This article is from the Australian Property Journal archive
A NEW leading indicators index devised by Capital Economics that combines several factors to capture the balance of supply and demand in Australia’s housing market suggests that house price growth will continue to slow over the coming months.
The firm’s new House Price Leading Index combines information auction clearance rates, the sales-to-new listings ratio, housing finance commitments, time on market and vendor discounting.
“It tends to lead annual house price growth by around four months and has a much higher correlation with house price growth than any of the individual leading indicators,” explained Capital Economics head of Asia-Pacific Marcel Thieliant.
“We expect annual house price growth to soften further from 6.7% in September to just over 6% by year-end.”
House price growth in recent months has been carried by Perth, Brisbane and Adelaide, with the hallmark being a severe lack of supply. Freshly-advertised housing stock levels are at their highest in three years, giving buyers more choice and together with existing affordability constraints are putting the brakes on house price growth across the country.
“Price growth slowed to 6.7% in September, but with prices still rising at an annualised pace of over 6% between September and June, that slowdown seems to have run its course. That’s remarkable because housing affordability is the most stretched since the late 1980s,” Thieliant said.
He said some indicators tend to predict turning points in the housing market earlier than others.
“For example, the widely watched data on auction clearance rates tend to predict house price growth with a lead of around three months and so does the ratio of sales to all outstanding listings. By contrast, the sales-to-new listings ratio tends to lead house price growth by as much as half a year.”
He said the new Leading Index doesn’t predict turning points in the housing market “quite as early as our sales-to-new listings ratio, but it more than makes up for that in reliability”.
“After all, while individual leading indicators usually point in the same direction, they often tell conflicting messages about the pace of any slowdown or acceleration in house price growth.” s.
Theiliant said “what’s causing problems instead” are the initial releases of home sales and time on market.
“As it takes time to finalise home sales, CoreLogic’s preliminary figures always show a sharp fall in sales over the most recent couple of months. CoreLogic is publishing model estimates that aim to remove that bias, but they aren’t very reliable either, to say the least,” he said.
He said initially published modelled estimates are still biased downwards, on average underestimated actual sales figures by nearly 19% for the most recently published month and by 9% for the month before that.
Capital Economics’ model therefore ignores the last three months of sales.
“Since the ratio of sales to overall listings only leads house price growth by three months, that means it’s no longer a leading indicator and we aren’t including it in our Leading Index.”
Thieliant said “the other troublemaker” is time on market, as data for the most recent months typically overstate how long properties have been available for sale, which relates back to not all recent home sales being captured.
“Over the last couple of years, the initial ‘time on market’ release has overstated the actual figure by a huge 26% for the most recent month and by a still large 9% for the prior month. Given that ‘time on market’ only leads house price growth by three months, ignoring the last couple of months of data would mean that it’s barely a leading indicator for house price growth any more.
The Leading Index adjusts the time on market print down by those figures, and which puts time on market data consistent with house price growth remaining little changed over the next few months rather than plunging as the original data would have suggested.
