News Bulletin

Affordability lifts as prices drop

Residential property values continue to drop, according to the latest RP Data-Rismark Home Value Index.

Released this week, the Index shows a fall of 1.4 per cent in dwelling values over the month of May 2012. The latest drop brings the cumulative decline to -2.2 per cent over the first five months of 2012 and -5.3 per cent over the past twelve months.

The May falls in value were spread across every capital city except for Adelaide, where dwelling values bucked the trend, improving by 1.2 per cent. Melbourne recorded the weakest market conditions over the month with dwelling values down 2.7 per cent in May.

Much of the weakness is confined to the detached housing market rather than apartments.

According to RP Data's research director Tim Lawless, unit values have been much more resilient to value falls compared to houses.

"Unit values across the combined capitals increased in May and they are up by 1.3 per cent over the first five months of the year", Mr Lawless said.

"Based on median prices, unit prices are generally around 15 to 20 per cent lower than house prices.

"Investment yields also tend to be higher and units are often located more strategically compared with their detached counterparts," he added.

The stronger performance across more affordable markets is also evident in the results from the RP Data-Rismark Stratified Hedonic Home Value Index. This index provides a summary of how dwelling values have changed across the most expensive 20 per cent of capital city suburbs, the middle 60 per cent of suburbs and the most affordable 20 per cent of suburbs.

According to Mr Lawless, premium dwelling values have fallen by -6.1 per cent over the twelve months ending April 2012 while dwelling values at the affordable end of the spectrum are down by just -1.5 per cent.

Rismark managing director Ben Skilbeck, however, pointed out that housing affordability is showing a marked improvement.

"The combination of interest rate reductions, declining home values and disposable income growth has significantly improved affordability", Mr Skilbeck said.

"Since dwelling values peaked in November 2010, they are down by -7.6 per cent, the RBA cash rate has fallen from 4.75 per cent to 3.75 per cent and disposable income per household has increased by over 5 per cent."

Rental yields are also showing some improvement, not just on the back of lower home values but also higher rents, while other housing market indicators are showing some positive signs that conditions might move towards stability.

Mr Lawless noted that each of the key vendor metrics analysed in producing the Index have improved over the month.

"Vendor discounting has reduced from a peak of -7.9 per cent to -7.1 per cent which suggests that vendors are becoming more realistic about price expectations on their home.

"The average number of days it takes to sell a property has also fallen from the seasonal highs recorded earlier this year - the typical capital city house is now taking 63 days to sell compared with 70 days last month."

He concluded by pointing out that auction clearance rates have also levelled around the 50 per cent market compared with an average of about 45 per cent throughout the second half of 2011.

RP Data Research Blog - Will the gap between the cash rate and mortgage rates come back to ‘normal levels’? Not likely in the near future.

Will the gap between the cash rate and mortgage rates come back to ‘normal levels’? Not likely in the near future.

Posted: 07 Jun 2012 05:28 PM PDT

Up until December 2007 the gap between variable mortgage rates and the Reserve Bank’s cash rate was 180 basis points; a gap which hardly changed between 1997 and the end of 2007. Since the onset of the GFC the only consistency between the variable mortgage rate and the cash rate has been a widening gap which reached a highpoint in May of this year at 330 basis points which is approaching double what the historic norm used to be.

Without doubt the cost of bank funding has risen since the onset of the GFC. If you’re interested in the topic of bank funding and how their costs have changed I can recommend reading this Bulletin (Banks’ Funding Costs and Lending Rates) from the Reserve Banks’ Cameron Deans and Chris Stewart which was released in March this year. The bulletin provides a comprehensive summary of the key factors which have pushed up bank funding costs since the GFC and highlights that as at March the costs of funding aren’t currently a great deal lower than during the peak of the GFC.

Importantly, the banks are now sourcing less of their lending funds from overseas. In fact, based on the March analysis from the RBA, more than 50% of Australia’s bank funding now comes from domestic deposits while short term debt and long term debt markets both comprise about 20% of funding originations. The reliance of the banks on deposits is likely to be even greater by now, as the trend is clearly upwards and recent GDP data highlights that households continue to show a preference for saving around 9% to 10% of their income.

As Australia’s banks seek more funding from local sources and strive to become less reliant on overseas funding, the competition for deposits is likely to heat up. That means higher term deposit rates which translates to higher domestic funding costs for the banks. Unless the banks are willing to see their margins shrink, I think we can expect higher deposit costs as well as overseas cost pressures to continue forcing the gap between the cash rate and mortgage rates further apart.

So it doesn’t look like there will be any lessening in the gap between mortgage rates and the cash rate, at least over the short term. Even if we see the cash rate fall a further 75 basis points as Westpac’s chief economist Bill Evans has predicted (taking the cash rate down to 2.75%), mortgage rates will still be higher than when the cash rate reached 3.0% between April and September 2009. The average standard variable mortgage rate reached a low point of 5.8% back then.

To receive that level of monetary stimulus we will need to see the cash rate drop do 2.5% and we will need to see the full rate cuts be passed on by the banks. That is unlikely. Based on the average bank cuts provided in May, which was about 74% of the cash rate cut, we will need to see the cash rate fall to around 2.0% to see standard variable mortgage rates fall to their recent lows recorded in 2009.

Best regards,

Linda J. & Carlos Debello, LJ Gilland Real Estate Pty Ltd

Tel: (07) 3263 6085 | Mobile: 0409 995 578 & 0400 833 800 http://www.ljgrealestate.com.au

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