It’s never easy to predict the outlook for house prices, but the task has become even more difficult in the past few days with the release of three different sets of house price data.
According to the Australian Bureau of Statistics, house prices across the country dropped 2.2% in the first quarter. But this contradicted data released last Friday by research firms RP Data and Australian Property Monitors, both of which claimed house prices increased in the first quarter, with RP Data recording a 1.52% increase and APM a 0.1% rise.
So which is right? And what is the real outlook for house prices?
Matthew Hassan, senior economist at Westpac, says the ABS figures are a “much weaker result than had been suggested by private sector measures”.
“The ABS house price data is labelled ‘preliminary’ and thus subject to revision. However, the weak first quarter estimate clearly casts major doubts over the state of Australia’s housing markets,” he said in a research note.
Hassan also said that the differences between private and ABS figures “may have to do with timing and/or composition effects. The monthly private sector measures suggest the firming in prices was most pronounced in February and March – the ABS estimates may be picking up more of the price weakness in January.”
Louis Christopher, head of property research at Advisor Edge, says that the ABS figures are a more accurate indicator of a market that is continuing to weaken.
He says the market is experiencing some boost from the large number of first-home buyers entering the market, but that the “aggressive correction” in higher-priced properties is negating any gains.
“A number of us underestimated the impact from the upper end of the market. We thought the lower end would override the data sales from the upper end but overall the market is still weak,” he says.
He also believes the discrepancies between the house price indicators is due to the way the data is compiled.”One of the reasons behind that is they base theories on detached housing, whereas APM and RP Data include townhouses. That means there could be mixed units in the result,” Christopher says.
“The market for $1 million properties is correcting in quite an aggressive manner in what we can see, and that partially explains why we saw the results from the ABS housing stats. Detached housing tends to be more expensive than townhouses, so they tend to be more impacted by what’s happening at the upper end.
“Even so, what it does suggest is that the market is still weak and probably a little bit weaker than we all thought. I rely on the ABS data quite significantly, and I trust it.”
David Green-Morgan, research director at DTZ Research, says the most surprising result was just how fast prices have fallen in the higher ends of the market.
“Given we’ve seen increased activity in the first home buyer segment, I think the assumption was that was holding the market steady, but actually what we’re seeing is that the housing sector is being affected just as badly as the rest of the economy.”
Green-Morgan says prestige homes are bringing the rest of the market down, with an abundance of sellers but limited buyers due to lack of credit.
“It’s much more difficult to get a mortgage at that level – you’d have to provide a bigger deposit to secure a mortgage,” he says. “If you’re a buyer above that level there’s some great opportunities at the moment, but there is a shortage of buyers, so that’s what forces price down.”
So where to next for house prices?
Economists are relatively upbeat, despite the gloomy economic conditions. Ange Montalti, economist at ANZ, expects “continued sluggishness in prices growth over the next year or so, but do not expect further significant falls in national median values over this period.”
JP Morgan economist Helen Kevans is tipping prices will fall 10% from peak to trough over the cycle. But given the ABS data says prices are down 6.7% in the past 12 months, further falls should be fairly limited.
“The acute shortage of new homes and accelerating population growth will, however, prevent falls similar to those in weaker, offshore markets. Another reason that Australia should not experience such a severe house price decline is that mortgage interest rates are predominantly variable (around 80% of all loans), which means most home owners benefit from cuts to the official cash rate.”
Westpac’s Hassan says he is “prepared to give the benefit of the doubt” to the positive signs emerging in the property market, including the house price indicators, finance approvals and auction clearance rates. But he does sound a note of caution.
“The risk is clearly that these measures are over-stating the current strength of the market,” he says. “If they are, that could spell some real problems later in the year as the pace of mortgage interest rate reductions moderates, the burst of first home buyer demand subsides, and unemployment continues to climb.”
Related stories:
•· ABS data shows decline in house prices, auction results dip
•· How to be a contrarian property investor
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
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