Asking Prices Flat for the March Quarter

By Louis Christopher on 3 Apr 2014
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SQM’s asking prices were updated yesterday, covering the last week of vendor activity.

This now completes the first quarter of the new year.

The index for the quarter recorded that asking prices for houses fell 1.6 per cent for the capital city average, while unit asking prices were flat for the quarter.

So it was a weak result for the quarter with vendors struggling to lift their asking prices. Surprisingly, weakness was recorded in Sydney, where asking prices for houses fell by 1.6 per cent for the quarter. Units rose by just 0.2 per cent.

How Other Housing Data Compares

Adelaide recorded the strongest result for the quarter, with asking prices for houses rising by 0.9 per cent and units rising by 3.5 per cent. 

This is all in contrast to the very bullish findings from the RP Data daily dodgy index, which among other things, reported a very sharp rise 5 per cent in Melbourne dwelling prices over the quarter, and now has Sydney up over 15 per cent for the year.

“…the evidence is clear. Sydney itself is going into overvalued territory.”

While that index may be meeting our forecasts this year of 15 to 20 per cent rises for Sydney, I am still very dubious of it and strongly recommend that you follow the ABS and APM versions of house price sold data, which will be reporting early next month based on a lot more sold data for the quarter gone by.

Market Valuations

The big rises reported out of the index this week had Mr Christopher Joye, a columnist for the Australian Financial Review, declaring that there could be a decline of up to 20 per cent in dwelling prices across the national housing market, because presumably, the market was massively overvalued and entering into a ‘bubble’.

One of SQM’s preferred measures of valuation is house prices to nominal GDP.

For a long time, we have given this method of valuation some precedence simply because we are believers that one can’t have a situation where house prices indefinitely rise faster than income growth.

Based on this measurement, the evidence is clear. Sydney itself is going into overvalued territory.

Sydney House Prices Vs Nominal GDP- April 2014

Source: SQM Research

We estimate that as of the end of December, the market was about 11 per cent overvalued. And if our forecast comes into reality, the market will be about 24 per cent overvalued.

In context, the market would be above its longer term average price to nominal GDP premium, but nowhere near the point in 2003 when it was dangerously overvalued – at one stage it was 55 per cent over nominal GDP.

“I suspect that would slow the market down during 2015, thereby creating a soft landing for the housing market.”

Now, let’s now consider the overall market based on the weighted average of the 8 capital cities.

In this chart, the market is currently recording a modest overvaluation, running at the long-term average since 1986.

National House Prices vs Nominal GDP - April 2014

Source: SQM Research

If we actually stripped out Sydney, the market would now be trading at a discount to nominal GDP. Hence my comments made in the Financial Review over the weekend.

Taking into account our forecast of 7 to 11 per cent for national dwelling price growth in 2014, the premium would then increase to about 14 per cent at the end of this year.

That would take it above the long-term average premium to incomes once again, but nowhere near the dangerous levels recorded in 2003 and still below the peak recorded in 2007 and 2010.

The Market is Not Massively Overvalued

The reason the market is not as massively overvalued as Christopher Joye would have you believe becomes all too apparent in the chart.

For an extended period in the last four years, the market underperformed compared to nominal GDP.

Indeed, it went through a correction between 2010 and 2012. Something we forecast. That allowed income levels to catch up and reduce the premium in the market.

So no, the market is not massively overvalued. Eventually, when we get to the market peak, we might be well into overvalued territory.

“We estimate that as of the end of December, the market was about 11 per cent overvalued.”

Presuming that rates do rise early next year as the money markets are forecasting, I suspect that would slow the market down during 2015, thereby creating a soft landing for the housing market.

One thing we do know in all of this is that the market is sensitive to interest rates, so SQM Research does expect a reaction when rates go up again.

But it is very unlikely in our opinion, that one would get an across the board, large scale 20 per cent fall in the market.

For that to happen, we think the RBA would have to aggressively lift rates going into 2015, by at least 200 basis points in a very short space of time.

That, or unemployment would have to dramatically rise above 7.5 per cent. And at this time, those scenarios seem very unlikely.

About the Author

SQM Research is an independent property advisory and forecasting research house which specialises in providing accurate property related advice, research and data to financial institutions, property developers and real estate investors. It is founded and run by one of the country's most recognised and respected property analysts, Louis Christopher.

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