hia - perspectives on australian house prices (march 2013)
TRANSCRIPT
Housing Industry Association Ltd 79 Constitution Ave Campbell ACT 2612 p 02 6245 1393 f 02 6257 5658 hia.com.au
Perspectives on Australian House Prices March 2013
Due to the uncertainty currently present in the Australian housing market, it is useful to
review the state of the market with a view to establishing the likely future direction of
prices.
Price developments are very important in housing markets for a number of reasons.
Periods of rising prices tend to be accompanied by stronger turnover in the market,
larger numbers of sales and more urgency in the behaviour of both buyers and sellers.
Strengthening prices fulfil an important signalling function, indicating to home builders
that a relative shortage exists and that more building is required. Conversely, periods
of falling home prices are characterised by greater uncertainty and hesitance on behalf
of market participants, with both buyers and sellers becoming more reluctant to close
sales. Overall market turnover tends to weaken. For prospective purchasers in
particular, falling prices provide an incentive to sit out of the market and wait in the
expectation that prices will drop further. For home builders, building projects may be
curtailed, postponed or even cancelled.
The chart below summarises developments in house prices and the number of house
transactions between 2002 and 2012 across the state capital cities. The last couple of
years have been marked by weak price developments. Price growth had been strong
for most of the decade prior to the Global Financial Crisis (GFC). In its aftermath,
prices fell markedly over the course of around one year before recovering strongly in
mid-2009 and reaching a new peak in 2010. Prices have drifted downward since then,
although an increase of 1.6 per cent occurred in the final quarter of 2012.
Key Points:
Residential price developments in the capital cities have been relatively
weak over the past three years.
Periods of weak prices have tended to coincide with reduced levels of
transactions in the market – turnover is much stronger during episodes
of price growth.
Over the past decade, transaction volumes in the capital city markets
have steadily declined.
The relationship between house prices and earnings is currently close
to its long term level, suggesting that any significant price movements
are unlikely.
The relationship between mortgage repayments and earnings also
suggests that the market is in a relatively ‘steady state’.
HIA Economics Group Research Note – March 2013 – Perspectives on Australian House Prices
Page 2
As we noted above, the relationship between prices and market activity tends to be strong. The chart
above clearly shows how sales volumes for houses tend to rise as price growth strengthens and how
weaker price developments coincide with fewer market transactions. At times of rising prices, buyers are
keen to close sales more quickly in order to limit their exposure to further price rises. Over the past
decade, the number of transactions has been on a gradually downward trend. In 2002, around 240,000
transactions occurred. This was substantially higher than for the year ended June 2012, when around
160,000 sales were recorded.
House price and income relationship
Measuring the relationship between home prices and other measures of economic activity can sometimes
shed light on possible future developments in the sector. For example, it is often proposed that the
relationship between household income on the one hand and home prices on the other will tend to remain
largely stable over time, with home prices tending to be a fairly stable multiple of household incomes. One
of the implications of this is that any significant deviations from the ratio means that house prices are out of
line with household incomes. In turn, this may act as a precursor to significant movements in price which
will restore the long run relationship.
0
10,000
20,000
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p-1
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p-1
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House prices and sales volumes in Capital CitiesSource: ABS
Price Change (qoq) % (LHS) Sales Volume (RHS)
2.0
2.5
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7.0
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House Prices as multiple of EarningsSource: RP Data; ABS
AUS Period Average
HIA Economics Group Research Note – March 2013 – Perspectives on Australian House Prices
Page 3
The chart above shows the ratio between median house prices in Australia since 1990 and average
earnings over the same period. Ideally, the household disposable income should be used instead of
earnings in the ratio as this is the ultimate determinant of the ability to pay for housing. However, data
availability dictates that the ABS Average Weekly Earnings series is used as a proxy for household
disposable income.
It is worth bearing in mind that this approximation assumes that there is only one earner per household. In
reality there are numerous multiple earner households. Our calculation also ignores the role of non-earned
income sources such as investment income. The overall effect of these factors means that our calculated
ratios are likely to be higher than what they would be if household disposable income were used instead.
The more important implication of this is that the ratio is likely to overestimate the likelihood of excessive
prices affecting the market. It is very important to bear this in mind when interpreting results of our
analysis.
On average, house prices have been a multiple of about 4.5 times average annual earnings (as shown by
the grey line). Over the last decade, the ratio has been consistently higher than this, particularly around
early 2008 and again in mid-2010. Price falls followed in both cases and the ratio currently stands at about
5.7. This is higher than the long term average, but the gap is not of hugely significant magnitude.
Accordingly, the most likely scenario is that prices will remain largely stable with no sizeable upward or
downward movement taking place.
House prices and mortgage costs
Examining the relationship between mortgage repayments and earnings also provides interesting insights
into potential price developments. Mortgage repayments represent a powerful indicator as they
incorporate prevailing house prices and interest rates into one measure. When taken as a proportion of
earnings, a useful perspective on house purchase affordability is provided. Economic theory holds that the
relationship between mortgage servicing costs and household income should remain largely stable over
time and that any significant deviation from its long term tendency may indicate imbalance. The figure
below illustrates the relationship between average mortgage repayments and earnings over a 23 year
period between 1990 and 2012. It is worth noting that this is a notional measure which calculates what the
repayment would be in a particular month for a house bought in that month, where the purchase is fully
funded by a standard variable rate mortgage. This form of calculation accounts for the interest foregone
on any savings funds used by the owners to purchase the property. It is also worth noting that our
calculation assumes that households are single earners and so the effect of multiple earner households is
ignored. This means that our metric probably overestimates the mortgage payment burden.
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
Nov-1
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Mortgage Repayments as % of EarningsSource: RP Data; ABS; RBA
AUS Average
HIA Economics Group Research Note – March 2013 – Perspectives on Australian House Prices
Page 4
The chart shows how since 1990, average mortgage repayments have accounted for about 40 per cent of
earnings. There has been considerable fluctuation around this figure. The ratio bottomed out during the
late 1990s, with brisk growth in house prices following. These rises combined with interest hikes brought
the ratio to a peak in mid-2008. Falling house prices and sharp interest rate cuts then caused the ratio to
fall considerably. Currently, the ratio is slightly above its long term average. This suggests that the
relationship between earnings, interest rates and house prices is balanced and consistent with stability in
the market. Accordingly, any large price swings are probably unlikely in the near future.
Overall, the analysis presented here indicates that the Australian housing market is relatively weak by
historical standards in terms of transaction volumes and anaemic price growth over recent months. This
state of affairs underlines one of the key features of housing markets generally, whereby low levels of
transaction and turnover tend to accompany periods of subdued prices. Consequently, the return of
sustainable price growth to the market would add welcome fuel to activity in the residential construction
sector.
Our analysis also sought to establish whether any significant price movements were likely in the market
going forward. The relationship between earnings and house prices is broadly consistent with its long term
tendency which suggests that any significant movement in prices is unlikely. This is corroborated by our
comparison of mortgage repayments and earnings, which are also in line with the long term trend.