Property Investment - November 2009

According to the market-leading RP Data-Rismark National Capital City Hedonic Index—which is published by the RBA in the Statement on Monetary Policy—Australian home values rose by an indicative 1.4 per cent in the month of October after just 0.4 per cent growth in September.**

Over the first ten months of 2009, Australian home values have now risen by 10 per cent following on from their 3.8 per cent peak-to-trough falls in 2008.

According to rpdata.com’s Senior Research Analyst, Cameron Kusher, “the strong growth figures throughout October after a slowdown during September show that the market is very resilient and that the 25 basis point interest rate increase during the month has not immediately impacted market.”
 
Rismark International Managing Director Christopher Joye said, “Although we forecast a resilient recovery in 2009, we have been surprised on the upside by the strength of conditions, which reflects Australia’s better-than-expected employment and growth outcomes. We project that as mortgage rates normalise capital growth rates will fall back to more subdued levels.”
 
Cameron Kusher said the likeliness of further interest rate rises over the next 12 to 18 months is likely to result in more normal growth conditions over 2010.

“As interest rates rise over the next 12 to 18 months more normal rates of growth are likely. The removal of the First Home Buyers Grant Boost and higher loan costs are will also result in greater pressure on the rental market,” he said.
 
Christopher Joye commented, “According to our analysis of all home sales in Australia, which we have privately shared with the RBA, the median Australian home value is only four times average disposable household incomes. This is inconsistent with claims that Australian dwelling prices are 6-8 times household incomes. People forget that 40 per cent of the housing stock is not located in the capital cities.”

“This data implies that Australian housing is not expensive by overseas standards, and also helps explain our internationally high rates of home ownership combined with very low mortgage default rates.”
 
“One question exercising people’s minds is the impact of higher interest rates. The RBA has pointed out that when they cut mortgage rates by 40 per cent in the second half of 2008 most borrowers did not actually reduce their repayments. The RBA suggested that this means that borrowers should be able to absorb future rate hikes as mortgage costs normalise,” he said.
 
When we divide the patented RP Data-Rismark Index up into the cheapest 20 per cent of suburbs ranked by price, the middle 60 per cent of suburbs, and the most expensive 20 per cent of suburbs (see chart), we see that contrary to popular belief the least expensive areas (+8.5 per cent) have significantly underperformed the luxury markets (+11.9 per cent) in the year-to-date. This reverses out the trend in 2008, when the cheapest areas fared the best while the luxury markets performed worst.
 
In the month of October homes values rose in every single mainland capital city except Darwin (-0.5 per cent), which is unsurprising given it has already experienced 12.7 per cent growth in the year-to-date.
 
Cameron Kusher commented, “Darwin has had a tremendous run over the last 18 to 24 months seemingly unaffected by the Global Financial Crisis. With values now similar to those recorded in Melbourne an eventual slowdown in growth was inevitable. From an investment perspective the city remains extremely attractive due to the impressive yields. Any slowdown in value growth is likely to have a further positive impact on yields.”

The biggest story of 2009 has been the strong recovery in the Melbourne and Sydney housing markets. In the three months to end October, home values in Melbourne and Sydney have outperformed most other capitals rising by 4.5 per cent and 3.2 per cent, respectively (see attached summary tables for more).

Over the year-to-date, Melbourne has been Australia’s best performing capital city, delivering capital gains of +14.9 per cent. Sydney is up by nearly 1 per cent per month with cumulative growth of 9.9 per cent.  In the first 10 months of 2009, most of the other capital cities have performed strongly with Darwin (+12.7 per cent) leading the way, followed by Canberra (+11.0 per cent), Brisbane (+6.9 per cent), Perth (+6.1 per cent) and Adelaide (+4.6 per cent).

The RP Data-Rismark National Home Value Index results show that in the month of October, detached houses (+1.5 per cent) have once again shaded units (+1.1 per cent).

Over the three months to end October, house values (+3.3 per cent) have also outperformed units (+3.0 per cent). But in the year-to-date, units (+10.4 per cent) have generated slightly higher capital gains than houses (+9.8 per cent).

Mr. Joye said that the greater rate of growth for units over the year is likely due to the fact that in the first half of the year there was strong unit demand driven by first time buyers.

In the RBA’s October Board Minutes, the Bank noted:

“[M]any households with home loans had not sought to lower their monthly payments when mortgage rates had fallen and had instead paid down their loan balances ahead of schedule. This would reduce the vulnerability of that part of the household sector to rising mortgage rates.”

In a speech last week, the RBA’s Deputy Governor reiterated concerns that we have previously raised about international interpretations of house-price-to-income ratios. He commented:

“International comparisons of the relativity between house prices and income have been the subject of considerable research over the years. One of the complications faced by people working on this topic is to ensure consistency in the data that underlie the comparisons. Do the figures relate to capital city prices, or the prices across the whole country? Do they cover all dwellings or just detached houses? Is income measured as average weekly earnings or average household income? It is not always possible to get entirely consistent data across countries, so we need to be careful in interpreting the results of these comparisons.”

Based on RP Data-Rismark estimates, Australia’s national dwelling price-to-income ratio of 4x is a bit higher than the US metric of 3x, which is lower than most developed economy peers. Here the Deputy Governor of the RBA offered an explanation for the differences:

“There are a couple of reasons why Australian households seem to be able to sustain a higher ratio of house prices to incomes. First, Australians seem to spend less of their income on non-housing consumption than is the case for US households, with a significant part of this difference explained by lower health costs in Australia. Australian households therefore have greater capacity to service housing loans. Second, the level of gearing in the United States housing market is noticeably higher than in Australia. This may reflect the fact that Australian households are more active in paying down their loans after buying a home, possibly because owner-occupied mortgage interest rates are not tax deductible here as they are in the United States. The faster pay-down of mortgage debt in Australia reduces the risk of borrowers subsequently getting into financial difficulty. Overall, the experience of the last few years suggests that the Australian household sector as a whole appears to have the financial capacity to sustain a relatively high ratio of housing prices to income.”

