Arek Drozda

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GUEST OBSERVATION
Residential property is <a href="https://www.propertyobserver.com.au/residential/a-roof-over-your-head-or-the-biggest-investment-you-ll-ever-make-how-should-we-treat-residential-property/2014020967655" target="_blank">considered an investment class</a> and, as such, it is subject to market cycles where prices fluctuate over time.
Being aware of the stage of the market cycle can help in timing purchase and sale decisions.
However, it is rather difficult to gauge the state of the market and its future direction by examining only historical prices, even if these are reported on a daily basis - as is the case with RP Data's Home Value Index. Periods of rises and falls in prices are of different durations and subsequent movements can have very different magnitudes.
Frankly speaking, the dynamics of the Australian real estate market are very little understood despite its value exceeding more than threefold the capitalisation of all companies listed on the Australian Securities Exchange. Financial institutions are not investing in it directly hence long term research on performance and cycles is almost non-existent, or at least not available to the public. 
True, we do have various, raw measures of price movement, reports on auction clearance rates, vacancy rates, intentions to buy, asking prices, or various affordability indexes but these were developed primarily in support of valuation or risk management activities of lenders and insurers, or for the purpose of economic modelling, and not necessarily to help in decision making by individuals. Besides, each of these measures on its own gives only a partial picture of the market.
Traders in shares, bonds, currencies and similar financial instruments have developed a myriad of secondary “technical indicators” to aid in recognition of prevailing market cycles and trends. There are no such indicators available for buyers and sellers of residential properties.
The only thing that comes close to a true market gauge is the concept of a “property clock” but it tends to be very subjective and readings often differ from one commentator to another. In other words, we are missing a truly analytical perspective on the state of the property market.
To address the lack of consistent, long term analytical measures that help understand the state of property market in Australia, I have compiled a set of unique indicators which I would like to share with you on a regular basis.
The aim of this first set of indicators is to provide a broad perspective on the national property market as a whole. Peculiarities of local markets will be assessed with another set of indicators which I intend to publish at a later date.
About the Indicators
The first two indicators in the set (buy-rent indicator and purchase affordability indicator) provide objective measures of relative attractiveness of residential real estate to prospective buyers. In other words, whether there is a potential incentive, “value” if you like, for prospective buyers to consider buying a property or not.
The third indicator, economic wellbeing indicator, reflects perceptions of Australians about the economy. Since people are more inclined to commit to a substantial purchase if they have a positive outlook on the economy, this indicator evaluates the likelihood of people committing to property purchases.
The fourth indicator, private housing credit impulse, measures what people are actually doing. That is, whether perceptions about the value of owning a property and outlook on the economy translate to actual purchases or not.
The fifth indicator, property prices gauge, aims to forecast how the collective actions of buyers will likely impact property prices and whether actual change in prices is proportionate to the volume of money flowing into the property market at any given time.
Actual prices feed back into the value proposition, as reflected in the first two indicators, which closes the information loop. This is the minimum set of indicators that allows drawing a definite conclusion on the overall state of the property market now and in the recent past.
The indicators are calculated back to mid 1980’s and where possible I publish them with a reference to the change in prices of established houses (as reported by the Australian Bureau of Statistics) to show how well they reflect the reality over time. I will provide my interpretation of the latest results, a bit more extensively than usual in this first edition, but please feel free to derive and share your own conclusions via comments.
A short explanation of some conventions to help in interpreting the information:
<ul>
<li>
Market outlook can be: positive, positive with negative bias, neutral with positive bias, neutral, neutral with negative bias, negative with positive bias and negative 
</li>
<li>
Charts are labelled as:
</li>
</ul>
Estimate – if data estimates are used in calculations of the latest measure,
Preliminary – if mix of actual and estimated data is used to calculate the current measure, and
Final – where all inputs are actual data.
Caveat
The information is provided in good faith and does not constitute financial advice. Use with caution and at own risk.
