Aussie house prices rise 3% in 2020 with only one city (Melbourne) suffering price falls

Australian house prices continued their gradual rebound from the COVID-19 induced correction with dwelling values across both capital cities and regional markets appreciating by a strong 1.0% in December according to CoreLogic's hedonic indices.

The outperformance of non-metro regional markets remained robust with a 1.6% capital gain in the month of December compared to a still-very-healthy 0.9% price rise for dwellings located in the 8 capital cities.

Over the 12 months of 2020, Australian dwelling values officially increased by about 3.0%. This concealed divergent performance across regional and metro markets: whereas homes in the 8 capital cities could only grind-out a soft 2.0% capital gain, regional dwellings increased in value by a solid 6.9%.

The price rises in December were remarkably consistent across the capital cities at around 1% for the month, which is impressive considering that this tends to be a seasonally-weak month wherein activity dramatically decelerates.

Over 2020, the top performing housing market was Darwin (+9.0%) followed by Canberra (+7.5%), Hobart (+6.1%), Adelaide (+5.9%), Brisbane (+3.6%), and Sydney (+2.7%). 

Notwithstanding all the forecasters predicting large 10%, 15%, 20% or even 30% house price falls post COVID-19, Melbourne (-1.3%) was the only city to suffer a capital loss last year. 

The truly abysmal forecasting performance of analysts in respect of the $7.3 trillion Aussie housing market in 2020 was arguably one of the biggest misses of the year, which extends a long-running trend of private and public sector economists getting the nation's largest asset-class wildly wrong, especially around key turning points (eg, 2008, 2009, 2012-2013, 2017, 2019, and 2020 to name a few recent inflexions). 

Readers might recall that Coolabah had a highly contrarian position in March 2020, projecting only a modest 0% to 5% decline in national dwelling values, which we argued would be superseded by capital gains of at least 10% to 20% commencing in or around September 2020.  

Across Australia, the peak-to-trough loss was just 2.1% according to the latest CoreLogic hedonic index data (capital city homes fell by 2.8%) with the correction coming to an end in September 2020.

Coolabah is forecasting house price growth of 10% to 15% in 2021, a view that many other analysts have slowly come to embrace.

What is not widely understood is just how little net aggregate house price growth there has been since 2017. The enclosed chart highlights the change in dwelling values across different markets since July 2017. Home values in Sydney (-3.88%) and Melbourne (-1.76%) are actually lower today than they were three years ago. This is also generally true across the 8 capital cities (-1.87%) with the biggest laggard being Perth property (-10.2%), which is substantially cheaper than it was in mid 2017.  The flip side of that coin is property in Adelaide (7.79%) and Brisbane (4.91%), which have net increased in value over this period.

It's also interesting to consider the changes in home values since the peak in the market in April 2020. As the chart below shows, dwelling prices across the 8 capital cities are still 1.03% below their high watermark last year. This is driven by Melbourne (-3.80%) and Sydney (-1.61%), which have some reasonable ground to recover just to get parity with their pre-COVID marks.

The next phase of the current housing cycle will likely see the return of investors seeking to capitalise on the unprecedented emergence of "positive gearing" whereby gross rental yields are way above the cost of servicing residential mortgage debt (see the final row of the table below).

Understanding the housing market---and accurately predicting its future trajectory---is hugely important if one wants to have any hope of divining wider economic and hence financial market outcomes. Beyond being the single most valuable household asset, housing is also the banking system's largest exposure. My experience has been that those who get the housing market wrong tend to also misfire when it comes to hitting other macro targets...