Goldilocks: more homes, modest price rises

House prices; Dwelling approvals

  • Approvals to build new homes posted the strongest gain in four years in June while prices of existing homes rose modestly. For now at least, the fears of the Reserve Bank Governor have been allayed.


  • The Federal Government's "Education Revolution" has showed up in the construction approvals data. Building approvals in the education sector soared in Victoria, Queensland and South Australia in June.


  • Dwelling approvals rebounded in June, lifting by 9.3 per cent after falling by 11.0 per cent in May. The value of approvals soared by 35.8 per cent in June - biggest gain in more than 19 years.


  • The RP Data-Rismark Hedonic Australian Home Value Index - the largest property database in Australia - rose by 0.4 per cent in June and by 2.7 per cent over the year. Fastest growth in dwelling prices in June was in Canberra (up 2.0 per cent) while Darwin dwelling prices grew the fastest over the past year (up 13.4 per cent).

What does it all mean?

  • For now at least, the Reserve Bank Governor's fears of a housing bubble have been allayed. House prices are rising, but only modestly. And judging by a surge in approvals to build new homes, the supply of homes is set to rise to meet the higher demand.


  • The lift in dwelling approvals is encouraging, but much more building will be required in coming months to address the shortage of housing stock. The number of approvals to build new apartments is more than a third lower than the average number recorded over the past five years.


  • Governments, lenders, developers and the central bank should get together to address the constraints on housing supply in Australia. With demand for homes propelled by the fastest population growth in 40 years and interest rates at generational lows, a housing bubble could indeed eventuate if home building doesn't lift markedly over the next year.


  • It's a simple matter of demand and supply. Demand for homes is increasing and supply isn't keeping pace, leading to higher prices and tight rental markets. The Reserve Bank seems to be showing some frustration that governments have been sweeping the problem under the carpet for far too long.


  • The Goldilocks lift in house prices (not too hot, not too cold) is clearly great news for the economy. Higher home prices boost wealth and consumer confidence but prices aren't rising too fast to create affordability problems for first home buyers.


  • The fruits of Federal Government's stimulus package are there for all to see in the building data. Approvals to either renovate or build new educational facilities soared in June with work concentrated in Victoria, Queensland and South Australia. No doubt building figures will be boosted even further in coming months as more work is approved in other states and territories.


  • Construction will be an important driver of the economy over coming years. More homes, units and educational facilities will boost demand for tradesmen and lift spending for building material suppliers and retailers. The increased income flows from increased construction activity will in turn lead to multiplier effects across the economy.

What do the figures show?

  • Building approvals rose by 9.3 per cent in June - the strongest gain in four years. While approvals are down 14.3 per cent on a year ago they are up 17.7 per cent from the January 2009 lows.


  • House approvals rose for the sixth straight month in June, up 4.7 per cent. The number of approvals is at 13-month highs.


  • Apartment approvals rose by 28.1 per cent in June after falling by 39 per cent in May. The number of apartment approvals (2525) is 37 per cent lower than the five-year average.


  • Approvals rose most in Western Australia (up 21.1 per cent) followed by Victoria (up 17.4 per cent), South Australia (up 11.3 per cent) and NSW (up 3.4 per cent). Approvals fell in Tasmania (down 7.6 per cent) and Queensland (down 1.9 per cent).


  • Overall, the value of building approvals soared by 35.9 per cent in June - largest rise since February 1990. New residential building rose 4.1 per cent, alterations fell by 0.6 per cent while commercial building rose by 94.5 per cent (biggest rise in 19 years). Despite the huge increase, the annual total of commercial building approvals is down 23 per cent on a year ago.


  • The sharp increase in commercial building approvals was concentrated in the Educational sector and in Victoria, Queensland, South Australia, and to a lesser extent, Western Australia.


  • The RP Data-Rismark Hedonic Australian Home Value Index rose by 0.4 per cent in June, the sixth consecutive monthly gain.


  • Over the first six months of 2009 capital city home prices rose by 4.5 per cent, or at an annualised rate of 9.0 per cent. Over the year to June home prices were up 2.7 per cent - the strongest annual increase in 11 months.


  • House prices rose by 0.6 per cent in June while units fell by 0.3 per cent. Over the past year house prices grew by 2.2 per cent with units up 4.2 per cent.


  • In June, Canberra dwelling prices rose by 2.0 per cent followed by Darwin (up 1.3 per cent), Sydney (up 0.7 per cent), Melbourne (up 0.5 per cent), Adelaide (up 0.3 per cent) and Perth (up 0.2 per cent). Dwelling prices fell 1.0 per cent in Brisbane.


  • Over the past year, Darwin dwelling prices recorded the strongest gain, up 13.4 per cent, followed by Sydney (up 4.8 per cent), Melbourne (up 4.2 per cent) and Canberra (up 2.4 per cent). Prices remain down on a year earlier in Perth (-1.9 per cent) and Brisbane (-0.5 per cent). Adelaide prices are unchanged on a year ago.


  • RP Data-Rismark calculates the median capital city house price across Australia at $498,618 with the median unit value at $405,363.


  • The average Sydney house price is $589,731 with the median unit price at $442,065. The median Melbourne house price is a record $472,815 with unit prices at a record $377,192.

What is the importance of the economic data?

  • The Bureau of Statistics' monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction 'pipeline' and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.


  • The RP Data-Rismark Hedonic Australian Home Value Index is based on Australia's biggest property database (129 million data records) covering 117,000 home sales in the first six months of 2009. Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.


  • The monthly RP Data-Rismark Hedonic Index compares month-to-month index results. Quarterly results are measured comparing end months rather than averaging each month in the quarter. For example, the second quarter of 2009 index results compares the end of June index with the end of March index. What are the implications for interest rates and investors?.


  • Both the government and private sector are acting to get Australia moving again courtesy of new construction. Homes, units and schools are all being built, creating multiplier effects across the economy. The Reserve Bank has now retired to the monetary policy sidelines - rate cuts are not necessary to boost growth.


  • While rate hikes still seem some way off, borrowers and investors need to do their homework. The cash rate stands at 3 per cent, whereas a more normal level of rates is just over 5 per cent.


  • A rash of companies and professions will benefit from the construction work underway. And the improved economic conditions will encourage the private sector to re-start moth-balled projects. Construction, engineering and household goods retailers will be key winners over the coming year.
Source Savanth Sebastian, Economist, CommSec