Australia’s housing market is valued at around $6 trillion, based on the latest quarterly residential property price index released by the Australian Bureau of Statistics.
It’s a mammoth amount, and the greatest store of wealth for a large proportion of Australian families. When you hear statistics rolled out that there are currently X number of Australians who are millionaires, it’s a safe bet that the vast majority are in that position due to the value of their house.
For an asset market valued in the trillions, there has been a disconcerting development in recent months: no one is really sure what is happening with prices, particularly in the largest and most expensive cities in the country, Sydney and Melbourne.
Some measures have price growth slowing fast, while others suggest that they’re accelerating again.
It’s creating an additional level of uncertainty for policymakers, heightening the potential for a policy misstep. It’s not exactly ideal given the complexity of the Australian economy that they already have to deal with.
In an attempt to uncover what is going on, Paul Bloxham, chief economist at HSBC in Australia and New Zealand, has been running a ruler over the numbers offered by Australia’s four main house price information providers, CoreLogic, Australian Property Monitors (APM), Residex and the ABS.
For some background on the dilemma facing policymakers right now, here’s what the four house price indicators have growth running at based on the most recent data. The chart comes from the RBA’s most recent chart pack released earlier this month.
“The gap between the measures has led to some debate about which measure is closest to the truth,” says Bloxham.
“A challenge has been that the Corelogic measure, which is showing the strongest growth and has typically been the one most relied upon by the RBA in recent years, has recently had some methodological changes.
“As a result, the RBA has become less confident about the veracity of this measure, stating in its August official statement that ‘strong increases reported by CoreLogic were overstated as a result of methodological changes’,” he adds.
So the index that the RBA used to rely upon when basing policy decisions — the CoreLogic measure — is now seen as not being as reliable as it once was.
The difference between it and the other indices is how it’s constructed, being a hedonic index rather than a stratified median measure such as the APM index, or a repeat-sales measure used by Residex and the ABS.
“Hedonic measures control for compositional shifts in turnover by accounting for things like number of bedrooms, block size and location, amongst other characteristics,” notes Bloxham.
The CoreLogic measure has been showing stronger house price growth compared to other indicators since undergoing methodological changes several months ago. But why?
Bloxham thinks he knows what may be contributing to the divergence between the indicators — changes in the types of properties that have been changing hands, partially as a result of Australia’s apartment building boom.
One plausible explanation is that a greater amount of lower-priced housing has been turned over recently. This fits with the fact that a lot of newly built apartments have been coming to market and apartments tend to be lower-priced than detached houses. Apartment prices have also grown more slowly than detached dwelling prices more recently. Lower-priced detached houses are also the ones that are likely to see the biggest spill-over effect from the apartment supply boost, as they are typically a closer substitute to most apartments than higher-priced houses.
He also suggests that strength in auction clearance rates, along with a slowdown in housing credit growth, point to the likelihood that “there has been some cooling in the housing market”.
Another timely measure of housing market activity, auction clearance rates, has also been high in recent months. This may also be consistent with the gap in the housing price measures. Auctions are more prevalent for higher-priced homes and account for only 30% of housing sales in Melbourne, 20% in Sydney and far lower rates in the other capitals. Auction volumes have recently been lower than in recent years, suggesting fewer high-priced dwellings are being sold.
More sales of lower-priced dwellings would also be consistent with the fall in housing loan approvals and slowdown in housing credit growth, as access to credit is typically a more important factor for lower priced housing. The tightening of lending standards since late 2014 has also applied most aggressively to loans to investors, which are more prevalent in the apartment market.
While Bloxham admits that compositional shifts in housing turnover have made it difficult to get a clear read on price growth recently, he suggests that the slowdown in loan approvals and credit growth are “particularly important” in terms of the outlook for Australian interest rates.
“Housing price gains are far more worrisome when they are fuelled by credit. It is the leverage that matters most,” he says.
Despite seemingly lowering the bar to another rate cut from the RBA, Bloxham suggests that his central case “is that the RBA is unlikely to cut further”.
He also says that “if housing price growth proves to be stronger than most of the measures show, or there is a re-acceleration of housing prices, loan approvals or credit growth, we see this as likely to bolster, rather than challenge, our case that the RBA is unlikely to cut further”.