very constrained by affordability. In fact, they are better off renting. Buying a unit is more affordable but again there is a going to be a level of hardship.
The realisation that renting is a better option will be taking hold but the lack of security of tenure will be influencing many people and causing them to accept the more difficult option. Ownership of house and land assets is going to become less prevalent and ownership of units will become more of the norm in time. Additionally, renting will become more prevalent in city areas. The data, with respect to the volume of sales in these two market segments, underlines the change taking place. Looking at Table 2 that follows, and in particular the volume of sales occurring in Sydney which is the most unaffordable market in Australia, the comparison between sales volumes of units versus houses is informative.
Clearly, if demand is limited due to affordability there will also be a limit on the rate of capital growth. Given the view that interest rates are unlikely to fall much further and house prices probably won’t fall in value by any significant amount, properties that are most likely to see growth are those located in areas with better affordability…
Overall, the Australian housing market is improving.
While I don’t favour considering houses and units as one segment because they have very different return attributes, it is usefully to combine them to simply get a general indication of the direction the market is heading. The median value of all dwellings in Australia is approx $425,000, which is around its peak value achieved in January 2011. In the last 3 months dwelling prices increased by about 1% while they increased by approximately 1.7% in the last 12 months. Clearly, the majority of advances in the market have taken place in the last three months. Sales activity remains low but it is improving. It is now close to the level achieved in December 1999.
Table 2 presents the performance of city and country areas to 30 April 2013.
Table 2
Most markets are presenting growth but Sydney’s un-affordability is making it overly sensitive to changing economic conditions. Equally, Melbourne has suffered in the last month but to a lesser extent. Auction clearance rates are up but it appears that the reality of current market conditions and talk of a slowing economy are being recognised by vendors who are accepting more realistic offer prices.
Graph 1 presents the capital growth rate on a quarterly basis and the trend in the dataset to April 2013. The improving situation is clearly evident.
Graph 1
Overall, the recent interest rate reduction will help ensure the advance in housing values that are currently being seen continues, albeit at a moderate level. Rental yields across the nation are rising and will continue to do so as fewer people venture into home ownership and renting becomes more the norm. The only exception to this is Canberra where there is a stock oversupply. There must also be some uncertainty here towards the employment level given the pending Federal Election and the likely outcome of a change in government.
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.
