The latest figures from RP Data showed that capital city houses prices fell 0.2 per cent in the month of November and ‘rest of state’ house prices fell 0.1 per cent). In their latest update RP Data & Rismark warned that they expect further weakness in 2011 as rates rise.
In the capital cities, Australian home values are now lower than the levels they reached in March 2010. That is, there has been no capital growth since the end of the first. Similarly, in the ‘rest of state’ markets, which account for around 40 per cent of all homes by number, dwelling values are now below their January 2010 peak.
The key drivers of the soft-landing in Australia’s housing market in 2010 has been the RBA and the banks, which have lifted the headline variable mortgage rate from 6.3 per cent in November 2009 to 7.8 per cent in November.
RP Data’s director of research, Tim Lawless, observed that the decline in Australian home values had been reasonably modest, “Since their peak in May 2010, capital city home values have fallen by 1.0 per cent in raw terms. The rest of state areas peaked in April 2010, and have suffered a similar 0.9 per cent fall. In the broader scheme of things, these are fairly modest adjustments in value.”
Downturn in all segments of the market
The soft-landing in Australia’s housing market has been evidenced in all capital cities and across each segment of the market. When RP Data-Rismark divide up their hedonic dwelling value index into ‘cheap’, ‘middle market’, and ‘expensive’ suburbs, they document a synchronous downturn in capital growth rates across all these areas.
Christopher Joye, Rismark’s managing director, added “Since the middle of the year, we have had a somewhat bearish view on housing over the 2010-11 period as a function of our projections for interest rates. If for some unlikely reason the RBA does not raise rates further, we would expect to see national dwelling prices stabilise over 2011 and grind out capital gains in excess of headline inflation, which we anticipate will breach 3 per cent by the end of the year.”
“Assuming, heroically, that there are no more increases in the cost of mortgage debt, we would forecast capital city dwelling price growth of 4-6 per cent in 2011. This is not, however, our base-case”, Mr Joye said. Joye continued, “We believe that there is a risk of at least three cash rate increases in 2011. In this event, our central case is that there will be little-to-no nominal dwelling price growth over 2011, with a chance of small nominal declines.
This is no bad thing, and will only further improve asset-class valuations. Indeed, Rismark has recorded an improvement in Australia’s dwelling price-to-disposable household income ratio, which has fallen from a peak of 4.7 times to 4.4 times in the third quarter of 2010. We believe that the likelihood of substantial national house price falls is remote.”
The under-performance in Perth and Brisbane has persisted in line with their higher repossession rates that came about care of the GFC. Over the three months to end November, Perth home values were down 3.0 per cent and Brisbane values were down 1.0 per cent in seasonally-adjusted terms. The best performing markets over the three months to end November have been Darwin (up 1.9 per cent), Canberra(up 1.2 per cent) and Melbourne (up 1.2 per cent).
What about interest rates?
Financial markets are currently pricing in a further two 25 basis point RBA cash rate increases over 2011 while the economic community expects a more aggressive 3-4 rate hikes.
According to Mr Lawless, the prospect of further rate hikes is likely to keep market conditions in the doldrums over the coming year, “The expectation of higher mortgage rates will be enough to keep a lid on capital gains across most parts of the country. Consumers have become very sensitive to interest rate adjustments to the extent that the nation seems to hold its breath on the first Tuesday of each month when the RBA’s decision is announced.”
Christopher Joye added that the RBA had pioneered a new form of monetary policy, “The RBA has well and truly led the central banking world on the subject of asset prices. The RBA has recently adjusted the way it sets interest rates to take more explicit account of changes in asset prices, which, in principle, include shares, commercial property and residential housing.
The RBA accelerated its rate hikes in 2009 and 2010 more rapidly than it would normally have done so in order to engineer a cooling in a housing market that it perceived to be growing at unsustainable rates. Other central banks, such as the Swedish Riksbank, are now following the RBA’s innovative lead.”
“This expansion in the RBA’s policy remit is not, however, without considerable risks: it is always possible that this benign autocrat overplays its hand and lifts rates too far in response to non-inflationary events.
Mistakes in this vein arguably occurred in the late 1980s, which led to a peak mortgage rate of 17 per cent in January 1990 and the recession ‘we had to have’. As a consequence, unemployment soared to around 11 per cent. The independence of central banks, and the RBA’s hard-won inflation-fighting credibility, are historically recent innovations. The non-democratically elected leaders of these institutions would, therefore, be wise to exercise their considerable powers with the utmost humility and care”, Mr Joye cautioned.
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