Luxury sector driving current fall in house prices: Christopher Joye

Based on RP Data-Rismark’s house price data released today it appears that most of the weakness in dwelling values has been confined to the luxury sector.

Whereas homes located in the 20% of most expensive suburbs across the nation are down in value by 3% between January and April (red line in chart below), those located in the middle 60% of suburbs have not budged in value (-0.1%). And there was actually a recent improvement in dwelling values in the cheapest 20% of suburbs over the last few months (refer to the blue line below).

This analysis is based on RP Data-Rismark’s “stratified” hedonic index calculated on a monthly as opposed to daily basis. As a consequence, the latest cut of the results runs through to end April in contrast to the more timely “daily” data that stretch through to the end of May.

The sustained correction in luxury property values is consistent with the thesis I have outlined here before of a fundamental downward adjustment in valuations in this specific sector due to the contraction of the once-lucrative financial services industry.

The disconnect between the luxury and mass markets is even clearer as we go back further in time. In the chart above the three markets are indexed to 100 as at the start of 2011. The cumulative dwelling value declines for the cheapest 20% of suburbs since January 2011 is only 1.8%. Similarly, the middle 60% of suburbs have declined by a relatively benign -2.9%. Yet in the 20% most expensive suburbs, the total loss has been 2.3 times higher at a stonking -6.8%.

Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.