Housing Fever

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

The latest data for the first quarter of 2022 show evidence that changes in economic fundamentals are now being reflected in housing market data, particularly for New Zealand. Rising inflation in both countries is lifting construction costs and putting downward pressure on real rents. Policy changes In New Zealand to boost the supply of state housing, to remove mortgage interest deductibility on rental properties, and to shift the bright line test on capital gains tax out to 10 years are all reducing speculative housing market sentiment. Central bank interest hikes to combat rising inflation in New Zealand have already impacted mortgage rates, with expectations of continuing rises over the next 12 months. A more aggressive position on interest rates was announced by the Australian Reserve Bank in its April 2022 policy meeting and rising bond yields in financial markets are already pricing in expectations of several rate increases by the end of 2022. All these forces on fundamentals can be expected to influence and raise uncertainty in the housing markets of both countries. Changes in the econometric picture are already evident as our analysis shows.

The price-to-rent ratio of the Sydney market dropped in January and February but turned back up in March. The ratio has been falling in Melbourne since February. It continues to climb (at a slower rate than in the previous quarter) in the Canberra, Brisbane, and Adelaide housing markets. The bubble signals for Sydney, Melbourne, Brisbane, and Adelaide remain switched on.

The New Zealand markets are volatile. The ratio headed upward in almost all regions in February but fell in five out of the six regions in March. The bubble signal for Auckland has been switched off since February, but it remains on for Canterbury.

Note: The historical distribution on the left panel is computed from January 2011 to December 2019.

The dot plots below showed when the housing fever indicator was switched on in each of the cities since 2020:

• Australia: 19Dec; 20Nov to 22Mar
• Sydney: 20 Apr; 20Oct to 22Mar
• Melbourne: 21 Jan to 22 Mar
• Brisbane: 20 Sep to 22 Mar
• Adelaide: 21 Jul to 22 Mar
• Hobart: 18 Apr and 21 Sep to 21 Nov
• Darwin: 21 May
• Canberra: 21 Mar to 22 Mar
• Auckland: 20Oct to 20Dec; 21Feb to 22Jan
• Canterbury: 20 Dec; 21 Feb to 21 Dec; 22Feb to 22Mar
• Otago: Oct 2021

Note: the starting date of the bubble episodes changed slightly compared with those released in the previous quarter. The changes are due to the revisions of some data series.