Home prices up! But Aussies refuse to borrow

It appears that the November rate cut has already worked its magic in the housing market, leading to the first lift in dwelling prices in almost a year. Before the rate cuts in November and December, supply and demand in the housing market was reasonably balanced, translating to a softening of home prices. But the rate cuts will serve to lift demand for homes and drive property prices higher over 2012. CommSec expects Australian property prices to grow around 5% in 2012, but as always there will be major deviations from city to city and across regional areas.

Certainly a small 0.1% lift in home prices is nothing to get excited about at present. But the small increase does signify that home prices are flattening or close to flattening.

If you had been thinking about purchasing an investment property, now is the time to get your homework and paperwork in order. The job market is healthy, housing markets are considered to be undersupplied and rates have been cut twice in the space of two months. Certainly other asset markets don’t offer the same attraction as residential property. But as always it is a case of researching your prospects, as conditions differ significantly across the country.

One major consideration for investors is whether to purchase a house or unit. Certainly apartments have been in demand as generation Y exercise their preferences for city living rather than suburban life. The gap between Australian house and apartment prices is now the smallest in over five years. Could apartments eventually become more expensive than homes? It seems hard to believe, but the gap in prices continues to close.

Aussies still aren’t keen on taking on debt – a factor that will bring the Reserve Bank a step closer to cutting rates in February. The Reserve Bank monitors home prices, lending, the Aussie dollar and the level of interest rates when considering rate changes. Home prices are still flat, the Aussie dollar remains firm, lending growth is weak and variable mortgage rates are still slightly above 15-year averages. CommSec expects the Reserve Bank to cut rates by another 25 basis points or quarter of a percent in February.

What do the figures show? 

House prices

The RP Data-Rismark Hedonic Australian Home Value index of capital city home prices rose by 0.1% in November in seasonally adjusted terms to be 3.5% lower than a year ago. 

Home prices in regional markets (40% of homes by number) rose by 0.3% in seasonally adjusted terms in November to stand 2.5% lower over the year.

Dwelling prices were strongest in Perth (up 0.5% in seasonally adjusted terms) followed by Canberra (up 0.4%) and Melbourne (up 0.2%). Dwelling prices were unchanged in Sydney but fell in Darwin (-0.9%), Brisbane (-0.7%), and Adelaide (-0.3%). Hobart prices fell by 0.4% in October (November data not yet available).

Home prices are lower than a year ago across all capital cities. Prices fell most in Brisbane (down 7%), followed by Melbourne (down 5.6%), Adelaide (down 5%), Perth (down 3.9%), Darwin (down 3.7%), Canberra (down 1.6%) and Sydney (down 0.5%). November home prices aren’t available yet for Hobart. In the year to October, home prices in Hobart were down by 3%.

Total returns on capital city residential property rose by 1.2% in the 11 months to November and were up 0.8% on a year earlier.

Across capital cities house prices were down 4.3% on a year earlier with unit prices down just 1.1%. The average Australian house price was $541,835 and the average unit price was $457,553. The $84,282 gap in prices was the smallest since April 2006.

Private sector credit

Private sector credit (lending) rose by 0.3% in November after a 0.2% rise in October. Annual credit growth held steady at 3.5%.

Housing credit grew by 0.5% in November after a 0.4% rise in October. Housing credit is up 5.7% on a year ago – the weakest annual growth in records going back 34 years.

Owner-occupier housing credit rose by 0.5% in November to stand 6% higher than a year ago. And investor housing finance lifted 0.4% in November to be up 5% over the year.

Personal credit rose by 0.1% in November. Personal credit was down 1.1% over the year – equalling the biggest decline in two years.

Business credit was flat in November after a similar outcome in October. Business credit is 0.9% higher than a year ago, marking only the third annualised increase in 29 months. 

What is the importance of the economic data?

The RP Data-Rismark Hedonic Australian Home Value Index is based on Australia’s biggest property database, covering more than 312,000 sales during 2011. Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.

The monthly RP Data-Rismark Hedonic Index compares month-to-month index results. Quarterly results are measured comparing end months rather than averaging each month in the quarter. For example, the first quarter of 2011 index results compared the end of March index with the end of December index.

Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

What are the implications for interest rates and investors?

Despite a modest lift in home prices the Reserve Bank is still expected to cut rates in February. But in the absence of another significant flare-up of the European debt crisis, we don’t expect the Reserve Bank to keep on cutting rates in 2012.

Real estate agents and retailers alike will cheer the result on home prices. If home prices start to move higher it will serve to accelerate demand for homes as well as flow-on items like furniture, carpets and curtains. Higher home prices will provide confidence to those who own or are paying off their homes. And stronger confidence potentially means higher spending on discretionary items.