On the subject of whether Australian housing is unduly expensive, the IMF commented in its October 2009 World Economic Outlook Report: “In the case of Australia, if the impact of long-term migration on housing demand is taken into account, the results do not produce evidence of a significant overvaluation of house prices.” The IMF also concludes that: “If past is prologue, these estimates suggest that…the [housing market] corrections in Australia and the United States are close to complete…”

In a recent presentation to the Melbourne Institute Rismark’s CEO examined IMF’s estimates of changes in real house price-to-income ratios from 13 OECD countries including Australia over the period 1997 to end 2008. It is noteworthy that the more recent period arguably disadvantages Australia since home values here fell only modestly in 2008 whereas they suffered precipitous falls elsewhere. On the basis of this benchmark, changes in Australian housing costs over time have been demonstrably ‘middle-of-the-road’. More precisely, between 1997 and 2008 Australia’s house price-to-income growth was lower than the following peers:

• The UK;
• France;
• Sweden;
• Spain;
• The Netherlands; and
• Ireland.

Australia’s house price-to-income growth between 1997 and 2008 was only slightly higher than that which was realised in Italy, New Zealand and Norway. (The two clear international laggards were Canada and the US.)  

*RP Data-Rismark’s previous “indicative” estimate for the month of September of +0.1 per cent has revised up to +0.39 per cent based on the latest data.

** In any given month the indicative index results will usually represent around one third to one half of the total population of sales transactions that are executed in the residential property market. RP Data ultimately collects roughly 100 per cent of all property sales via its licence agreements with every State and Territory Government Valuer General and Land Titles Office. These data

(2) RENTAL INCOME GROWTH - Despite the fact that rental rates have eased nationally over recent months, certain suburbs in each state have witnessed exceptional increases in median rental rates during the last 12 months.
 
Over the 12 months to September 2009 weekly rents for houses nationally have increased by 3.4% and units have witnessed a slightly greater rate of growth at 4.1%. Compared to recent years, these results reflect a slower rate of growth. In most areas, rents have actually shown modest falls in recent months as value growth has returned to the market and rental growth has failed to keep pace. Also, first home buyer activity has eased some of the pressure on the rental market as renters became first home buyers.

With the First Home Buyers Grant Boost being wound back and mortgage rates rising it’s anticipated that more people will be forced to remain in the rental market. The impact is likely to be that rental rates will once again start to climb, especially given that nationwide our annual new dwelling requirement continues to go unfulfilled.

Across the housing market nationally, Rose Bay in Sydney’s Eastern Suburbs has witnessed the greatest annual growth in house rents at 58.3%. Over the 12 months, median weekly advertised rents increased from $600/week to $850/week.

The top five list sees a fairly even split between high and low priced suburbs making the list with many New South Wales, Victorian and Western Australian suburbs having higher price tags whilst other states recording a mixture of higher and lower priced stock.

A trend of note is that most of the best performing suburbs are situated within the capital city regions in fact, 29 of the 40 suburbs listed are within capital city markets. Those suburbs located outside of the capital city are generally situated in or close to larger regional markets, the exceptions are: Gunnedah in New South Wales and the Queensland mining and resource areas of Blackwater, Dysart and Moranbah.

Across the unit market, West End in Brisbane has seen the greatest jump in median weekly advertised rents, increasing by 39.4% from $330/week to $460/week.

The vast majority of suburbs with the greatest annual growth in rents for units, have witnessed this growth across lower priced stock with the only exception being Western Australia.

Similar to the results for houses, the vast majority of top performing suburbs for units were situated within capital city markets with 32 of the 40 suburbs listed located in these regions. Importantly, units are generally not as widely dispersed throughout the country and tend to only be available in capital cities, major regional markets, holiday coastal areas and some coastal towns.

There are many reasons why individual suburbs may see a large increase in median weekly advertised rents over a 12 month period. Some of these may include: a dramatic change in housing stock and quality, housing undersupply coupled with increasing demand or a shift from ownership to rentals. An example of improving housing quality is likely to have occurred in West End with new unit stock injected into the market, whilst increasing demand in mining and resource towns such as Dysart coupled with a housing undersupply is likely to have driven up rents in these areas.

Finally an area like Bronte has seen house prices fall 19% over the year however, it remains popular. It is likely that some residents have moved into the rental market rather than the housing market in order to enjoy the benefits of living in the suburb without having to service the mortgage. Also, some owners may have had to sell due to the economic downturn but still wish to remain in the suburb and renting is currently their best option.

(3) POLUPATION GROWTH - Australia is going through a baby boom. Over the last year 293,600 babies were born in Australia; an absolute record number of new arrivals. At the same time, Australia is recording the highest level of overseas migration on record. The steep ‘natural increase” (ie births minus deaths) and the rate of overseas migration have combined to produce the record level of population growth we are currently experiencing – almost 440,000 new residents over the year to March.

(4) INTEREST RATES - The Reserve Bank of Australia released the minutes of their most recent board meeting this week which reveal some interesting insights into the lifting of the cash rate by 25 basis points earlier this month. The overall mood of the meeting was that the economy was in good shape and although the recovery is still fragile it is likely that the cash rate will continue to increase over time back to more normal levels. Although these increases are likely, it appears that the RBA will take a cautious approach. Thus, it would seem to suggest that the increases to interest rates may not occur in successive months (although most economists seem to think there’ll be another increase in December) and are likely to be in 25 basis point increments rather than the more aggressive 50 basis point increases.