MNI DATA ANALYSIS: Australia Hsg Weakens More; Risk To RBA

By Sophia Rodrigues

     SYDNEY (MNI) - Australian national dwelling values recorded their first

annual decline since October 2012, raising worries that tighter credit

conditions could spur further weakness in the housing market.

     So far the weakness remains concentrated in the two major cities of Sydney

and Melbourne but may make the Reserve Bank of Australia alert to the risks to

the economy and its forecasts at a time when downside risks are building in

other parts of the economy.

     The RBA has always said it doesn't target house prices but that doesn't

mean housing market developments are not important to its forecasts. Indeed, one

of the biggest risks to the RBA's forecasts is that households' consumption and

saving decisions could be more sensitive to an easing in house price growth.

     This would lead to weaker consumption growth than forecast by the RBA, and

has the potential to change the direction of monetary policy.

     The CoreLogic Hedonic Home Value Index for May, published Friday, showed

national housing values fell 0.1% m/m, the same pace as April but the y/y values

fell 0.4% to mark the first decline since October 2012.

     The fall was entirely due to a 0.2% m/m drop in combined capital house

prices which offset the 0.2% rise in combined regional prices.

     In the latest month, Melbourne prices led the decline, falling 0.5% m/m

compared with a 0.2% decline in Sydney prices.

     Melbourne has now taken over from Sydney as the weakest performing housing

market over the past three months with a 1.2% fall to mark the largest decline

since February 2012. 

     Melbourne's housing market was previously looking more resilient to value

falls relative to Sydney but in recent weeks auction clearance rates have been

deteriorating, inventory levels are rising and transaction activity is tracking

12.9% lower than one year ago.

     According to CoreLogic's head of research Tim Lawless, the negative

headline growth rate is a symptom of weakening housing conditions across the

capital cities, led by Melbourne and Sydney where previously, capital gains were

nation-leading. 

     "Sydney and Melbourne comprise approximately 60% of Australia's housing

market by value, and 40% by number, so the performance of these two cities has a

larger effect on the headline market performance," Lawless said.

     The decline in both these cities are mainly due to weaker conditions in the

more expensive end of the housing market.

     In Sydney, the most expensive quarter of the market has seen dwelling

values fall by 7.1% since peaking compared with a 1.4% fall across the least

expensive quarter of the market and a 3.3% decline across the broad 'middle' of

the market. 

     In Melbourne, the most expensive quarter of the market is down 3.3% since

peaking, while the broader middle market saw dwelling values fall by 0.8%. The

most affordable quarter of properties did not decline at all, remaining at

record high values. 

     The most affordable quarter of the market in Sydney and Melbourne are

likely supported by the higher proportion of first home buyers.

     RENTAL CONDITIONS

     Weekly rents nationally rose 0.1% m/m and at an annual pace of 1.9%

compared with 2.0% annual pace recorded in April. While rental growth remains

slow, they are rising faster than dwelling values and thus placing upward

pressure on rental yields after a long period of yield compression.

     Developments in the rental market are important because of its contribution

to housing inflation, which has a greater share in overall inflation.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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