Why rate cuts are starting to help house prices: Joye

Have the RBA’s relentless rate cuts had any impact on Australia’s housing market? Today we are going to find out.

One of the important benefits of the new “daily” RP Data-Rismark house price index suite is that we get very timely updates on the current market pulse. I am going to use these indices to look at the performance of both the national market and some of the individual capital cities. Before I do, a word on the underlying data.

When analysts think about house price data they typically do so from two perspectives. The first asks the question: what is happening to “actual” prices; that is, the prices that home owners transact at. The second queries how house price movements compare to similar periods over time; more specifically, this approach seeks to strip out the strong “seasonality” that house prices display at various points during the year.

Both techniques have their merits. Indeed, analysts should always be mindful of the two. On the one hand, there is an argument that we do not normally “seasonally adjust” asset price (or financial market) data, such as stocks, bonds, or commercial property prices. So if you want to measure actual or realised investment returns, you must use the raw housing data.

On the other hand, analysts also want to understand whether current market dynamics are unusually strong or weak. For example, Australian house prices normally fall in the month of December. Accordingly, price declines in December do not actually signal a deteriorating market. This is just what usually happens when the market shuts down over the Christmas break. By seasonally adjusting the December data, we can arrive at more sophisticated conclusions as to the market dynamics at that particular juncture.

In Australia, the housing market becomes seasonally weak during the winter months of May through August, inclusive. With this observation in mind, I will leverage off the raw house price indices for today’s purposes.

In my first chart, I have illustrated the national, eight capital city, “all dwellings”, index. This shows us the change in the value of the housing stock, including both detached homes and units, across all the capital cities on a value-weighted basis. And we can identify four distinct market phases in the year-to-date.

Over the month of January national dwelling values declined by about 1%. They then fully recovered this loss over the seasonally robust months of February and March. Indeed, homes values continued grinding out gains through to the 15^th of April.

Now recall that the RBA cut rates in November and December. Yet the banks unilaterally jacked rates back up in February by 10 to 15 basis points, and one of the major banks, ANZ, hiked by another 15 basis points in the middle of April.

So before the May rate cuts, Australian borrowers had been effectively subject to an interest rate increase over the first four months of the year, which arguably did much to diminish the impact of the December relief.