RP Data – Rismark Property Value Index Release

Released 30 January 2009

For expanded Media Release click here to view the PDF document (234kb)

The year that was... the year ahead...

Released today, the combined RP Data-Rismark International National Property Indices report confirmed that Australian property values have demonstrated exceptional resilience to the global financial crisis with overall property values falling by only 2.6 per cent during the 2008 calendar year. Including rents, the total returns to residential property were actually positive in 2008.

By comparison, US house prices are down by more than 25 per cent, the benchmark ASX All Ordinaries Index fell by 45 per cent, and Australian Listed Property Trusts (LPTs) have declined by 55 per cent. In fact, the Australian share market has fallen by more than 5 per cent in a single day on more than four occasions during the last year.

The report confirms that the key driver of the modest tapering in Australian house prices was the rise in mortgage rates from just 8 per cent in July 2007 to a peak of 9.6 per cent in mid-2008, which is only now being reversed by the RBA.

It is fascinating to note that when the RBA lifted mortgage rates by a similar margin in 1994-95 Australian dwelling values fell by exactly the same amount (ie, 2.6 per cent) according to the RP Data-Rismark Hedonic Index.

According  to RP Data National Research Director Tim Lawless the robust performance of Australian residential markets can largely be attributed to a critical undersupply of dwellings across the nation’s capital cities, which Westpac estimates to be 140,000 homes and growing, combined with record population growth which is forecast by the ABS to continue through to 2056.

In addition to Australia’s very strong banking system, which has not suffered from any bailouts or nationalisations, and historically low mortgage default rates, which are only 15 and 30 per cent of US and UK levels respectively, Australia’s residential market has been one of the best performers internationally.

Since September 2008 the standard variable mortgage rate has fallen by nearly 30 per cent from 9.6 per cent to 6.8 per cent with the expectation that rates will fall below 6 per cent in February. Since house prices have not increased at all in 2008, there has been a huge improvement in buyer affordability.

Christopher Joye, Rismark International’s CEO, said, “With futures markets pricing in a sub-3 per cent cash rate by the middle of 2009, home loan rates should fall below 5 per cent presenting the most attractive borrowing costs in recorded history. In fact, home loan rates in Australia have not been less than 6 per cent since way back in 1970.”

While unemployment looks set to rise to 7 per cent, this will be offset by a halving in home loan rates combined with massive government fiscal stimulus and housing subsidies.  “Low interest rates and the continued serious undersupply of housing in Australia will continue to hold a floor under capital city residential values in the lower and middle segments of the market”, according to Dr. Matthew Hardman, Rismark International’s Head of Research.

Perhaps the biggest story in residential markets is rising rental returns which are currently 5.4 per cent and 4.5 per cent for units and houses, respectively. This means that as mortgage rates fall investors will soon confront “positive gearing” opportunities given rents in some areas will be higher than rates. In Sydney, unit rents are already over 5.7 per cent while in Darwin they have hit 6.8 per cent.

The markets most prone to further declines in value will be coastal and holiday regions together with mining towns. 

Tourism numbers are projected to fall considerably during 2009 which will be detrimental to coastal markets which rely on holiday renters.  At the same time many holiday home owners have been forced to place their weekender on the market at a time when there is a great deal of stock available for sale in these locations.

While at the macro level Australian property values have proven to be resilient, between each of the mainland capitals the performance of the market has ranged considerably. 

Darwin stands out as having provided both the highest capital growth and strongest rental yields. Darwin houses increased in value by 11.6 per cent and unit values increased by 7.8 per cent over the year.  Despite such strong capital growth, increases in Darwin rental rates actually outpaced capital growth resulting in the highest rental yields of any capital city.  Darwin houses are returning a median gross yield of 6.6 per cent and gross yields for units are averaging 6.8 per cent.

Perth At the opposite end of the spectrum is Perth where house and unit values have fallen by 8.3 per cent and 11.1 per cent respectively over the calendar year.  Perth dwelling values skyrocketed during 2006, peaking at an annualised growth rate of 46.2 per cent in July ‘06.  Such growth was of course unsustainable and the result was a rapid decline in growth rates, eventually moving into consistent month on month negative growth in mid 2007.  Despite the falls in value, Perth rental yields remain the lowest in the nation, having been eroded significantly by the strong capital growth of 2006.  Perth houses, on average, are providing a gross rental yield of 4.3% and units are providing a gross return of 4.6%.

Sydney The best opportunity for capital growth in 2009 appears to be the Sydney market where value growth has been minimal since 2004.  In fact, Sydney house values are still about $40,000 lower than their peak reached back in February 2004.  Yields have improved markedly during this time due to hefty increases in rental rates.  Sydney houses are now returning the third highest yield of any mainland capital city (after Darwin and Canberra), with a median gross yield of 4.7 per cent.  Sydney units are also third highest of the mainland capitals at 5.7 per cent. 

Strategically affordable properties in the $250,000 to $600,000 price categories are likely to be the best performers.

According to Dr Hardman in high volatility environments, risk-return considerations are particularly important for portfolio management.

“The much lower volatility of residential real estate, together with its returns being negatively correlated to equities and LPTs highlights the importance of the asset class as a significant component of any well balanced investment portfolio.

“The relative performance of Aust residential property over 2008 is testament to its strength as a diversification asset,” Dr Hardman said.

Ends. Detailed tables available in the PDF.

NOTE:

*RP Data and Rismark recommends that caution be used when interpreting property indices results as these results can
vary depending on the methodology used and sample size.

In all RP Data and Rismark published indices, methodology is clearly indicated. More information on the RP Data‐Rismark indices can be found here: http://www.rpdata.net.au/indices/

For media enquiries contact:

Mitch Koper, National Communications Manager, RP Data Limited – 0417 771 778 or mitch.koper@rpdata.com