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Dwelling prices decline in Q3

Christopher Joye
November 10, 2010

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In the RBA's Statement on Monetary Policy released on Friday, the Bank concluded that there has been a "welcome cooling in the housing market, with dwelling prices declining slightly over recent months, after increasing solidly over the year to the March quarter”. (Indeed, the RBA understandably characterises the one per cent per month capital growth during 2009 as "unsustainable".)

The RBA's assessment is important for central bank watchers. The ABS reported a 0.1 per cent increase in house prices over the September quarter. In contrast, RP Data-Rismark's market-leading hedonic index reported a decline in dwelling values (-0.4 per cent) over quarter three.

As discussed previously, RP Data-Rismark was the first house price index supplier to identify the soft-landing in the market (months in advance of others), with a tapering in dwelling values beginning in June.

Getting a timely handle on emerging risks is vital for the banking system in particular, which has large derivative exposures to the housing market. House price indices are normally a crucial input into the Automated Property Valuation Models used by most banks to regularly revalue their collateral. And if your index does not offer up-to-date indications of turning points, this can adversely affect your risk management. Of course, the demand for accurate and timely analysis is all the more acute in an environment in which interest rates are rising.

A second point worthy of note is the fact that the RBA relies on RP Data-Rismark's capital city indices to gauge conditions across the individual conurbations, and on our regional index to cover the "rest of state markets", as shown by the graph below.

Since late last year, Rismark has been projecting an end to the double-digit rates of capital growth experienced following the cessation of the GFC-induced downturn in December 2008, and has consistently forecast no capital growth in the second half of 2010. This central case was motivated by our expectations for disposable household income growth during 2010, and assumed a maximum increase in the cash rate of 25 to 50 basis points over the second half.

As we have observed many times now, if consensus market economist forecasts of a 5.5 per cent cash rate by end 2011 are realised, there will be further downside risks for asset prices over the next 12 months. Borrowers should, therefore, be comfortable servicing rates 125 to 150 basis points higher than current levels as a conservative precaution.

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Published: Thursday, November 11, 2010

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