Arek's April state of the market summary is on the following pages. Please click below. 
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Summary
Market outlook: positive with negative bias
 
<ul>
<li>Current conditions favour purchasing over renting but change in trend is imminent (as at December 2013) </li>
<li>Purchase affordability is at a historically high level and has most likely reached its peak (as at December 2013) </li>
<li>Confidence in the economy has started to deteriorate in recent months but is still positive (as at March 2014) </li>
<li>Housing credit is growing strongly, indicating healthy demand (as at March 2014) </li>
<li>Actual prices are slightly ahead of what could be expected based on housing credit growth (as at February 2014)</li>
</ul>
 
National real estate price forecast
Conditions are supportive of further growth in prices in June 2014 quarter and beyond, however increasing pessimism about the economy indicates a possible slowdown in the pace of that growth.
#1 Optimal accommodation choice: Buying more advantageous than renting
<img src="/images/2014/04/28/BRI_April2014.png" alt="">
The Buy-Rent Indicator (BRI) identifies how cost of buying is changing in relation to cost of renting.
BRI bottomed in June 2012 (indicating the lowest point in the current cycle) and it has been rising consistently since then. Although still in buy-territory, the indicator is fast approaching the equilibrium line.
This indicator is constructed based on a simple concept that renting and buying are substitute accommodation options, hence the optimal choice depends on which cost is rising in relation to the other.
BRI in “buy zone” implies that the cost of buying a property has either declined more or risen less, in percentage terms, than cost of renting, therefore making this accommodation option more attractive.
The practical use of this indicator is for identifying market cycles and for timing purchase and sale decisions. In particular, market cycles can be determined by identifying peaks or troughs on the graph (for example, the last two peaks were in March 2008 and June 2010 - and coincide with peaks in national property price indexes).
The crossing of the indicator from rent to buy zone gives a signal that costs of buying started to decline, or at least are rising less than costs of renting.
For those intending to buy in the current cycle the optimal point for making a purchase is when the indicator crosses into buy territory, if the decline is driven by falling interest rates. However, if the fall is caused primarily by falling prices the optimal point is when the indicator turns up, confirming that purchasing costs have bottomed in the current cycle.
The crossing of the indicator from buy to rent zone (which is now approaching) gives a signal that buying costs are rising faster than rental costs.
In the market where property prices are rising, this marks the point in time when opportunities to purchase a property at attractive prices may be all but exhausted in the current cycle. Prices are expected to continue on the upward trajectory from this point onwards which will cause buying costs to rise further.
For those intending to sell in the current cycle, the crossover marks the optimal point if costs of buying are rising due to changes in interest rates. If buying costs are rising primarily due to price increases, the optimal point for selling will be when the indicator peaks, which should coincide with a peak in property prices.
Please note, this indicator can be calculated only on a quarterly basis and is therefore lagging (the latest reading is for December 2013). That is, the confirmation of the cycle peak or trough can be delayed for up to six months.
#2 Purchase affordability: At historically high level, started to decline 
 <img src="/images/2014/04/28/PAI_April2014.png" alt="">
The Purchase Affordability Indicator (PAI) compares changes in the annual cost of buying to changes in average full time adult income, therefore it identifies how purchase affordability has changed over time.
PAI is at historically high level, comparable to that reached in 2009 or 1994, but has recorded a decline in December 2013 from a peak reached in September 2013.
This indicator explains the reason why prices have been growing so strongly. That is, relative to incomes of Australians working full-time, property prices are still very affordable (in the past 30 years purchase affordability was only better between September 1996 and December 2002).
PAI is a lagging indicator and the latest available reading is for December 2013. This indicator will continue to decline if cost of buying grows faster than adult full time incomes. However, prices have still a lot of room to move before they reach an overpriced territory.
Article continues on next page. Please click below.
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#3 Perceptions about economy: Outlook is positive but conditions are deteriorating
<img src="/images/2014/04/28/EWI_April2014.png" alt=""> 
The Economic Wellbeing Index (EWI) is designed to reflect general perceptions of Australians about the current economic conditions.
