With dwelling values now declining across the nation, in this week’s Property Pulse we take a look at inflation-adjusted (or real) dwelling value changes to the June 2018 quarter.

When analysing housing markets the focus is typically on nominal changes in values.  While it makes sense to analyse a market in nominal terms, it’s worthwhile measuring the change in dwelling values relative to the rise in the overall cost of consumer.

Over the 12 months to June 2018, nominal dwelling values fell by -0.8% while in real terms, considering inflation was up 2.1% over the year, dwelling values have declined by a much greater -2.9%.  Nominal values fell over the past year in Sydney, Perth and Darwin however, in real terms values fell across all capital cities over the past year outside of Hobart and Canberra.

Real annual change in dwelling values, to June 2018

Perth is the only capital city in which nominal dwelling values have fallen over the past decade, down -4.6%.  When the change in values across capital city markets over the past decade is adjusted for inflation, the results look very different to the nominal figures.  Real dwelling values have fallen over the past decade in Brisbane, Adelaide, Perth and Darwin, have barely changed in Canberra and have increased by less than 12% Hobart.  At the same time, there has been a significant increase in real dwelling values in Sydney and Melbourne.  This highlights the deterioration in housing affordability in Sydney and Melbourne and the relatively weak housing conditions elsewhere across the country over the past decade.

Real cumulative change in dwelling values, 10 years to June 2018

With the recent declines in values across Sydney and Melbourne and the slowing of growth or continued declines in most other capital cities, Hobart is the only capital city in which real dwelling values remain at their peak.  Perth and Darwin have had the weakest 10 years for value changes and in these two cities real dwelling values were -29.2% and -29.0% lower than their peak respectively.  

The declines in real dwelling values are relatively recent in Sydney and Melbourne, with values lower over the past 4 and 2 quarters respectively.  Perth has had the largest real value falls and has been falling for the longest period of all capital cities with the peak occurring in December 2006.  Values have been declining in Brisbane since March 2008 yet the real value falls from peak in the city at (-12.5%) is less than half that of the decline in Perth (-29.2%).  Darwin has had the steepest decline in real dwelling values with a fall of -29.0% over the 21 quarters since March 2013.

Real change in dwelling values, from respective market peaks to June 2018

In Sydney and Melbourne dwelling values have only started falling over the past 12 months.  Although dwelling falls have only been moderate so far, the expectation is that values will continue to fall over at least the coming 12 months.  In real terms this will mean larger declines.  As household incomes gradually trend higher and housing prices trend lower, we can expect to see some improvement in housing affordability.  Improved housing affordability doesn’t guarantee a return in value growth, real values have fallen a long way in Perth and Darwin and values are yet to rebound.

Quarters since peak in 'real' dwelling values, to June 2018

In previous downturns for Sydney and Melbourne, real value declines have been large and they have taken a long time to eclipse their previous peaks.  After real dwelling values peaked in Sydney in December 2003 they fell by -18.4% to December 2008 and didn’t eclipse their previous peak until June 2014.  In Melbourne, real dwelling values peaked in June 1989 and fell by -24.3% to December 1995 and didn’t eclipse their June 1989 peak until September 1999.  

Value declines in the two largest cities are a relatively new occurrence and given it is occurring from a back-drop of significant increases over recent years it could be many years before we see real dwelling values returning to their previous peak.  Especially when other external factors are considered such as tightened credit accessibility, potentially higher mortgage rates and historic low rental returns as well as the potential for changes to the tax treatment of investment housing.