Housing Fever

Downward momentum of the price-to-rent ratios continued during the current quarter in the Sydney, Brisbane, Adelaide and Perth housing markets. For other cities, like Melbourne, Darwin and Canberra, the price-to-rent ratio either increased slightly or stayed at a similar level.

The 2020-2022 housing bubble involved six capital cities (Sydney, Melbourne, Brisbane, Perth, Hobart and Canberra). These housing markets now appear to be in a recovering state. Sydney, Brisbane and Canberra markets have almost arrived back to normality according to the computed non-fundamental/speculative components; but Melbourne and Hobart are still manifest some deviation from fundamentals. Notably, the non-fundamental market components in Perth and Darwin fell substantially below their average levels between 2021 and 2022, implying a potential over-correction during these years and are still to recover.

After rapid changes sustained over much of the period 2020-2022, New Zealand housing markets appear to have reached a more stable phase, with their price-to-rent ratios roughly unchanged over the last quarter.

Housing bubbles were detected in the Auckland and Canterbury regions for a substantial period between 2020 and 2022 and briefly in Waikato and Otago in 2021. Like Perth and Darwin in Australia, there is some evidence of an over-correction in the Waikato, Wellington and Bay of Plenty housing markets. On the other hand, Auckland, Canterbury, and Otago are still on trajectories returning to normalcy from speculative bubble episodes.

Periods when the housing fever indicator was switched on in each of the cities since 2020 are listed below:

Australia

• Sydney: 21 May to 21 Jul, 21 Oct to 21 Nov
• Melbourne: 21 Feb to 22 Jul
• Brisbane: 20 Apr to 22 May
• Adelaide: NA
• Perth: 20Dec to 21Jan
• Hobart:  21 May to 22 Jun
• Darwin: NA
• Canberra: 21Mar to 22 Apr

New Zealand

• Auckland: 20 Oct to 22 Jun
• Canterbury: 20 Nov to 20 Dec and 21 Feb to 22 Jun
• Bay of Plenty: NA
• Wellington: NA
• Waikato: 21 Nov
• Otago: 21 Oct – Nov

Price-to-rent ratios in all Australian capital cities continue to head down this quarter, with the decline steepest in Sydney.

The bubble signal for the Sydney housing market has been switched off since Dec 2021. The signal for the Melbourne market remains on but its non-fundamental component has begun shrinking in 2022Q3, following the lead of the other capital cities. The bubble signals for Brisbane, Hobart, and Canberra were switched off in April/May 2022, while the signal for Perth was switched off in January 2021. No bubbles were identified in Darwin and Adelaide. The non-fundamental component continues to weaken in Perth and Darwin.

Price-to-rent ratios have continued to fall in all regions of New Zealand, with the largest falls occurring in Auckland and Wellington. Bubble signals are now switched off in all regions. Steep declines in the non-fundamental component have occurred in Wellington, Waikato and Otago during 2022 and a sustained decline in the Bay of Plenty region is evident over 2021-2022.

Periods when the housing fever indicator was switched on in each of the cities since 2020 are listed below:

Australia

• Sydney: 21 May to 21 Jul, 21 Sep to 21 Dec
• Melbourne: 21 Mar to 22 Sep
• Brisbane: 20 Apr to 22 May
• Adelaide: NA
• Perth: 20Dec to 21Jan
• Hobart: 21 May to 22 May
• Darwin: NA
• Canberra: 21Mar to 22 Apr

New Zealand

• Auckland: 20 Aug to 22 Jun
• Canterbury: 20 Nov to 20 Dec and 21 Feb to 22 Jun
• Bay of Plenty: NA
• Wellington: NA
• Waikato: NA
• Otago: 21 Oct

In terms of methodology, we made a few significant changes in this quarter’s update.

• We replaced the rental index obtained from the Australian Bureau of Statistics (ABS) with those from CoreLogic, as the rental data from CoreLogic reflects current market conditions better than those from ABS. This modification has led to significant changes in the bubble identification results. The new results are believed to be more accurate.
• Due to the unavailability of national level rent data from CoreLogic, we dropped our analysis for the Australian national level market.
• We employ a 90% significance level instead of a 95% significant level to provide a less conservative view of speculative conditions.

The Sydney and Melbourne price-to-rent ratios have been volatile over the last two quarters. It is the first time in a long time we have observed price-to-rent ratios decline in Adelaide, Brisbane, Canberra, and Hobart. The price-to-rent ratios in Perth and Darwin continue to decline.

Despite similar dynamics in the price-to-rent ratios of the Sydney and Melbourne housing markets, speculative components of these two cities behave very differently. Our results show that the bubble signal in Sydney has been switched off since November 2021. In contrast, the signal is still on for Melbourne due to its weak housing market fundamentals. In particular, rents (in real terms) have been trending down since early 2021 in Melbourne. The bubble signals for Brisbane, Canberra, and Hobart were switched off in May 2022. The timing coincides with the rate hike decision of the Reserve Bank of Australia.

We see an overwhelming near-uniform correction in New Zealand, with price-to-rent ratios falling dramatically in almost all regions over the past three quarters. Although the bubble signals for Auckland and Canterbury remain switched on, the bubble components have stopped expanding since 2021Q3. This analytic evidence strongly corroborates anecdotal and heuristic media discussion, showing unequivocal indications of the impact of recent government and central bank policy changes in New Zealand.

Periods when the housing fever indicator was switched on in each of the cities since 2020 are listed below:

Australia

• Sydney: 21 May to 21 Jul, 21 Sep to 21 Nov
• Melbourne: 21 Feb to 22 Jun
• Brisbane: 20 Aug to 22 May
• Adelaide: NA
• Perth: NA
• Hobart:  21 Jun to 22 May
• Darwin: NA
• Canberra: 21Mar to 22 May

New Zealand

• Auckland: 20 Aug to 22 Jun
• Canterbury: 20 Nov to 22 Jun
• Bay of Plenty: NA
• Wellington: NA
• Waikato: 21 Nov
• Otago: 21 Oct