The EWI is in positive territory but has been declining since June 2013.
A more volatile raw measure of the index is trending up again but only after it recorded significant falls in the previous four months and crossed over into the negative territory.
Declining EWI indicates that perception of Australians about the state of economy started to change to less upbeat since mid-2013 but overall, it is still positive.
The key premise behind this indicator is that people are generally less inclined to make big purchases when they are worried about the state of the economy. This has certainly been a pattern in the past – every time the index crossed into the negative territory, property prices either declined or reduced the rate of growth.
The index is still positive so there should be still plenty of positively thinking buyers and property prices are not likely to decline however, increased uncertainty should take some heat off the market.
The EWI is updated monthly and therefore it offers quite timely insight into the perceptions about the state of economy.
#4 Demand: Housing credit continue to grow
 <img src="/images/2014/04/28/PHCI_April2014.png" alt="">
The Private Housing Credit Impulse (PHCI) provides an indication of the level of buyer activity in the residential property market in Australia, hence it reflects underlying demand for properties.
The March 2014 estimate is positive and reached its highest value since December 2011.
Positive and rising value of the indicator reflects continued strong demand for residential property.
The practical use of this indicator is to provide early warning about impending changes in housing credit uptake, and hence, changes in the underlying demand for residential property.
The most significant signals are when the indicator turns up after bottoming in the negative territory or when it turns down after peaking in a positive territory - since these indicate major trend reversal points.
PHCI bottomed in December 2011 when the decline in the rate of quarterly growth in mortgage finance reached the lowest level and started to improve (i.e. when mortgage finance started accelerating again). This trend was immediately reflected by the reduction in the rate of declines in property prices.
As more money started to flow into the property market, it coincided with a pick up in residential property prices from December 2012 onwards. The demand for property has been rising ever since, with a minor slowdown in June 2013 quarter.
The indicator is currently close to a level at which it turned down on two previous occasions - the September 2006 peak, after which credit declined significantly in a lead up to the Global Financial Crisis (which also coincided with a period of severe purchase unaffordability), and in June 2010 when property prices reached another peak, induced by post GFC stimulus.
In contrast to those previous occasions, property is now much more affordable than in 2006 and demand for residential property seems to be real (rather than induced with incentives, as in 2010), so there is a strong momentum for mortgage credit to continue to rise. However, there could be a temporary slowdown in the strength of that rise as a result of self-imposed credit restraints due to economic uncertainty.
It is important to note that, although this indicator is reported in quarterly intervals, it is derived on a monthly basis. In other words, it is initially calculated based on estimated values which are subject to subsequent revision once actual data becomes available. Hence, the latest quarterly reading can change from one month to the next.
#5 Property price expectation: Values are rising and are close to the level of actual prices
 <img src="/images/2014/04/28/PPG_April2014.png" alt="">
The Property Prices Gauge (PPG) is a proxy of a property price index. It becomes a leading indicator when combined with House Price Index (HPI).
PPG continues on the upward trajectory after a temporary slowdown between March and July 2013. The value of the indicator is close to the value of establish house price index.
Expected and actual prices are relatively close now, although were at variance for a while. This indicates that recent price rises are now in line with underlying demand and are not the result of a mad rush to buy.
PPG is calculated from credit related statistics and is not dependent on any reported property price data. It provides a good indication of the magnitude and future direction of the actual price movement.
The most significant signals from this indicator are when it diverges from actual prices - it points to either underlying strength or weakness of the market.
For example, it provided ample warning about 2008 price falls - almost a year in advance, and then signalled strength of a subsequent recovery. Post-June 2010, it provided evidence that the market was stronger than actual price falls indicated and again, signalled market recovery since March 2012.
The index is calculated on a monthly basis but house price data can only be updated in quarterly intervals.
You can <a href="component/googlecse?q=arek+drozda" target="_blank">read more of Arek Drozda's pieces here</a>.
