Before we dive into this month’s housing market update, it’s worthwhile reminding our readers about the two different ways Residex measures price changes across the housing market.
Residex has historically produced two measures of price / value growth across the Australian housing market: the non-revisionary median value index (summary results have typically been published monthly on the Residex blog) and the revisionary repeat sales index (updated quarterly with a revised back series and generally relied upon by policy makers as the preferred Residex measure).
The non-revising median value method uses an indexing technique to estimate the current median value of all houses and units using all properties which have transacted in the region. Alternatively, the repeat sales index identifies sale pairs and calculates the capital gain across these sales.
Both measures provide a valid measurement of housing market conditions, while they also have their drawbacks.
The non-revising median value index provides an estimate of capital gain or decline across the entire property portfolio, regardless of whether a dwelling has transacted over the most recent period. It is useful for assessing the broad change in the overall value of housing stock from period to period, but will not revise historically as new data flows through.
The repeat sales method excludes transactions without a sales pair which inherently excludes the effect of new housing stock and also excludes those properties which may have transacted prior to digital records being kept. A repeat sales index is ideal for understanding the capital gain or loss between sales over time, regardless of their hold period.
Neither method has been adjusted or changed in any way since CoreLogic acquired Residex, however with policy makers utilising and referring to Residex’s repeat sales index, it makes sense that we include the quarterly repeat sales index for public commentary and market analysis.
Observing some of the comments from the market in reference to Residex indices, it seems there has been confusion between the two measures, with some commentators confusing the non-revisionary median value measure with the repeat sales measure.
Of course both measures are still available on a subscription basis, with detailed segmentation across small geographic regions and across housing types. Both of the Residex indices have particular strengths and purposes, and interpretation depends on the use case.
This month we are focusing on the Residex non-revising median value series which is current to the end of January.
Based on the Residex results, national house values were 4.9% higher over the past 12 months while national unit values were 2.7% higher. The annual result is down slightly compared with the same period a year ago, when the Residex median house value rose by 5.8%, and units 5.5%.
The regional variation in housing market performance has been significant. Over the past 12 months, Residex data shows the regional areas of Victoria (+9.0%) and New South Wales (+8.7) recorded the largest gain in median house values, while across the capital cities the strongest gains were in Hobart (+7.8%) and Melbourne (+5.9%).
At the other end of the spectrum were the markets where house values had fallen over the past 12 months. Residex reported a fall in the median value of houses across Darwin (-6.7%), regional NT (-5.7%), Perth (-3.6%) and regional WA (-3.6%).
The unit sector reported growth in median unit values that has generally been lower than growth in median house values. Interestingly, in Brisbane, where concerns around oversupply have plagued the market, annual growth in the median unit value (+1.2%) was higher than growth in the median house value (+0.6%).
Different methods, different outcomes
The latest median value results from Residex highlight one of the more confusing aspects of analysing and understanding housing markets. As a case in point, while the Residex median value series is reporting that Sydney house values rose in value by 4.6% over the past twelve months, the same data set, but using a repeat sales index shows an annual growth rate of 7.1%. Other measures from Residex parent company, CoreLogic, shows Sydney house values were up 16.0% based on the hedonic regression method, were 12.9% higher using a stratified median and 10.2% higher based on the more volatile simple median measure.
The chart below traces the rolling annual change in house prices/values since 2009 using each of these measures. Outside of the simple median price, which shows a substantially higher amount of volatility, the other measures tend to show broadly similar outcomes over the medium to long term.
Importantly, three of the five measures outlined below have a revising back series (simple median, repeat sales and stratified median) which means the more recent trends for these series will be adjusted as more data flows through. This is one factor that can help to explain the tight correlation historically, as well as recent divergence.
It is also important to note that the CoreLogic hedonic regression index is not revised. It is also published in a high frequency format (daily) and only one day in arrears, so it is very timely. In Mid-2016 the CoreLogic hedonic index was the first series to show a rebound in the slowing pace of capital gains, which also coincided with the May and August rate cuts as well as a resurgence in investor participation in the housing market.
Progressively over the second half of 2016, each of the alternative measures have followed this rebounding trend to different extents. It is now very clear across a wide range of measures that lower interest rates and the increased demand from investors triggered a rebound in housing market growth that has once again been very much concentrated within the Sydney and Melbourne housing markets. Smaller cities such as Canberra and Hobart also saw value increases, appealing for their relative affordability.
Unfortunately, improvements made to the CoreLogic hedonic index sampling technique in May last year distracted many commentators from reporting the turnaround in housing market conditions that were identified very early by the CoreLogic hedonic regression series; a trend which has now been confirmed by the Residex median value and repeat sales series as well as other published measures.
Other factors in the market are also supporting continued strength in the housing market. Listing numbers remain historically low across the most active housing markets, clearance rates are tracking in the high-70% to mid-80% range and average selling time has reduced over the second half of the year. Additionally, transaction numbers ceased a downward trend over the second half of 2016 and started to rise.
The different methods used to measure housing market conditions will always show variations. This is inherent due to different calculation methods, but also the revising nature of some indices and the underlying differences in raw data. Over the longer term, the housing market trends track very closely across each of the quoted methodologies, however some will show the twists and turns of the housing market in a much timelier manner.
Director of Research, CoreLogic