Housing Fever

The Australian housing market has in the main been steady since last quarter. House prices have stabilized in Melbourne, Canberra, Hobart, and Darwin or resumed upward drifts of varying strengths in Sydney, Brisbane, Adelaide, and Perth. The price-to-rent ratios fall into three categories: trending upward in Brisbane, Adelaide, and Perth; remaining flat in Sydney and Hobart; and declining in Darwin and Melbourne.

The housing fever indexes mirror the trends in price-to-rent ratios, with Adelaide, Brisbane, and Perth moving upward, Melbourne trending downward, and Canberra remaining leveraged. However, unlike the price-to-rent ratio, Sydney’s fever index is also downward trending, indicative of stronger housing market fundamentals in Sydney.

As in the previous quarter, house prices and price-to-rent ratios in New Zealand markets show only minor fluctuations. Wellington’s fever index has seen some variation, remaining slightly elevated compared to other markets. Other regions are following similar patterns to those of last quarter, with Otago continuing its downward trend, while the remaining markets remain stable.

Since 2023, house prices across all markets have either stabilized (Melbourne, Canberra, Hobart, and Darwin) or resumed an upward trend (Sydney, Brisbane, Adelaide, and Perth). However, unlike house prices, rising rents have caused the price-to-rent ratios to decline in Melbourne and Darwin, while in Sydney, the ratio has remained flat. These data reflect the impact of changes in housing market fundamentals.

The upward trend in the fever index for Brisbane, Adelaide, and Perth shows no signs of slowing down, as these markets continue to experience strong growth. In contrast, the fever indices for Hobart and Canberra have stabilized, reflecting stronger market fundamentals. Meanwhile, Sydney’s fever index has leveled out, indicating that the city’s market is holding steady.

As in the last quarter, we observe only minor fluctuations in house prices and price-to-rent ratios across the New Zealand markets, except for a sudden drop in the price-to-rent ratio in Otago, driven by rising rents reflecting a change in market fundamentals in the Otago region.

Interestingly, compared to the last quarter, Wellington’s fever index has reversed direction and started to trend downwards. The other markets are behaving in a similar way to the previous quarter:  Otago continues its downward trend, while the remaining regional markets remain stable.

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.