City home values continue to climb despite rate rises…

Based on the RP Data - Rismark February Hedonic Home Value Index results released today, dwelling values in Australia's capital cities continued to rise by 1.4 per cent over the month following on from 2.0 per cent growth in January. In the 12 months to end February, Australian capital city home values have increased by 12.7 per cent after values fell by circa 3 per cent in 2008.

Following a request from the RBA, RP Data - Rismark have developed a new ‘Rest of State' Hedonic Home Value Index that covers all non-capital city regions across mainland Australia. This has been reported in the RBA's Statement of Monetary Policy. Interestingly, capital gains have been much more subdued in the Rest of State markets with just 7 per cent growth in house values over the 12 months to end February 2010.

This recent growth in capital city home values needs to be placed in context. Based on the latest ABS National Accounts data, the per capita disposable household incomes grew by 6.0 per cent per annum over the five years to December 2009. At the same time, Australian capital city dwelling values increased by almost exactly the same amount (6.2 per cent per annum) despite the strong growth registered in 2009. That is, dwelling values have tracked per capita incomes with a ratio of almost 1:1.

Rismark CEO, Christopher Joye, said, "A more remarkable statistic is that in the six years to end December 2009, dwelling values in Australia's largest city, Sydney, only rose by a stunningly low 1.3 per cent per annum. At the same time, per capita disposable household incomes grew by 5.7 per cent per annum. That is, household incomes have risen much more rapidly than Sydney dwelling values over this period, which have actually declined in inflation-adjusted terms."

The strong market conditions were mainly driven by large quarterly increases in Melbourne (+5.4 per cent), Darwin (+4.2 per cent ) and Sydney (+3.8 per cent). In contrast, Perth (-0.2 per cent) and Hobart (-4.2 per cent) have been much weaker.

House values increased by 3.1 per cent over the quarter while unit values gained 3.7 per cent. To provide some pricing context, the median house price is $485,000 in capital cities, while the median unit price is around $400,000.

According to Tim Lawless, Rpdata.com's Research Director, the continued high rate of capital gains in the new year comes as a bit of a surprise. He said, "Since October we've seen a further 1 per cent added to the cash rate and the boost to the First Home Owners Grant has been completely wound back. It was reasonable to expect that these factors would have dampened market conditions, however this does not yet appear to be the case."

Mr Lawless suggests that these robust market conditions can be largely tied back to the high level of consumer and business confidence across the Australian economy, "Consumer confidence remains well above the long term average thanks to better than expected domestic economic conditions, particularly an unemployment rate that has peaked much earlier and lower than anyone predicted. Such high levels of confidence appear to have reduced the dampening effect of rising rates and the removal of fiscal stimulus," he said.

Rismark's Christopher Joye added, "The housing market has been undeniably buoyed by population growth of 2.1 per cent per annum, which is among the strongest in the developed world. While the government believes the population will be 35m persons by 2050, we think it is more likely to be closer to 40m persons even assuming lower net overseas migration."

Despite the higher than expected growth rates seen in January and February, Rpdata.com and Rismark International still expect to see a moderation in capital gains over the course of this year. According to Mr Lawless, "With interest rates anticipated to rise by another 50 to 100 basis points the impact is likely to be felt most in the mortgage belts of Australia with affluent areas outperforming." Rismark's Christopher Joye concurred, noting, "While we will see year-by-year fluctuations, it is reasonable to expect house prices to track disposable incomes, all things being equal."
Ends.

Key statistics, tables and graphs available and can be downloaded from RP Data here

Source: RP Data news, 31 March 2010

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