Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Thursday, 30 October 2014

Inflation-adjusted house prices since 2008

Inflation-adjusted house prices

Plenty of other interesting things to look at this week with the winding down of QE in the US as the labour market strengthens, with considerations for how that might affect share markets.

One further point of Australian property market interest first, though.

A key theme of this blog has been that, particularly after our experiences in London, we felt that after Australian household debt hit a plateau (essentially when the financial crisis put an end to most of the debt binge party) the best performing cities would be the largest cities.

And specifically, we picked out Sydney. We have focused in particular on the areas where investors dominate, which is the inner ring suburbs, within an easy 10-15 minute train commute of the city.

Not that it has been a fashionable viewpoint over all these years, with the experts recommending almost anywhere but Sydney in many cases (h/t Chris Gray of Empire of Empire, who was one property expert who actually did get it right).

Six year itch

Goodness has it really been six years since the prophets were guaranteeing us all that there would be "an epic property crash" across Australia?

Gosh, it really has. Where does the time go?

As good a time as any for a market update, then.

Interestingly we are now seeing some property markets tanking in mining towns, but on the other hand prices are rising in many of the capital cities.

RP Data's Cameron Kusher tackled the answers here.

You can argue the toss over whether "real" increases in dwelling prices should be adjusted back for inflation (CPI), household disposable incomes or median wages growth, but since wages are only growing at around the pace of inflation at the present time, the results wouldn't be a whole lot different.

Nominal and real house price growth by capital city

As we expected Sydney, and to a lesser extent Melbourne are miles out in front, with Sydney having recorded capital growth of 51.2 percent, although by investing in quality stock, particularly ijn the inner west, you could easily have done better than the averages.

Due to the compounding effect on growth assets, that represents solid compounding capital growth of around 7.2 percent per annum since December 2008.

Not all capital city housing markets have performed very well, though.

Kusher notes that when adjusted for inflation, real prices have declined in Brisbane, Adelaide, Perth and Hobart.

"Sydney and Melbourne have been the strongest capital cities for value growth over the past year and consistently over recent years.  

In nominal terms, values have increased by 14.3% and 8.1% respectively over the past year.  

As the above chart shows, when you adjust the growth in values for the effects of inflation, the level of growth is lower.  

Note that real home values have still increased in each capital city except for Canberra over the past year.  Although, outside of Sydney, Melbourne and Darwin the rate of growth has been 4.0% or less in all cities.”

As we have already highlighted, real home value falls are much more frequent than falls in nominal terms.  

This is also the case across the individual capital city markets.  

As you can note from the above chart, outside of Sydney and Melbourne, real increases in home values over the past two years have been minor.

Combined capital city home values began to recover from the financial crisis at the beginning of 2009 after reaching a low point in December 2008.  

Since that time, nominal home values have increased by 34.0% across the combined capitals, largely driven by increases of 51.2% in Sydney and 44.9% in Melbourne.  

Notably, Brisbane (6.0%), Adelaide (10.9%), Perth (14.5%) and Hobart (-1.6%) have all recorded nominal gains of less than 15% since December 2008.

In real terms, between December 2008 and September 2014, combined capital city home values have increased by a much lower 16.5%.  

Across the individual capital cities, real changes in home values between December 2008 and September 2014 have been recorded at: 31.6% in Sydney, 26.1% in Melbourne, -8.0% in Brisbane, -3.7% in Adelaide, -0.6% in Perth, -14.7% in Hobart, 11.0% in Canberra and 5.1% in Darwin.

The next time you hear someone talk of the booming national housing market remember these statistics.  

Yes combined capital city home values are rising and this is due to the influence of the Sydney and Melbourne housing markets where values are rising.  

Real home values in Brisbane, Adelaide, Perth and Hobart are still lower than they were before the financial crisis and have seen no real growth in more than six years.”

Very good points from Kusher as usual.

Sydney property has beaten inflation by 31.6 percent. Not too shabby, and we can expect to see more of the same in FY15 for the harbour city, with solidly rising prices in Brisbane over the next three years too.

For various reasons that we have covered here previously, we would expect to see a rather more sedate 2015 for Melbourne, Perth, Adelaide, Canberra and Darwin.


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