The median house price around Australia fell 0.2% in June to according to the latest figures from RP Data, with the housing prices falling 2% over the year. This clearly shows our markets are correcting and not collapsing as some commentators and many bloggers would have us believe.
While the June result was technically the sixth straight monthly correction in capital city home values, the rate of decline has been moderating since January when capital city values fell by 1.2%. They then fell 0.5% in March, 0.4% in April and 0.3% in May.
But, considering the latest inflation numbers were way above the RBA’s target range, what will happen to house prices if interest rates rise later this year?
The RP Data figures show prices falling in every capital city in the month of June except in Hobart, where they rose by 0.9% to a median of $322,500.
Prices fell the most in Darwin (-2.8%.) They also fell in Adelaide (- 0.5%),Brisbane (- 0.3%) and in Sydney(- 0.2%), Melbourne (0.1%) and Canberra (- 0.1%.)
The city with the highest median price remains Sydney at $515,000, followed by Melbourne and Canberra at $485,000.
Over the year, the largest falls have been in Brisbane and Perth with drops of 6.3% and 4.7% respectively, followed by 2% in Melbourne, 3.1% in Adelaide, 2.7% in Darwin and 2.8% in Hobart. Prices have also fallen by 0.3% in Canberra.
According to Tim Lawless, RP Data’s research director, the effects of natural disasters experienced earlier in the year are now washing out of the monthly and quarterly numbers.
“Market conditions are clearly being dampened by low levels of consumer confidence fuelled by interest rate speculation and global economic jitters. The higher-than-expected CPI figures earlier this week are likely to reignite the interest rate debate which is not going to assist with an improvement in consumer sentiment,” Mr Lawless said.
Rismark’s economist, Christopher Joye, added, “We think the RBA is likely to raise rates at least once or twice more to address Australia’s burgeoning inflation problem, which means dwelling values will probably soften a bit further. This should open up attractive investment opportunities.”
“Higher rates means the rental market will tighten beyond its already firm levels, with vacancy rates near all-time lows. In turn, this will drive rents and yields even higher. Over the next year we expect to see wages and disposable incomes continue to rise solidly while house prices flat-line or taper modestly,” Mr Joye said.
A similar pattern of a slowing rate of dwelling value declines has been found in the ‘Rest of State’ markets, which includes the 40 per cent of homes located outside the capital cities.
According to RP Data-Rismark’s Rest of State Index, house values were down 1.6% in the first quarter of 2011 and a lower 1.2% in the June quarter. The performance of regional markets over the first six months of the year is very similar to the capital cities, with values off by 2.8%.
According to Mr Lawless, the weak regional performance can mostly be attributed to the Queensland and Western Australian markets.
Unit markets have continued to outperform detached houses, with unit values recording no change in value over the June quarter compared with a 1.2% fall in (more expensive) house values. A similar result applied over the twelve months to June: unit values were unchanged whereas house values were down by 2.6%.
Mr Lawless said the variation in performance between the two housing types comes back to affordability.
Is the market bottoming?
“Some of the key leading indicators have recently shown improvement suggesting the housing market may be approaching the bottom of the cycle. The average selling time reached a high of 58 days back in March and is now down to 52 days.”
“In contrast, the level of vendor discounting has risen to 6.8 per cent in June as vendors become more willing to meet market price expectations. Listing volumes have recently leveled and are now about 2.6 per cent lower than their peak last month. Despite the modest improvement in these indicators, the readings remain above average highlighting that any return to capital gains is likely to be a way off, particularly if interest rates rise in the near-term,” Mr Lawless said.
Rismark’s Mr Joye added, “As a conservative guide, dwelling prices tend to track disposable incomes through-the-cycle, or the typical owner’s average 7-8 year holding period. Historically, disposable incomes have expanded at a six per cent per annum pace. Going forward, a more realistic guide is probably around 4-5 per cent per annum.”
“Over the next 10 years, it would not be unreasonable to expect to generate this kind of capital growth in concert with rental yields net of costs of 3-4 per cent annum. Patient folks opportunistically investing in housing are probably going to find the best prices, and valuation fundamentals, that they will have had access to in a long time. Otherwise, we favour variable-rate cash as an asset-class given our long-held forecast that the RBA will raise rates to deal with Australia’s growing inflation problem.”
“The Australian housing market’s demand- and supply-side fundamentals remain healthy. And they will improve further in the year ahead. The one fly in the ointment is interest rates. When the RBA comes to cut them, affordability in this country is likely to be the best we’ve seen in over a decade, which will help fuel a robust recovery and encourage investors to allocate scarce capital to boosting housing supply” Mr Joye said.
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