AREK DROZDA is an independent analyst who has worked in the public and private sectors for over 20 years in business development, data analysis and in building geographic information systems. 
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Buying more advantageous than renting, yet change imminent: April 2014 state of the market analysis

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GUEST OBSERVATION
Summary
Market outlook: unchanged - positive with negative bias
<ul>
<li>Buying and renting costs are changing at the same pace giving no preference to either option (as at March 2014).</li>
<li>Purchase affordability is at a historically high level but the downward trend is now apparent (as at March 2014).</li>
<li>Confidence in the economy has deteriorated further and is close to crossing into negative territory (as at May 2014).</li>
<li>Housing credit is growing strongly, indicating healthy demand (as at March 2014).</li>
<li>Actual prices are above of what could be expected based on housing credit growth but margin is reasonable (as at March 2014).</li>
</ul>
National Real Estate Price Forecast
Unchanged: conditions are supportive of further growth in prices in June 2014 quarter and beyond, however declining optimism about the economy indicates a possible slowdown in the pace of that growth.
#1 optimal accommodation choice: buying and renting costs are balanced
 <img src="/images/2014/05/20/BRI_May2014.png" alt="">
The Buy-Rent Indicator (BRI) identifies how cost of buying is changing in relation to cost of renting.
BRI bottomed in June ’12 (indicating the lowest point in the current cycle) and it has been rising consistently since then. The indicator has now reached the equilibrium line.
This indicator is constructed based on a simple concept that renting and buying are substitute accommodation options, hence the optimal choice depends on which cost is rising in relation to the other. The practical use of this indicator is for identifying market cycles and for timing purchase and sale decisions.
The crossing of the indicator from buy to rent zone gives a signal that buying costs are starting to rise faster than rental costs.
In the market where property prices are rising, this marks the point in time when opportunities to purchase a property at attractive prices may be all but exhausted in the current cycle. Prices are expected to continue on the upward trajectory from this point onwards which will cause buying costs to rise further.
#2 purchase affordability: at historically high level but declining 
 <img src="/images/2014/05/20/PAI_May2014.png" alt="">
The Purchase Affordability Indicator (PAI) compares changes in the annual cost of buying to changes in average full time adult income, therefore it identifies how purchase affordability has changed over time.
PAI is at historically high level, comparable to that reached in 2009 or 1994, but is steadily declining from a peak reached in September 2013.
This indicator explains that, relative to incomes of Australians working full time, property prices are still very affordable. In the past 30 years purchase affordability was only better between September 1996 and December 2002.
Prices have still a lot of room to move before they can be considered unaffordable.
Article continues on next page. Please click below.
<hr class="system-pagebreak">
#3 perceptions about economy: conditions are deteriorating
<img src="/images/2014/05/20/EWI_May2014.png" alt=""> 
The Economic Wellbeing Index (EWI) is designed to reflect general perceptions of Australians about the current economic conditions.
The EWI is falling since June 2013 and has almost reached a crossover line.
The key premise behind this indicator is that people are generally less inclined to make big purchases when they are worried about the state of the economy.
EWI fallings towards neutral line indicates that perceptions of Australians about the state of economy are deteriorating but have not yet turned negative. Increased uncertainty about the economy can result in more sluggish demand for residential properties.
#4 demand: housing credit continue to grow
 <img src="/images/2014/05/20/PHCI_May2014.png" alt="">
The Private Housing Credit Impulse (PHCI) provides an indication of the level of buyer activity in the residential property market in Australia, hence it reflects underlying demand for properties.
The preliminary March 2014 PHCI is positive and reached its highest value since December 2011. Consequently, property prices continue to record higher values.
The practical use of this indicator is to provide early warning about impending changes in housing credit uptake, and hence, changes in the underlying demand for residential property.
Positive and rising value of the indicator reflects continued strong demand for residential property.
