Home values remain below their highs when adjusted for CPI- Cameron Kusher

According to the RP Data-Rismark home Value Index, capital city home values were 0.7% higher than their previous highs in September however, when you adjust for inflation, RP Data’s capital city index remains -6.5% lower than the previous peak.

The RP Data-Rismark Home Value Index shows that combined capital city home values have increased by 8.7% throughout the current growth phase and are now 0.7% higher than their previous peak which was recorded in October 2010.

It is important to note that the combined capitals index is stock weighted, which means the performance of larger cities like Sydney, Melbourne and Brisbane have a larger impact than smaller ones.

Although the combined capitals index is now higher than the previous peak, at an individual city level, the only capitals where values are at a record high are Sydney (+6.6%) and Canberra (+0.5%).

RP Data Property Pulse - research article

It is important to note that these figures are nominal (not adjusted for the affects of inflation). With the quarterly CPI data released by the Australian Bureau of Statistics last week, we can adjust the results of the RP Data-Rismark Home Value Index for inflation to September 2013.

When you adjust capital gains for the affects of inflation the results are significantly different. Across all capital cities values remain lower than their previous peaks. At a combined capital city level, inflation adjusted values are -6.5% lower than their previous peak compared to being 0.7% higher if unadjusted.

RP Data Property Pulse - research article

The cities such as Sydney and Canberra are higher than their previous peaks in non-adjusted terms whereas they remain -3.3% and -6.6% lower respectively when adjusted for inflation. This fact highlights exactly why the impact of inflation on home values is an important, if not often overlooked consideration for the market.

Over recent years, the housing market has been characterised by higher levels of volatility and subsequently lower levels of home value growth. Conversely, inflation has still been occurring at a time when home value growth in most cities has failed to maintain pace. As a result, the cost of most other goods and services in the economy has risen at a faster pace than home values over recent years.

This fact is highlighted by the third chart which shows the difference in growth between the inflation adjusted and the non-inflation adjusted capital city dwelling values over time. At a combined capital city level, inflation adjusted values peaked at the end of the September 2010 quarter, which is at a similar time to the non-adjusted figures.

The major difference has been that those inflation adjusted figures have seen a turnaround in value growth over just the past couple of quarters whereas the non-adjusted figures have been increasing since June 2012.

RP Data Property Pulse - research article

The final table highlights the quarter in which inflation adjusted values peaked across each capital city, the quarter in which they reached a recent trough, the peak to trough value falls and the increase in values from the respective market troughs.

The most confronting figure is how long it has been since there has been any ‘real’ value growth in some of these cities. Sydney values peaked all the way back in the first quarter of 2004, Brisbane values peaked in the first quarter of 2008, Perth values peaked in the third quarter of 2007 and Hobart values peaked in the final quarter of 2007. In Melbourne, Adelaide, Darwin and Canberra the value peaks have been much more recent.

RP Data Property Pulse - research article

The data highlights that the costs associated with most goods and services has increased at a faster rate than the increase in home values over recent years. As a result, housing is relatively more affordable especially considering how low mortgage rates are currently.

Given this it is no surprise that home values have been growing on the back of low interest rates although, it has been mainly contained to Sydney, Melbourne and Perth. It will be interesting to see over the coming months if value growth in these cities can be maintained as we foresee some potential affordability constraints entering these markets given the rapid rate of value growth.

Conversely, it will be interesting to see whether some of the markets that have seen larger value corrections such as Brisbane, Adelaide and Hobart start to see an improvement in value growth conditions.

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Cameron Kusher

About

Cameron Kusher is Corelogic RP Data’s senior research analyst. Cameron has a thorough understanding of the fundamentals such as demographics, trends & economics. Visit www.corelogic.com.au


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