Housing values

Housing affordability is now at its best level in a decade, so there is every chance capital growth will accelerate this year. This has ramifications for buyers and sellers, builders and developers, investors seeking to resolve asset allocation questions and the Reserve Bank of Australia’s monetary mandarins.

In the middle of last year some misanthropes were not prepared to accept that the RBA’s 75 basis points’ worth of rate cuts over May and June, coupled with the 50 basis points salvo in late 2011, had reinvigorated Australia’s moribund residential market.

Seven Network’s David Koch was a prominent sceptic. In July, “Kochie” rejected evidence from RP Data that Australian house prices were climbing again. “[House price rises are] just not happening yet,” he wrote, predicting that “tough times for Australian property appear set to continue”.

One source of his conviction was Louis Christopher, a property commentator with SQM. After the publication of RP Data’s June house price index results, Christopher issued a media release to say that the numbers were simply wrong.

“I do not believe for a moment that house prices are now rising in Sydney or Melbourne as RP Data have claimed,” Christopher said. There were “no other measurement[s] . . ­. indicating that prices are rising”.

These conflicts are par for the course when it comes to the question of whether the cost of Australian bricks and mortar is rising or falling. It is no surprise that the issue attracts attention given that 60 per cent of household wealth is invested in residential property. House prices matter.

The bad news for those hoping to see housing depreciate further is that Kochie and Christopher were wide of the mark. We know this because we have the benefit of the 2012 house price data from the three benchmarks used by the RBA.

According to APM’s monthly index, Sydney and Melbourne prices have appreciated at annual rates of 6 per cent and 7 per cent respectively since June 2012. RP Data offers a similar picture with monthly dwelling values in Sydney and Melbourne rising at a 7 and 6 per cent annualised clip from their depths in May 2012.

The Australian Bureau of Statistics index, which ignores the apartment market and is only calculated on a quarterly basis, shows that free-standing house prices in Sydney and Melbourne have inflated at more modest rates.

The bottom line, all three measures broadly tell the same story: home values were increasing in the second half of 2012.

RP Data’s “hedonic” index, which controls for renovations and changes in the types of properties, suggests that dwelling values in the eight capitals have been expanding at a healthy 6 per cent annualised rate since the mid-2012 nadir. This is faster than wages and disposable household income growth.

House prices are being driven upwards by a tremendous improvement in affordability, the result of generous RBA rate cuts. UBS data show that mortgage repayments as a share of disposable income are at their lowest level in 10 years.

For those analysts who cling to the concept of a “prudent” Australian consumer who shuns risk and leverage and is squirrelling away more savings than they have done in 20 years, the next 12 to 24 months will be a formidable test.

According to UBS’s measure, housing affordability is now better than it was in early 2009 just before a spectacular run-up in national prices. In that year Australian home values jumped about 14 per cent.

To be sure, they had the tailwind provided by an enlarged first-time buyers’ bonus. Yet we also had a global economy in recession. Today local and global growth prospects are demonstrably more positive.

The last time Australian housing affordability was this good was in 2001. That year Australian dwelling prices surged 19 per cent. They ballooned again in 2002, by 16.7 per cent and in 2003 by 17.6 per cent.

One important difference in 2001 was that Australia’s household debt-to-disposable income ratio was a substantially lower 95 per cent. By 2006 it had hit 150 per cent, which is about where it is today.

In the early 2000s families could assume more leverage to bolster their purchasing power. They may not be able to do this again.

However, the signs of housing momentum are building. Australia’s largest mortgage broker processed more home loans last month than in any January previously.

RP Data’s CEO, Graham Mirabito, says that his valuation subsidiary, ValEx, which covers 80 to 90 per cent of all loan transactions,, last week mediated more valuation requests than ever before.

The RBA with its policy settings is certainly doing everything possible to fire up the embers. It says rates are not at “emergency lows” but they sure look like it.

During the GFC, the RBA pushed the average discounted home loan rate down to 5.4 per cent. Discount home loan rates today are only 30 basis points higher at 5.7 per cent.

Fixed-rate home loans are cheaper than ever. The average three-year fixed-rate loan in 2009 was 6.6 per cent. Today it is just 5.5 per cent. On Friday, Westpac announced a two-year fixed-rate product for just 4.99 per cent.

It is hard to imagine how these circumstances will not stimulate hearty asset price inflation.

Article by Christopher Joye