With the release of the Consumer Price Index (CPI) for March 2019 over the past week, the low rate of inflation is resulting in larger inflation adjusted (or real) dwelling value falls. Over the March 2019 quarter, inflation was unchanged over the quarter and 1.3% higher over the past year, its slowest annual rate of growth since September 2016. Many economists now expect that as early as next month the Reserve Bank (RBA) will cut interest rates given inflation is now much lower than its 2% to 3% target range.

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While housing values are typically looked at through the prism of nominal movements, it is interesting to consider the effects of inflation, especially now considering values are falling. The above chart highlights that given the weak housing market conditions, when the annual change is adjusted for inflation the market looks much weaker. Nationally, nominal values are -6.9% lower over the past year compared to a ‘real’ decline of -8.2%. Hobart and Canberra are the only two capital cities in which real dwelling values have increased over the past year.

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Over the past five years, real dwelling values have increased at a rate of 1.4% pa nationally. The above chart shows that real value growth has been much more varied at an individual capital city level. Perth and Darwin have recorded large falls in values over the past decade while Brisbane and Adelaide have seen small gains while the remaining four capital cities have seen comparatively strong growth, with Hobart’s gain much greater than the rest. Keep in mind, the recent value falls in Sydney and Melbourne, which comprise a substantial weighting within the national and capital city indices, are dragging down the five year growth rates.

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Taking a slightly longer-term look at value growth over the past decade shows that real dwelling values have increased at an annual rate of 1.3%, marginally lower than the 1.4% over the past five years. Once again, the real change is varied throughout the capital cities. Over the past decade, real dwelling values have fallen in Brisbane, Perth and Darwin and have barely increased in Adelaide. Meanwhile, Sydney and Melbourne have been the standouts for growth with real values increasing 3.3%pa and 3.1% pa respectively.

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The above chart highlights the decline in real dwelling values from the respective quarterly peaks. The ongoing declines in values in Perth and Darwin over the past decade has seen substantial real value declines in both cities. Note that Perth’s peak was all the way back in December 2006. The other point this data highlights is just how quickly the Sydney and Melbourne markets are experiencing real value declines. Sydney values peaked in the June 2017 quarter and real values are already down -16.5% which is a larger decline than what has been seen in Brisbane, Adelaide and Canberra despite these markets seeing a peak in real dwelling values many years ago.

The decline in real dwelling values in Sydney is nearing its peak to trough decline of -17.4% recorded between December 2003 and December 2008. The fall remains more moderate than the one between March 1989 and March 1991 where real dwelling values recorded a peak to trough fall of -20.1%.

In Melbourne the current decline of -11.8% from the market peak is nowhere near as large as the real value falls of -27.4% between March 1989 and December 1995. The current decline is larger than the -10.3% fall in real dwelling values which occurred during the financial crisis with value falling between December 2007 and December 2008.

With dwelling values expected to continue to fall throughout 2019, real dwelling values will fall even further away from their previous peaks. Although the market is typically reported in nominal terms, when you take into consideration the effect of inflation falls are much larger and are occurring rapidly within the two largest capital cities (Sydney and Melbourne).