With the Australian Bureau of Statistics releasing the Consumer Price Index for the December 2016 quarter recently, using the CoreLogic Home Value Index we can adjust changes in dwelling values for the effects of inflation.
The value of looking at inflation-adjusted or ‘real’ home value changes is that it highlights whether housing values are moving higher or lower relative to other costs across the economy.
Combined capital city dwelling values increased by 10.9% throughout 2016 while headline inflation increased by a much lower 1.5%.
When adjusted for inflation, value growth is lower across all cities (as you’d expect) with values having fallen over the year in both Perth and Darwin.
In 2008 home values fell by 6.1% between the end of the March and December quarters.
In real terms, capital city dwelling values fell by a larger -8.3% over the same period.
Both in nominal and real terms values started to rise once again from the end of 2008.
This recovery in growth was fueled by generous grants to first home buyers and the stimulus of extremely low interest rates.
Over the eight years from December 2008 to December 2016 only Sydney and Melbourne have recorded real dwelling value growth in excess of 12%.
Outside of Sydney and Melbourne, Darwin (2.6%) and Canberra (11.7%) are the only two cities that have recorded a real increase in values.
In Brisbane (-2.3%), Adelaide (-2.6%), Perth (-9.0%) and Hobart (-8.6%) real home values are lower than they were eight years ago.
The chart above shows the real change in individual capital city home values from their previous market peak.
The chart shows that in only Sydney and Melbourne are real values above their previous peak.
In Sydney, values are 37.8% higher than their March 2004 previous peak.
Real Melbourne home values are 19.4% higher than their September 2010 peak.
In Brisbane, real home values peaked over the March 2008 quarter and at the end of 2016 they were still 9.1% lower than they were at that time.
Adelaide home values were 5.3% lower in December 2016 than they were at the time of their real value peak in June 2010.
Perth home values peaked in real terms all the way back in September 2007 and at the end of 2016 they were still -18.5% lower in real terms.
Real dwelling values peaked in December 2007 in Hobart and at the end of 2016 were still -14.3% lower.
Following their peak over the September 2010 quarter, Darwin dwelling values are currently -19.8% lower in real terms.
Finally in Canberra, real dwelling values are -1.4% lower than their June 2010 peak.
Although most people tend to not look at the world in inflation-adjusted terms, it is important to consider housing costs from this aspect from time-to-time.
It highlights that although the cost of housing at times escalates quickly (particularly so in Sydney and Melbourne at the moment) in real terms the growth may not be substantial.
It is undeniable that Sydney home values have risen rapidly over recent years however, consider that since their previous March 2004 peak, they have only increased at a rate of 2.5%pa.
This is largely due to the fact that values fell in real terms between March 2004 and March 2014.
With inflation remaining low and values continue to rise we would anticipate that in real terms values are likely to continue to rise across most of the capital cities throughout 2017.
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