My friend Chris Joye has already blogged about the house price bounce that appears in his data, but I thought I’d try to give a bit more colour.
First of all, it does seem that there has been a firm increase in dwelling prices across the last six weeks or so. The above chart shows the annual ‘splits’ for the daily series – so that the eye can pick up on seasonal patterns. It looks to me like this is a ‘real’ bounce, and not just a seasonal increase.
The bounce is most apparent in the housing data – as the above chart shows. It is less apparent in the ‘units’ data – see below.
There has been a lot of debate about what’s going on in the various markets – particularly in Melbourne. That’s fair enough, data is often ‘choppy’ at turning points (note, the data is to 16 July 2012, and the following charts show MoM NSA, with MoM being to the same day of the prior month).
The RP series suggests that the bounce is focused in the ‘expensive’ cities of Sydney, Melbourne and Perth. This passes the ‘sniff’ test – the claim has been that rate cuts have brought in buyers. Therefore, I would expect that the rise in house prices ought to occur first in markets where affordability is the largest issue constraining buyers.
Lower rates directly increases affordability – and ought to increase prices. That’s what we are seeing. If this hypothesis is true, I’d also expect house prices to be going up faster than unit prices – as buyers substitute toward houses.
We are certainly seeing firm house price increases in the ‘expensive’ markets – as the above chart shows. And the increases in unit prices have been relatively less robust – see below.
At this point, is looks to me that the data is bouncing, and it’s happening in the way I’d expect if lower mortgage rates are the catalyst.
This suggests to me that the RBA has (finally) got rates away from restrictive – if the gains maintain their present momentum, rates may even be at a point where they are adding to demand.
The asset price channel is an important part of the monetary transmission mechanism – if there is firm evidence that it’s working again, it raises the bar for further rate cuts.
Assuming the RBA shares my judgement that house prices are rising, I think we’d need another sub 0.5%q/q core CPI print to get an August cut. After all, it’s not just asset prices — we also have better than expected Q1 GDP, and the unemployment rate remains basically steady in the 5% to 5.25% range.