Why property prices have gone back to normal
Over the 12 months to July 2011, capital city home values have fallen by –2.9% and values are down 3.4% over the first seven months of the year. House values have declined much more substantially than unit values over the twelve month period (-3.7% vs. -0.5%) as more buyers seek out the relative affordability of apartments compared with houses.
Over the 10 years to July 2011, capital city home values have increased at an average annual rate of 6.8% with annual value growth ranging from as little as 4.4% per annum in Sydney to as much as 13.6% per annum in Darwin. The growth in house values has been well in excess of inflation which has increased at 2.9% annually over the 10 years to June 2011.
Undoubtedly the growth in values has been strong and occurred during a time when access to credit was much easier to obtain and interest rates were inherently lower than what was recorded during the previous decade. As a result many home owners have reinvested their equity into the property market, buying additional investment properties as values have continued to rise.
Looking at growth over the entire decade only tells part of the story; in fact the first five years of the decade recorded very different outcomes for the property market compared with the second half of the decade.
Over the first five years, home values across the combined capital cities increased at an average annual rate of 8.6%. Average annual capital gains across each city varied during that period from 4.7% growth in Sydney to 22.1% growth in Hobart.
In each city except for Melbourne, home value growth over the first half of the decade was in excess of the decade average.
During the second half of the decade, average annual growth in property values has generally been much more subdued, with Melbourne the one exception.
Across the combined capital cities, home values have increased at an average of 5.1% annually between July 2006 and July 2011 compared to 8.6% annually over the preceding five years. While the top performing capital city during the previous five years (Hobart) recorded average annual value growth of 22.1%, the top performing city during the most recent five years (Darwin) has recorded value growth of 10.1%.
To put this into perspective, during the first five years of the last decade only Sydney and Melbourne recorded average annual value growth below the best performed city of the most recent five years. Alternatively, Sydney was the weakest performer of the first five years of the decade, however four capital cities have recorded inferior growth over the past five years to that which Sydney recorded between July 2011 and July 2006.
Some may find the Perth and Hobart results to be quite startling. After recording average annual growth of 21.2% and 22.1% respectively during the first five years of the decade, over the most recent five years values in these cities have grown at average annual rates of 1.1% and 3.4% respectively. Average annual property value growth in Brisbane, Perth and Hobart has been less than half of what it was during the preceding five years.
Over the past ten years, average annual value growth for houses (7.1%) has been superior to that of units (6.1%). Focusing on the most recent five years shows that units have actually enjoyed a superior level of value growth. Across each five year period the average annual value growth for units has been quite consistent whereas house value grew by 9.5% pa during the first five years and almost half that (4.8% pa) during the most recent five years.
The recent superior performance of units as opposed to houses continues today and is reflective of changing lifestyle patterns. In particular, first home buyers and young professionals are likely to be much more attracted to an inner city unit rather than a house 20 plus kilometres from the city centre, especially if they work centrally and they also work long hours.
Overall the data highlights the impact of the property 2001-2004 "property boom" which has well and truly lifted the annual growth rates across the first half of the decade. The two recent growth phases (ie 2007 calendar year and 2009/2010) were much more sublime compared to the meteoric rate of growth early in the new century.
Looking to the future, with housing credit growth constrained and affordability a barrier to market entry, property values are likely to grow at a slower pace and the likelihood of large spikes in value growth over a 12-24 month period as witnessed at times during the past decade is less likely. Basically, property value growth fundamentals are largely returning to normal conditions after being abnormal for much of the last decade.
Tim Lawless is research director at RP Data.