Reserve Bank Governor, Glenn Stevens, referred recently to the prices being paid for homes in Sydney as being crazy. A little earlier Treasury Secretary, John Fraser, referred to a “bubble” in Sydney house prices. Both made it plain that the Sydney housing market was really the only housing market in Australia showing signs of worrying house price increases.
This week the Q1 residential property price indices produced by the Australian Bureau of Statistics for Australia and its eight state and territory capital cities will be released. The previous reading for Q4 2014 showed residential property prices in Australia, up by 1.9% q-o-q and by 6.8% y-o-y, on the face of it hardly a runaway boom. Annual growth in residential prices actually decelerated through 2014 from 10.8% y-o-y in Q1, the peak annual growth rate in the current cycle. Moreover, that peak was not particularly high compared with earlier housing cycle peak annual price moves over the past decade such as 18.1% y-o-y in Q2 2010, or 13.3% y-o-y in Q1 2008.
One salutary lesson, however, is that these high peaks in annual growth in house prices are relatively quickly followed by a period of house prices falling – yes falling even in Australia. After the early 2008 peak, annual change in house prices was negative in both Q1 2009, -4.0% y-o-y and Q2 2009, -4.6% y-o-y. The period of negative annual change in house prices was even more extended after the 2010 peak. Every quarter between and including Q2 2011 to Q3 2012 annual change was negative with the low recorded in Q1 2012 at -4.1% y-o-y.
Another important lesson is that house prices move very differently in Australia’s eight capital cities. Sydney is currently the boom capital city for house prices and back in Q4 2014 they rose by 3.4% q-o-q and by 12.2% y-o-y and the reading for Q1 2015 when it is released this week may even be a little stronger. Sydney’s annual change stands head and shoulders above the other seven capital cities ranging from 0.8% y-o-y for Darwin to 5.3% y-o-y for Brisbane. The majority (5) of the eight capital cities had annual price increases below 3% y-o-y, clearly not a house price boom for many in Australia.
Even in Sydney it is a debatable point whether what is happening to house prices now is really indicative of bubble behavior or simply a catch up for a decade of underperformance in the house price stakes. The current ABS house price series only goes back to Q3 2003, but taking that quarter as a base for the calculation through to Q4 2014, a period of just over 11 years, Australian house prices have risen by 74.3% over the entire period. By comparison Sydney house prices are up by 56.5% over the same period. Only one of the eight capital cities has done worse than Sydney over the period, Canberra 51.5%. The other six capital cities have experienced gains ranging from 72.0% for Adelaide to the two front runners, Perth up 138.7% and Darwin up 180.7%.
What is often forgotten when looking at the increases in Sydney house prices over the last year or two is that it was not very long ago – the middle years of the last decade – that Sydney house prices were worrying for a very different reason, they were continually falling. Sydney house prices fell for seven consecutive quarters between Q1 2004 and Q3 2005 and over that period the fall in prices amounted to 7.7%. Sydney house prices were still trading below their Q4 2003 level more than five years later in Q2 2009. This protracted period of very weak Sydney house prices compounded existing factors limiting the supply of new housing in Sydney. Years of housing under-supply have contributed to rising Sydney house prices over the past year or two. The pressure on house prices has been reinforced by low borrowing interest rates and attractive conditions for both domestic and overseas investors.
In isolation, price movements in the Sydney housing market over the past year or so may look a little crazy, but not at all crazy in the context of what has happened to Sydney house prices over the past decade or so. Moreover, no other capital city has experienced unduly strong house price increases over the past year.
Also, some of the factors currently driving up Sydney house prices are looking more like putting the brake on prices fairly soon. New housing supply is lifting very sharply. Home building approvals have been running around 5,000 a month each month so far in 2015 (February 2015 was a record high 5,804) whereas until two years ago approvals struggled to make 3,000 a month and were often sub 2,000 prior to 2010. The State Government is promising to fast track a further 200,000 new home building blocks in the outer suburbs over the next few years.
Existing foreign investment guidelines are being applied more stringently (receiving considerable press coverage in China in particular). Terms and conditions of home loans provided to residential property investors are also tightening under APRA’s watchful eye.
The bottom line is that the house price boom in Sydney is starting to face headwinds. House price movements elsewhere are already moving sedately or in some cases stalling. House price movements are likely, in our view, to become less of a constraint on the RBA determining what to do with monetary policy. Another cash rate cut still seems to be on the cards and will probably be delivered in August.