With Low Inflation, Real Dwelling Value Falls Are Being Exacerbated
With the release of the Consumer Price Index (CPI) for March 2019 over the past week, the low rate on inflation is leading to larger inflation adjusted (or real) dwelling value falls. Over the March 2019 quarter, inflation was unchanged over the quarter and 1.3% higher over the previous year, its slowest annual rate of the expansion since September 2016. Several economists now expect that as early as next month the Reserve Bank (RBA) will then cut the interest rates given inflation is now much lower than its 2% to 3% target range.
While the housing rates are typically looking through the prism of nominal movements, it’s interesting to consider the effects of inflation, especially now seeing that the values are falling. The above chart highlights that given the weak looks much weaker. Nationally, nominal values are -6.9% diminished over the previous year compared to a ‘real’ decline of -8.2%. Hobart and Canberra are the only 2 capital cities in which real dwelling values have increased over the past year.
Over the past 5 years, real dwelling values have magnified at a rate of 1.4% pa nationally. The above chart shows that real value growth has been much more varied at an individual capital city level. Perth and Darwin have documented large falls in valaues over the past decade whereas Brisbane and Adelaide have seen smaller gains, while the remaining 4 capital cities have seen comparatively strong growth, with Hobart’s gain much larger than the rest. Keep in mind, the recent value falls in Sydney and Melbourne, which comprise a substantial weighting within the national and capital city indices, are dragging down the five-year growth rates.
Taking a rather long-term look at the value growth over the past decade shows that real dwelling values have increased at an annual rate of 1.3% marginally below the 1.4% over the past 5 years. Once again, the real change is varied throughout the capital cities. Over the past decade, real dwelling values have dropped in Brisbane, Perth and Darwin and have hardly increased in Adelaide. Meanwhile, Sydney and Melbourne have been the standouts for growth with real values increasing 3.3% pa and 3.1% pa respectively.
The above chart highlights the decline in real dwelling values from the respective quarterly peaks. The continuing declines in values in Perth and Darwin over the previous decade has seen substantial real value declines in each city. Note that Perth’s peak was all the way back in December 2006. Whereas this data highlights just how quickly the Sydney and Melbourne markets are experiencing real value declines. Sydney values peaked in June 2017 quarter and real values have already dropped -16.5% which is a larger decline than it has been seen in Brisbane, Adelaide and Canberra despite the markets seeing a peak in real dwelling values many years ago.
The decline in real dwelling values in Sydney is nearing its peak to trough decline of -17.4% documented between December 2003 and December 2008. The falls remained moderate between March 1989 and March 1991 where real dwelling values documented a peak to trough fall of -20.1%
In Melbourne the current decline of -11.8% from the market peak is nowhere near as big as the real value falls of -27.4% between March 1989 and December 1995. The current decline is bigger than the -10.3% fall in real dwelling values which appeared during the financial crisis with value that dropped between December 2007 and December 2008.
With dwelling values expected to continue to drop throughout 2019, real dwelling values will drop even further away from their previous peaks. Although the market is typically reported in nominal terms, when you take into consideration the effect of inflation is way larger and the occurring readily with the 2 largest capital cities (Sydney and Melbourne).