Real Home Values Still Well Below Previous Peaks

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Consumer Price Index (CPI) or inflation data for the June 2015 quarter was released earlier this week by the Australian Bureau of Statistics (ABS).  The data showed that over the quarter headline inflation increased by 0.7% and it was 1.5% higher over the year. Inflation is quite low at the moment and it is being significantly outpaced by the growth in capital city home values which rose by 9.8% over the year to June 2015.

In nominal terms, Sydney and Melbourne have been the standout capital cities for home value growth both over the past year and post GFC.  On the other-hand nominal home values have fallen over the past year in Perth and Darwin.  When you factor in inflation, real home value growth remains much stronger than all other capital cities in Sydney and Melbourne, albeit the rate of growth is slightly lower.  When you look at annual real home value changes, the declines in Perth and Darwin are larger and values have also fallen over the past year in Hobart.  The data clearly highlights that growth in Sydney and Melbourne home values is significantly above the rate of inflation whereas across the other capitals values are either growing only slightly above inflation or are falling.

Looking at the compound annual growth in real home values over five year periods shows some interesting trends.  Over the past five years only Sydney (4.5%pa) and Melbourne (0.9%pa) have recorded real increases in home values.  Over the same timeframe real values have fallen across all other capital cities with the greatest falls in Brisbane (-2.4%pa), Hobart (-3.5%pa) and Darwin (-3.2%pa).  Over the past decade, Hobart is the only city to have recorded ongoing falls (-1.0%pa) however, real value rises have been moderate in Brisbane (0.9%pa), Adelaide (1.0%pa) and Canberra (1.2%pa).  Elsewhere the rises have been comparatively stronger at 2.6%pa in Sydney, 3.8%pa in Melbourne, 2.8%pa in Perth and 4.0%pa in Darwin.  The results, particularly the more recent results for the past five years, show that recent growth has been very narrowly focused on Sydney and Melbourne.  Any discussion about excessive growth in home values needs to be focused on these two cities with values having fallen in real terms over the past five years in all other capital cities.

Another way to look at growth over recent years is to look at the quarter in which housing markets previously peaked and where they now sit relative to that peak.  The above chart shows real home values now relative to their previous peak.  The details for each capital city are listed below:

• Sydney – home values peaked in March 2004 and are currently 19.5% higher than that previous peak. Following the March 2004 peak they took until March 2014 or 10 years to eclipse the previous peak.
• Melbourne – home values in Melbourne are currently 1.8% higher that their previous peak. After real home values peaked in September 2010 they fell by as much as -14.5% and took until March 2015 to eclipse their previous peak.
• Brisbane – following their peak in the March 2008 quarter, home values across the city fell by as much as -17.8%. Brisbane home values are currently -13.0% lower than their March 2008 peak which was more than 7 years ago now.
• Adelaide – home values are currently -8.0% lower than their previous peak which occurred in June 2010. Although real home values are still below their previous peak they are starting to increase following a maximum decline of -11.3% recorded in the September 2013 quarter.
• Perth – home values are starting to fall again however, they’ve consistently been below their previous peak since September 2007. Perth home values have fallen by as much as -16.2% and are currently -12.0% lower than their previous peak and trending lower.
• Hobart – after reaching a peak in the December 2007 quarter, Hobart home values are currently -19.3% lower than this level. Home value growth has increased a little of late having increased from a maximum decline of -21.7% however, they remain a long way off their previous highs.
• Darwin – real home values across the city are currently -17.8% lower than their previous peak. Real home values peaked in September 2010 and fell by as much as -20.5%.  With nominal values once again declining we may see real value declines slump further over the coming quarters.
• Canberra – following their peak in the June 2010 quarter, real home values in Canberra fell by as much as -10.6%. There have been some moderate rises in Canberra home values lately however, they are still -7.2% lower than June 2010 levels.

Home values are still lower than their peak across all capital cities except for Sydney and Melbourne.  In markets such as Perth and Darwin real home values are falling once again while in markets such as Brisbane, Adelaide, Hobart and Canberra real home values remain a long way off their previous highs.  Any commentary around a housing bubble should be clearly focussed on the Sydney and Melbourne housing markets, outside of these two cities and Darwin capital city housing markets have seen very low levels of real value growth for the best part of a decade now.  Remember this has occurred despite the fact mortgage rates have shifted to their lowest levels since the 1960s.

There is currently plenty of talk about a housing bubble or a potential housing bubble and there was a lot of similar bubble commentary about Sydney in early 2004.  Any such talk needs to be firmly focussed on the Sydney and Melbourne housing markets which are the only cities in which real home values are above their previous peaks.  After Sydney home values peaked in 2004 they fell by as much as -17.9% in real terms and took 10 years to return to their previous peak.  If history is anything to go by, this scenario potentially reflects the type of fallout we could see for Sydney and possibly Melbourne following the current boom in housing values. Elsewhere growth remains stuck in low gear despite very low mortgage rates.  The softer economic conditions outside of Sydney and Melbourne explain a large part of this underperformance, as well weaker population growth, lower levels of consumer sentiment and declining commodity prices.