Why house prices slumped in the second half of April: Joye

So we have a bunch of house price data out. The ABS’s quarterly median detached house price index, which was published yesterday, claims that capital city prices across Australia fell 1.1% in the March quarter.

Confusingly, Australian Property Monitors (APM) reported a 0.9% increase in detached house prices over the same period (but with a notably smaller +0.1% rise in the price of units). And APM and the ABS apparently use similar “stratified median” index methodologies.

In contrast, RP Data-Rismark have recently launched a radically different, and much more sophisticated, “hedonic” house price index technique that tracks changes in the value of the overall housing “stock” rather than simply the transactional sales “flows”. Only about 5% to 6% of the housing stock turns over each year, and these transactions can be an imperfect representation of the 95% of homes that do not trade.

RP Data-Rismark’s eight capital city “all dwellings” index, which includes both houses and units, registered a flat (actually up slightly) result over the first three months of 2012. Yet when we look at the detached house sub-series values declined by 0.1% over this period (units were up 0.9%).

Aggregating across the three major indices—with one up, one down, and one flat—one might reasonably conclude that home values were mostly unchanged during the quarter. This makes sense given that the RBA’s two rate cuts in November and December arguably helped galvanise an improvement in housing conditions over the first quarter of 2012.

A crucial rider to this is the fact that the banks have over February and April taken 50% to 60% of the December rate cut back. Beyond reducing the stimulus that the RBA’s rate relief would have otherwise injected into the economy, these independent pricing decisions by the banks—justified or not—have undoubtedly created substantial confusion in the minds of consumers in respect of the future level and direction of lending rates.

Today RP Data-Rismark also reported their results for the month of April. On a month-on-month raw basis, dwelling values across Australia’s eight capital cities declined by 0.8%. This movement is highlighted in the first chart below, which shows the daily index changes over the month of April. The second chart stretches this data back to the start of 2011 using a one-week moving average.

What is especially interesting is that 100% of the decline experienced in April occurred in the second half of the month. Whereas over the first 14 days of April, Aussie home values followed on from the trend set in February and March, yielding a small capital gain based on RP Data-Rismark’s method, they slumped by 0.85% in the second half of the month. What could have caused this dramatic intra-month change?

One possible explanation is the intervention of Easter, which caused a sharp decline in auction and private treaty sales activity over the period April 6 through 9, inclusive. This does not, however, shed light on the adverse price action that really began on April 16.

A likely more powerful explanation is the fact that one of Australia’s largest banks, ANZ, lifted all of its variable mortgage rates by six basis points on Friday, the 13th of April, which triggered a tsunami of negative media coverage and speculation that other banks would follow suit. This coincides perfectly with the inception of the price falls on Monday, April 16.

There are two other factors that probably contributed to the malaise in the last few weeks of April. The first is the fact that the RBA had said for months that it would not cut rates unless it received a “benign” inflation print when the first quarter inflation data were published on the April 24.

This article first appeared on Property Observer.

Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark. The above article is not investment advice.