Consumer Price Index (CPI) data for the December 2017 quarter was released earlier this week by the Australian Bureau of Statistics (ABS).

According to the release, headline CPI rose by 0.6% over the quarter to be 1.9% higher over the year.  The Reserve Bank’s (RBA) preferred measure of inflation (underlying inflation) showed an increase of 0.4% over the quarter to also be 1.9% higher over the year.  The RBA has a target range for underlying inflation of 2% to 3% p.a. and the latest data shows that underlying inflation has not been within the target range for two years.

With the release of CPI data ‘real’ changes in dwelling values can also be analysed.  On a nominal basis, national dwelling values fell by -0.3% over the December 2017 quarter however, when that is adjusted for inflation the fall becomes a much greater decline of -1.0%.  That represents the largest quarterly fall in real dwelling values since they declined by -1.3% over the September 2012 quarter.  It was a similar story across the combined capital cities where real dwelling values fell by -1.2% over the quarter which was the largest quarterly fall since December 2011.

2018-02-02--realvsnormalquarterlychange

 
Across the individual capital cities, nominal changes in values resulted in a decline in values over the quarter in Sydney and Darwin.  Once inflation is accounted for, only Melbourne, Hobart and Canberra recorded real increases in dwelling values over the quarter.  The slowdown in dwelling value growth over the final quarter of 2017 resulted in real value falls in a majority of capital cities.  For Sydney, the -2.7% fall in real dwelling values was the largest quarterly fall since September 2008 when real values were -3.4% lower over the quarter.

2018-02-02--realvsnominalannualchange

 
While both real and nominal dwelling values fell over the final quarter of 2017 they were higher throughout the 2017 calendar year.  Nationally, nominal dwelling values increased by 4.2% in 2017 and were 2.3% higher in real terms.  Perth and Darwin were the only capital cities to record real falls in values over the year however, growth in Sydney decelerated significantly. 

2018-02-02--totalchangeinrealdwellingvalues

Over the past decade, real dwelling values have fallen in five of eight capital cities and have barely risen within Hobart. Although across the combined capital cities and National indices real dwelling values have increased that has been entirely driven by rises in Sydney and Melbourne.

This also highlights that while housing affordability has deteriorated over the past decade in Sydney and Melbourne, if anything the combination of historic low mortgage rates and declining real values in other capital cities has made housing more affordable.

Despite this fact, the more affordable housing outside Sydney and Melbourne has largely not attracted more people to these regions, at least not until recently.

2018-02-02--realhomevaluechanges

 
By comparing the change in real dwelling values across the capital cities to their previous peaks it further reiterates that housing market conditions over recent years have largely been weak outside of Sydney and Melbourne and, more recently, Hobart.  Discounting the recent falls in Sydney dwelling values they are currently 30.4% higher than their previous peak in December 2003.  After values previously peaked in Melbourne in June 2010 they were 24.9% higher than that peak in December 2017.  Hobart was the only other capital city in which values were above their previous peak, 1.2% higher than their December 2007 peak at the end of 2017.  All other capital cities remain below their previous peaks when looking at real changes in dwelling values.  The magnitude of these current declines from their peak are: -12.1% in Brisbane, -6.6% in Adelaide, -28.0% in Perth, -27.8% in Darwin and -6.2% in Canberra.

The analysis looking at real changes in dwelling values reiterates just how strong growth has been in Sydney and Melbourne relative to the other capital city markets over recent years.  With real values now falling in Sydney and slowing substantially in Melbourne it will be interesting to see whether other capital cities see an acceleration similar to what has occurred over recent years in Hobart.  Of course much tighter lending policies and the looming threat of higher interest rates may effectively dampen enthusiasm for housing over the coming year(s) and lead to weaker overall growth.