Monetary policy has lifted the prices of the most expensive dwellings, but this impact is yet to flow through to the rest of the housing market. This experience reinforces doubts about the effectiveness of monetary policy when inflation and therefore interest rates are very low.
According to the widely reported Corelogic Home Value Index, housing values increased by 15½ per cent over the course of 2019 and finished the year strongly. Judging by this supposed increase in dwelling prices, the cuts in interest rates seem to be having an impact, and some commentators are therefore describing housing as an area of strength in the Australian economy.
Indeed, comments by the Reserve Bank, that the economy has bottomed out and that growth is picking up, seem to rely heavily on the supposed increase in dwelling prices. But how accurate are these reports of a rebound in dwelling prices, and what do they really tell us?
The Corelogic Home Value index records the increase in the average price of dwellings traded in the designated region in the specified month. As such the average price recorded in these transactions reflects the mix of dwellings actually traded, and this mix can vary over time, which will of itself change the recorded average.
In fact, sales of dwellings are heavily weighted towards the top end of the market, as the turnover in the inner more expensive suburbs is much greater than in the outer cheaper suburbs. In addition, Corelogic reports that the recovery in dwelling sale prices has been particularly marked in the upper quartile of the market. These higher priced dwellings are mostly located in the inner suburbs and their price is increasing much faster than in the outer suburbs. This is because the scarcity value and relative amenity of properties located close to the centre of the metropolis is increasing relatively as the city size grows over time.
Thus, although dwelling prices fell in 22 out of Corelogic’s 46 capital city sub-regions in the last twelve months, Corelogic nevertheless recorded an overall price increase of 15½ per cent for all the combined capital city regions. Furthermore, Corelogic’s data show that over the course of last year eight of the ten sub-regions where dwelling prices increased fastest were all in the inner suburbs of Sydney and Melbourne and the northern suburbs of Sydney, with the other two sub-regions with the fastest price increases being Hobart and Canberra.
An alternative measure of the change in dwelling prices is provided by the Statistics Bureau (ABS), where its consumer price index records the value of new dwelling purchased by owner-occupiers. Thus the ABS dwelling prices do not cover the prices paid by investors, and the ABS attempts to measure the price change for dwelling of similar quality, so that they are not affected by changes in the transactions mix. Because the ABS price series only refers to new dwellings that also means that it has a much higher weighting of houses in the cheaper outer suburbs, and even in the inner suburbs, new dwellings would mostly be represented by units and not houses, which are more expensive.
Given the differences in their mix of dwellings, it is not surprising that the increase in average dwelling prices recorded by Corelogic is typically much higher and/or more volatile than the increase reported by the ABS. In Table 1 the increase reported by Corelogic is typically greater than the ABS increase, and sometimes more than twice as much, with the exceptions being Brisbane over the last five years and Adelaide and Hobart in 2019. Equally in Perth and Darwin where dwelling prices have fallen, the size of the price fall reported by Corelogic is much greater than the ABS price fall.
In sum, the ABS series suggests that new dwelling prices remain almost stationary across Australia’s capital cities, with the exception of Hobart. Furthermore, the ABS price series is the more reliable measure of how much the prices of new dwellings have actually changed, as the ABS series is not affected by changes in the mix of dwellings over time, and it is not biased in favour of high priced dwellings either.
Table 1. Change in Dwelling Prices, per cent
|Last Year *||Last Five Years|
*ABS refers to year ending Sept. quarter and Corelogic refers to year ending December
Significantly, the stagnation in new dwelling prices reported by the ABS series is much more consistent with the fact that dwelling construction is still falling, and in terms of economic activity that is what matters. The latest September National Accounts report that the volume of gross fixed investment in dwellings fell by 9.6% for Australia as a whole over the four quarters ending in September. Furthermore, housing construction is unlikely to pick up soon, as the total number of dwelling units approved for construction in the three months ending in October (the latest information) fell by 15½ per cent compared with the same three months last year.
In short, this continuing fall in dwelling construction suggests that the main impact of monetary easing on the housing sector so far has been to increase the disparities in housing wealth. New dwelling prices remain static, which may be good for housing affordability for new would-be homeowners, but their demand continues to be depressed.
Against this background it is not surprising that the latest ABS data also reveal that home ownership has dropped further by 2 per cent from 68 per cent in 2015-16 to 66 per cent in 2017-18, and it is hard to see what will turn this around.
As I argued in a previous article, “The Future of Monetary Policy, (Pearls & Irritations, 22 October 2019), there are good reasons why very low interest rates will push up the values of assets relative to incomes. This is, of course, what we are seeing in the housing market at present. But in Australia in recent years, the increase in dwelling values has been especially concentrated on higher priced housing that has a scarcity value. Thus, monetary policy has served to exacerbate inequalities in the distribution of wealth.
On the other hand, lower interest rates have done little to stimulate the demand to build new housing which is much more limited by the stagnant incomes of new home buyers and their job security. In these circumstances there are understandable calls for fiscal policy to do more, but what does that imply for housing?
The Government’s response so far has been very limited. It has introduced a new loan guarantee scheme for first-home buyers which started on 1 January. Under this scheme the Government will guarantee the mortgages of first-time buyers who can have a deposit as low as 5 per cent, so that they will avoid the cost of mortgage insurance and save around $10,000. The scheme is, however, restricted to only 10,000 loans and there is a purchase price cap on the home of $700,000.
In Sydney, for example, these restrictions mean that the scheme is only effective in middle to outer suburbs. There are no properties for sale at less than $700,000 within 10 km from the city centre, and only 2-bedroom units with a median price of less than $700,000 in suburbs within the 10-20 km radius from the city centre. For houses, that means that new home buyers would need to go even further out to qualify for this assistance.
These restrictions and the fact that there are only 10,000 loans guaranteed, mean that it is unlikely that this scheme will do much to lift construction activity in the foreseeable future.
Frankly if the Government is fair dinkum in wanting to help first-time home buyers and lift homeownership rates then it needs to redirect some of the money that it keeps promising for infrastructure projects that typically have no business-case. Instead it should use that money to start spending more on creating cheaper social housing estates. That would help support both the level of economic activity and help families find accommodation where they need it at a price they can afford.
Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University.