Australian House Price Update: Where’s The Value?

Originally published by BetaShares

Although the official measure of house price inflation suggested Sydney property gains remained solid in the June quarter, more timely indicators point to a softening in this long red-hot market. That’s consistent with estimates suggesting mortgage affordability constraints in Sydney are now around previous peak levels. Meanwhile, better value appears evident in other capital cities, suggesting the overall national housing market need not weaken dramatically anytime soon.

Nationwide, property prices are not stretched

According to the Australian Bureau of Statistics, established house prices across Australia’s eight capital cities rose by 1.9% in the June quarter to $730,000* – or 11.1% over the past year. Since the last trough in the December quarter of 2011, national house prices are now up 50%, or an annualised gain of 7.7%.

As seen in the chart below, while national house prices are well above previous peaks as a percent of average after-tax household income, average mortgage servicing costs* remain close to long-run average levels (at least since 2004) – thanks to very low mortgage rates.

Chart

All up, that suggests nation-wide house prices – helped by current low interest rates – are not overly stretched, though a period of price weakness (at least relative to income) would seem necessary once interest rates rise to more normal levels, assuming households aim to keep their mortgage servicing costs around the past long-run average.

But there are big differences between cities

The picture at the capital city level, however, is quite disparate. As seen in the chart below, mortgage servicing costs are already well above average in Sydney, despite today’s low interest rates. Indeed, mortgage servicing costs are now around the previous peak levels in the early 2000s – suggesting affordability constraints might soon start to slow the market even without the RBA needing to lift interest rates.

Chart

The only other capital city, however, where mortgage servicing costs are currently above average is Melbourne. This suggests other cities appear better placed to withstand higher interest rates over the next few years. In particular, the Perth market already appears to have corrected a long-way following the mining downturn, and seems to offer reasonable value.

Chart

*Based on ABS-determined weights for each capital city.

*Defined as percent of average after-tax household income required to service a 25-year mortgage (assuming 20% deposit) at the current discount major bank standard variable mortgage rate. After-tax household income is based on a male and female each earning the average full-time wage for each gender.