House prices take a breather over September

• RP Data‑Rismark report that Australian dwelling prices rose by a small 0.1% over September.  Annual growth eased to 9.3%.

• Dwelling prices growth has been strongest in Australia’s two largest capital cities, Sydney and Melbourne, over the past year.  Prices in Sydney rose by 0.8% in September while they fell by 0.8% in Melbourne.

• The RBA has become increasingly concerned around increased leverage on house price speculation.

• The RBA will welcome the cooling in house price growth over September.  But strong house price appreciation in Sydney on fervent investor demand remains cause for concern.

Just a minor lift in Aussie dwelling prices.

Australian dwelling prices took a breather in September after posting solid rises over the previous three months.  The small 0.1% increase means that prices are now 18.8% above the May 2012 trough and exceed the previous peak in October 2010 by 10.0%.  Annual growth has eased from a peak of 11.5% in April 2014.

Australia’s two largest cities, Sydney and Melbourne, have been driving the lift in national house prices.  Dwelling prices in Sydney rose by 0.8% in September while they fell by the same amount in Melbourne.  Prices rises in Sydney have shown no sign of slowing and are being fuelled largely by investor interest.  In Melbourne, however, dwelling price momentum has cooled largely in response to a lift in supply.  The forward looking indicators suggest that a lift in supply is forthcoming in Sydney.

Low interest rates and the expectation of future capital gains mean that investors in Australia are currently the major driver of the property market.  Lending to investors has risen substantially over the past year.  One consequence is that rental growth is likely to be weak as the proportion of dwellings available for lease lifts.

Policy makers have been showing increasing signs of concern at the investor driven property price surge.  Last week, the RBA published its semi‑annual Financial Stability Review (FSR) which echoed concerns in the September Board minutes around increased leverage on house price speculation.   The Bank has revealed it is in discussion with APRA and others about what steps “might be taken to reinforce sound lending practices”.  The debate about macroprudential policy has taken off as a result.

The RBA will front the Senate’s economics committee tomorrow for a special hearing on Thursday to explain the risks associated with the housing boom and the potential for macroprudential policy to be introduced.  We will be watching that space closely.

From a rates perspective, the rhetoric from the RBA around house prices has taken any further cuts right off the table and together with other factors will ultimately put rate hikes onto the agenda.

Table 1: RP Data‑Rismark Dwelling* Prices, September 2014

*All dwellings, median price.**Values are for houses only up to August

Click here to read the report.