What’s driving up the price of housing?

Inflation data released by the ABS last week shows that housing costs for the typical Australian household rose by 4 % over 2011, driven mostly by large increases in electricity, utilities, water and sewerage prices.

Consumer Price Index (CPI) figures released last week showed that over the year, headline inflation was running at 3.1% (3.0% in seasonally adjusted terms).

The housing component of CPI increased by a greater 4.0%. At the capital city level, housing costs grew by as much as 5.9% over the year in Adelaide and by as little as 1.9% in Darwin.

Over the last 20 years, headline inflation has increased at an average annual rate of 2.6% while housing costs have increased by 2.7% annually. Across individual capital cities, housing costs have increased by as much as 3.3% annually in Canberra and by as little as 2.1% annually in Melbourne.

The Housing component of CPI is made up of a collection of sub-groups as detailed in the second graph. With regards to measuring price appreciation in the actual home, the CPI measure only takes into the consideration the cost of purchasing new dwellings by owner occupiers which accounts for only a small portion of all purchases.

Arguably, it is more meaningful to look at the movement in home values across all properties. On this note, the RP Data-Rismark Home Value Index results show that values have fallen by -3.6 over the year. So clearly the cost of purchasing houses has become more affordable over the year… so what’s driving up the cost of housing?

The results show that the largest increases in housing costs over the past year have come from: electricity (12.2%), utilities (10.1%), water and sewerage (8.6%), gas and other household fuels (6.7%) and property rates and charges (5.2%). What do all of these items have in common? Well they aren’t as large as the overall cost of the mortgage bill but they need to be paid each quarter and appear to be forever getting more expensive at a rate far exceeding the overall rate of inflation.

The third table highlights the annual change in those components which have recorded the greatest increases over the past year broken down across each capital city. As the table shows, electricity and utilities costs have risen at a rate above inflation across each city. In fact, across all of the items listed only water and sewerage costs in Perth, gas and other household fuels costs in Hobart and Darwin and property rates and charges costs in Sydney, Adelaide and Hobart have rise at a rate below their respective increases in CPI over the year.

These increases in costs are nothing new either. In each city except for Perth and Darwin electricity costs have been rising at a rate above housing CPI on an average annual basis over the last 20 years. Utilities costs have risen at an average annual rate above the capital city housing CPI in each capital city over the past 20 years.

Another feature of the market over the past year has been the increase in rental rates. While home values have fallen by -3.6% over the last 12 months, rental rates across the combined capital cities have increased by 4.8% according to the CPI data (note the RP Data-Rismark measure shows rents are up by a higher 6.3% over the year). The increase in rental rates highlights the shortage of housing stock in certain areas given that as values are falling and rental growth is picking up.

According to ABS data, rents have increased by as much as 6.4% in Canberra and 6.3% in Sydney. With low rental vacancy rates in most capital cities and home values falling, we would anticipate that the cost of rental accommodation will continue to increase in most capital cities over the next year.

Overall, the CPI data shows that it continues to become more expensive to run a household on a day-to-day basis despite the fact that home values have actually fallen over the year. Given the ongoing annual increases in electricity, utilities, water and sewerage, gas and other household fuels and property rates and charges over a long period of time, it is unlikely that the increase in these costs will relent. They are also likely to result in a consistent increase in housing CPI which is above that of headline inflation.

Tim Lawless is the Director of Property Research at RP Data.