Hi, I’m Frank Nothaft, CoreLogic’s Chief Economist. I am speaking with Tim Lawless, CoreLogic’s Research Director for Asia and Pacific and an authority on the Australian housing market. We will be discussing home-price trends in the United States and in Australia. As you know Tim, the United States had a 5-year drop in home prices. CoreLogic’s Home Price Index for the U.S. dropped by one third between its 2006 peak and 2011 trough. After bottoming out, the CoreLogic Home Price Index is up more than 50 percent, with the index now above its pre-Recession peak. In the past 12 months through June, our U.S. index is up 6.8 percent. In contrast, CoreLogic has now found that home prices in Australia have dipped during the last several months. Is the current decline in home prices in Australia temporary, or do you see it continuing for a few years?
Housing cycles in Australia have generally been dictated by either interest rate policy, or by economic shocks; such is the global financial crisis. The current downturn is quite different though, with housing market conditions being heavily influenced by credit regulation and by title lending policies. These policies have been evolving since early 2015, however it’s highly likely that credit availability will remain tighter over the coming years, at least relative to prior years. Our view is that housing prices will continue to moderate over the short to medium term here in Australia, however interest rates are likely to remain around their current record lows throughout 2019, which will continue to keep a floor under housing demand and prevent values from falling materially.
We have a strong seasonal effect in the U.S. in home sales, housing construction, and home prices. Generally, we see stronger sales, building, and home-price growth in the spring and summer and weaker activity in the autumn and winter. Does the Australian housing market experience a similar type of seasonality? If so, since summer in America is winter in Australia, does that explain some of the recent price decline?
We do see some seasonality at certain times in the Australian housing market, especially around holiday periods. But seasonality is generally confined to transactional activity rather than affecting the rate of capital gains. The current market conditions really don’t have anything to do with seasonality; they are largely the result of a tighter credit environment, coupled with secondary factors, such as higher supply levels, fewer foreign buyers and fewer investors, and housing affordability challenges across the largest cities.
As a monitor of price trends in U.S. metropolitan areas, I use CoreLogic’s Market Conditions Indicator to give me a sense of which markets may have over heated prices. In June, the Market Conditions Indicator found that about one-third of U.S. metro areas were ‘overvalued’, or in other words, sale prices were ‘frothy’. In my mind, these areas are at risk for a valuation correction, especially if incomes of local-area residents do not rise substantially. The price decline you see in Australia, Tim, would you describe this as a “market correction” or is it still too early to tell?
Dwelling values have been falling consistently in Australia on a national basis since September last year, however falling values are generally confined to the Sydney and Melbourne housing markets, which are Australia’s 2 largest cities. It’s in these markets also where conditions were previously extremely strong. Residential property values have been trending downwards in Perth and Darwin since 2014 as well. Based on a consistent negative month to month change, it’s pretty clear that the Sydney and Melbourne housing markets have moved into a correction after recording 5 years of rapid price appreciation.
Here in the U.S., after our national Home-Price Index had reached its trough in 2011, average prices were back at the level they had been at in 2003 – eight years earlier! That means many homeowners who bought their home in 2004 through 2006 had their equity completely erased. CoreLogic’s Equity Report found that one-fourth of all homeowners with a mortgage had negative equity, were “upside down” so to speak, at the depth of the Crisis. How do you see the “market correction” unfolding in Australia, will it be more mild than what we saw in the U.S.?
Although dwelling values are down 1.3percent nationally between the market peak in September last year and the end of June 2018, the fall comes after consistently strong capital gains emanating out of Sydney and Melbourne. National dwelling values remained 32percent higher than they were 5 years ago, while in Sydney and Melbourne, where values have slipped the most, dwelling values are still 50percent higher than what they were 5 years prior.
We have had wide dispersion in home-price change at a local level here in the U.S. of A. Based on our Market Conditions Indicator, two-thirds of metros here in America have a single-family market that is fairly valued or even undervalued. Those areas will likely continue to have steady, moderate appreciation. But overvalued metros -- Los Angeles, Seattle, and parts of southern Florida come to mind – should have a moderation in price growth. Do you see the same differential in home-price performance across cities in Australia?
Like any housing market, the trends across Australia have been diverse. While values are trending lower across Sydney and Melbourne, as well as trending lower in Perth and Darwin, the southernmost capital city, Hobart, has seen values track 13percent higher over the past 12 months. The annual pace of capital gains remains positive in Brisbane and Adelaide, and many regional markets are continuing to see values trending higher, particularly coastal markets close to major capitals as well as lifestyle destinations.
First-time home buyers are roughly one-third of the buyers in the U.S. today. With the run up in prices, a purchase requires a lot of cash on hand, and it’s probably a bit of a scary undertaking for a young Millennial buyer. I bet some of them are thinking, ‘Prices may be up a lot right now, but what if they don’t continue to go up?’ Are you seeing remorseful Aussie buyers, possibly regretting a purchase that occurred at the height of the home price frenzy?
The vast majority of Australian homeowners are likely to remain in a positive equity position. However, some homebuyers who purchased a property over the past 12 months, in Sydney or in Melbourne, are more than likely to be holding a property that is now worth less than what they paid for it. Undoubtedly many of these recent buyers will be concerned about their potential loss of wealth, however most homeowners will own their property for at least 5 years, providing an opportunity for at least a partial or a full recovery in the value of their dwelling over this period.
Well, for a young household, the alternative to buying is to continue renting. Here in America the rental market continues to have relatively low vacancy rates and rents have been rising in most metros. The CoreLogic Single-family Rent Index measures this rent change over time. For the U.S. as a whole, rents on single-family homes are up a cumulative 18 percent during the last five years. What’s going on in the Aussie rental market? Conditions are certainly different there, with prices soft and declining in some major cities. Do you expect some renters to postpone buying, renew their lease, and wait a few more months (or years) to see if prices move lower and make buying more affordable in the future?
Rental conditions across Australia have generally been sluggish. Over the past 5 years, rents nationally are only up by 8percent, while dwelling values have increased by a little more than 32percent over the same time frame. The relatively weak rental conditions are generally attributable to the large number of investors that have been active which has contributed to rental supply, as well as the housing construction boom, which has supported supply additions to the market. For renters, this is clearly good news, as rents are generally tracking lower than the rates of inflation in the capital cities. However, for investors, it means the rental yields have been compressed to well below average levels.
Hey Tim, thanks so much for chatting with me about the U.S. and Australian housing markets. There are a lot of experiences that they have had in common, such as relatively rapid price growth in major cities after the Global Financial Crisis. But there are differences too, such as the recent dip in prices in several major Australian cities. Let’s catch up again soon and compare how are housing markets have evolved.
The views expressed in this US/Australian Podcast are those of the authors and do not necessarily reflect the position of CoreLogic or its management. Check back often to the CoreLogic Insights page for more information about the United States and international real estate economy.
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