Between 2020 and 2021, the housing market witnessed a rapid surge in the PropTrack (all dwelling) price index, followed by a notable decline in 2022. By 2023, all markets had either stabilized (Melbourne, Canberra, Hobart, and Darwin) or resumed an upward trajectory (Sydney, Brisbane, Adelaide, and Perth).
Price-to-rent ratios derive from the PropTrack price index and the ABS rent index. The trends in these ratios mirror those of the price indexes. Nevertheless, unlike the price indexes, the price-to-rent ratios in the Melbourne and Darwin markets persisted in a sustained decline at the end of the sample, driven by rising rents.
Below, we present the fever indexes, calculated using the method proposed by Shi and Phillips (2023), with some adjustments made to facilitate real-time implementation and improve accuracy. These indexes represent the computed non-fundamental component for the price-to-rent indexes, considering factors such as the real interest rate, real rent growth, and housing completion growth as fundamentals. The real rent growth and housing completion growth are lagged by one quarter due to delayed data release, whereas there is no delay in the real interest rate.
Notable increases in the fever index were evident between 2013 and 2015 in the Sydney and Melbourne housing markets. A similar surge occurred between 2020 and 2021 across all capital markets and declines commenced from either late 2021 or early 2022, consistent with the trends seen in the price indexes. In recent quarters, the housing fever indexes exhibit some diverse patterns. While the Melbourne and Darwin markets continue their descent and the Sydney market remains stable, sharp rises are evident in the remaining markets. The significant drop in the Darwin and Melbourne fever indexes is consistent with those observed in the price-to-rent ratios, driven by rapid rent increases in these two markets.
The following figures depict New Zealand house prices and price-to-rent ratios. Noticeable increases in house prices are observed from the second half of 2020. However, a significant shift in direction in house price dynamics becomes apparent in late 2021, coincident with the Reserve Bank of New Zealand’s first interest rate hike in seven years. House prices plateau in Canterbury and Otago but the remaining markets experience a rapid decline. This downward trend halts in mid-2022, with prices in all markets remaining stable in the past few quarters.
Just as with the trend in house prices, there is a sharp decrease in the price-to-rent ratios across all New Zealand housing markets starting from late 2021. Unlike the price series, however, this declining trend persists until late 2023, with the ratios stabilizing in the last two quarters.
The fever indexes for the New Zealand markets are computed similarly to those of the Australian market. Fundamental factors considered for the price-to-rent ratios include the real interest rate, real rent growth, and housing consents growth. Due to data release delays, real rent and housing consents growth are delayed by one month, while the real interest rate is available without delay.
As observed, the fever indexes for all New Zealand regional markets show an increase from the second half of 2020. They shift direction from late 2021 following the RBNZ’s interest rate hike. Similar to the Australian housing markets, we note some disparity in the behavior of the index across different regions in recent quarters. While the Wellington market is trending upwards, the remaining markets are stabilizing after their earlier downward trajectories. The upward trajectory of the Wellington fever index is partially due to its relatively stagnant price-to-rent ratios and a decrease in rent.
