Low inflation impacting real dwelling value
16 May 2019
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 per cent higher over the past year, its slowest annual rate of growth since September 2016. 

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.  

Real vs. nominal

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 per cent lower over the past year compared to a ‘real’ decline of -8.2 per cent. Hobart (4.6 per cent) and Canberra (1.7 per cent) are the only two capital cities in which real dwelling values have increased over the past year.

Over the past five years, real dwelling values have increased at a rate of 1.4 per cent per annum nationally.  
 
Real value growth has been much more varied at an individual capital city level. Perth (-5.3 per cent) and Darwin (-7.5 per cent) have recorded large falls in values over the past decade, while Brisbane (0.3 per cent) and Adelaide (0.9 per cent) have seen small gains. The remaining four capital cities have seen comparatively strong growth, with Hobart’s gain (4.6 per cent) 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.

A decade of data

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 per cent, marginally lower than the 1.4 per cent 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 (-0.6 per cent), Perth (-2.4 per cent) and Darwin (-3.3 per cent) and have barely increased in Adelaide (0.1 per cent).  

Meanwhile, Sydney and Melbourne have been the standouts for growth with real values increasing 3.3 per cent per annum and 3.1 per cent per annum respectively.

Peaks and troughs

The ongoing decline in values in Perth and Darwin over the past decade has seen substantial real value declines in both cities, at -34.5 per cent and -37.2 per cent respectively. 

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 per cent. This is a larger decline than what has been seen in Brisbane (-15.4 per cent), Adelaide (-6.1 per cent) and Canberra (-3.6 per cent) 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 per cent 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 per cent.

With dwelling values expected to continue to fall throughout 2019, real dwelling values will fall even further 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.


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