How has the housing market performed when adjusted for inflation?

Home values are typically looked at in unadjusted or nominal terms however, adjusting for the effects of inflation can provide a useful insight into how the housing market has performed and why home value growth has picked up over recent times.

Home value movements are often measured in unadjusted or nominal terms as this highlights the true change in values.

It is also important to consider ‘real’ movement in home values; this is done by adjusting value changes for the effects of inflation.

Analysing home value changes in real terms allows greater insight into how the housing market has performed relative to the level of inflation in the economy.

With the release of the March 2013 quarter CPI figures last week we can now compare the nominal and real movement in capital city home values over the first quarter of the year.

According to the RPData-Rismark Home Value Index results, home values across the combined capital cities rose by 2.8% over the first quarter of 2013.

CPI was measured at just 0.4% over the quarter indicating that in real terms, home values increased by a slightly lower 2.4%.

As the first chart shows, home value growth is significantly lower over the period of March 1996 to March 2013 when you take into consideration inflation.

In fact, combined capital city home values have increased by 241% over the period in nominal terms but in real terms they have increased by a significantly lower 121%.

Although nominal values have risen over recent years, in real terms, capital city home values are currently at a similar level to what they were in September 2007.

rpdata's property pulse - research article

In nominal terms, quarterly capital city house values were -3.3% lower than their September 2010 quarter peak over the first quarter of 2013.

Unit values across the combined capital cities also peaked over the September 2010 quarter and at the end of the first quarter of 2013 they were -0.9% lower.

If the results are adjusted for inflation, each peak was also recorded in September 2010 however, house values are currently -8.9% below their peak and unit values are -6.6% lower.

As the second table shows, in nominal terms, all cities and product types have recorded an increase in values since their respective lows, highlighting the pick-up in home value growth since the second quarter of 2012.

rpdata's property pulse - research article

The third chart highlights that when adjusted for inflation the results are quite dramatically different in some instances.

The most notable differences are found in Sydney, Brisbane, Perth and Hobart. In inflation adjusted terms the Sydney market peaked in the first quarter of 2004 and house values remain -8.7% lower than their peak and unit values are -3.4% lower. In Brisbane, house values peaked in the first quarter of 2008 and are -16.7% below their peak and unit values peaked in the final quarter of 2009 and are -12.8% lower.

 

House values in Perth peaked in the third quarter of 2007 and are currently -11.8% lower while unit values peaked in the final quarter of 2009 and are -10.5% lower. Finally, Hobart house values are currently -17.0% lower than their fourth quarter of 2007 peak and unit values are -13.8% lower than their second quarter of 2009 peak.

rpdata's property pulse - research article

Overall the data highlights that over recent years, rising costs across the economy have outstripped the increase in home values.

As a result, the relative affordability of home values has shown some subtle improvement over this time.

When you also consider that over recent years mortgage rates have been lower than in the past, it has contributed to an improvement in housing affordability.

This would also seem to indicate why there has been an increase in home values over recent months given that in inflation adjusted terms values are at a similar level to what they were at the end of the September 2007 quarter.

The fact that home values have remained below their peak for a much longer period of time in Sydney and Perth is also probably a reflection of why these two housing markets have recorded some of the strongest rebounds in home values of all capital cities over recent times.

Looking forward, we have already seen that the rate of home value growth has slowed throughout April and keeping in mind that value growth is typically strongest over the first quarter of the year, we would expect that increases in home values will continue to track fairly closely to inflation, or perhaps slightly higher based on the low mortgage rates, over the coming year.

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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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