Volatility returning to the premium housing markets

Australia’s prestige markets, normally associated with water frontage, magnificent views, or urban acreage were once considered to be safe havens during a downturn. The argument was that the absolute scarcity of these properties would protect prices from falling significantly while more common housing stock could be more prone to price falls due to the wider abundance of generic stock in the ‘burbs’.

More recently, however, the premium housing sector has displayed a higher level of volatility. Based on an analysis using the RP Data-Rismark stratified median house price series, during the GFC premium house prices fell considerably more than the broader market place; over the 2008 calendar year the top ten percent of the market saw a -14% fall in Sydney, Melbourne’s most prestigious sector saw prices fall by -12%, Brisbane’s top end recorded a -10% decline and prices in the Perth premium market fell -18%.

The steep GFC falls were largely regained during 2009 with the premium sector significantly outperforming the broader market. Over the 2009 calendar year within the most expensive top ten percent of the market, Sydney prices were up 16%, Melbourne’s 18%, Brisbane saw a 10% lift and Perth’s top end prices saw a 13% gain.

With the market now having left the growth phase behind, once again it appears that the premium markets are showing their volatility. Prices within Sydney’s top end have fallen -7.5% over the six months to the end of September, and Melbourne premium prices are down -10.8%. Price falls in Brisbane and Perth, where market conditions have been considerably weaker, have been much more widely spread across the pricing segments.

The most stable market sectors, based on price, have been the broader ‘middle’ of the market where Sydney and Melbourne continued to record price growth over the reported six month period and in Brisbane and Perth the falls in prices were less than what was recorded in the higher and lower price segments.

Looking forward, once the November interest rate rise is included within the data, the weakness in the more affordable segments of the market may become more evident. Home owners and prospective buyers in these market segments are very sensitive to affordability pressures and there may be further weakness at these lower price points.

The good news for these markets is that the outlook for interest rates is looking increasingly stable. Financial markets are predicting only one further rate rise towards the end of 2011 which will be welcome news across all the market segments.

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