#5 property price expectation: values are rising and are close to the level of actual prices
<img src="/images/2014/05/20/PPG_May2014.png" alt="">
The Property Prices Gauge (PPG) is a proxy of a property price index. It becomes a leading indicator when combined with House Price Index (HPI).
PPG continues on the upward trajectory after a temporary slowdown between March and July 2013. The value of the indicator is close to the value of establish house price index.
Actual prices are above of what could be expected based on housing credit growth but not too far ahead. Therefore, current price level is well supported. 
For more extended description of individual measures and how to apply this information please refer to the first report in this series: <a href="/expert-insights/buying/30639-state-of-the-property-market-april-2014?limitstart=0" target="_blank">State of the Property Market, April 2014</a>. 
Caveat: The information is provided in good faith and does not constitute financial advice. Use with caution and at own risk.
AREK DROZDA is an independent analyst who has worked in the public and private sectors for over 20 years in business development, data analysis and in building geographic information systems. 
You can <a href="component/googlecse?q=arek+drozda" target="_blank">read more of Arek Drozda's pieces here</a>.
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Further price growth likely, though pace may slow: May 2014 state of the market analysis

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GUEST OBSERVATION
If NSW and Sydney are representative of the market dynamics on the national scale then there is a straightforward answer to question “Where to buy?”
Centrally located properties in the capital city offer the best return long-term for passive property investors, whether owner occupiers or those buying to let.
A Common Dilemma
Property buyers face a choice between more affordable properties which offer attractive rental yields but are further away from the city centre or in regional locations, or more expensive properties in central locations but with possibly much lower rental yields.
Many property advisors would recommend the first option, as it offers better cash flow from day one with reduced capital commitment, all things being equal.
However, for passive investors the second option is a much more sensible choice. This also holds true for those who buy and hold properties over a long period and are not into more adventurous activities like buying to renovate or redevelop, looking for a quick flip, or to access an exceptionally high yield over a short period of time.
Let’s examine historical information that leads to this conclusion.
The Evidence
Housing NSW <a href="https://www.housing.nsw.gov.au/About+Us/Reports+Plans+and+Papers/Rent+and+Sales+Reports/" target="_blank">publishes quarterly sales statistics</a> for Local Government Areas (LGA) and the records date back to 1991 for many locations, totalling just over 22 years of data.
The information is grouped into inner, middle and outer rings for Sydney, as well as into regional centres (i.e. “Rest of Greater Metropolitan Region”) and the rest of NSW.
Simple analysis of changes in median prices over the past 22 years (from July 1991 to December 2013) reveals quite an interesting picture, as summarised in the table below:
<img src="/images/2014/07/15/Table1_change_in_median_prices_NSW.png" alt="">
The increase in median prices in LGAs located in the inner ring outstrips the rate of growth in any other region in NSW.
This is particularly the case with non-strata dwellings which increased over five times in the last 22 years (that is, December 2013 median price is now six times 1991 median price), comparing to 2.4 times rise for the “Rest of NSW”. The difference over the 10 year period is not as dramatic, with the exception of strata dwellings, but still the pattern is obvious.
The following map presents a 20-year perspective on median sale price growth of non-strata dwellings to highlight the key point [click image to launch interactive map]:
<a href="https://www.propertyobserver.com.au/https://mapdeck.com/256" target="_blank"><img src="/images/2014/07/15/SydneyGMR_20yr_price_change_by_region_.png" alt=""></a>
Let’s chart the relative change in median prices over time for additional insights.
<img src="/images/2014/07/15/Chart1_change_in_median_prices_NSW.png" alt="">
The picture is quite clear – over the long term, median prices grew faster in the metropolitan area than in the rest of NSW.
<img src="/images/2014/07/15/Chart2_Inner_Sydney_median_prices_Dec13.png" alt="">
 <img src="/images/2014/07/15/Chart3_Inner_Sydney_change_in_median_prices_Dec13.png" alt="">
Again, over the long-term median prices in the inner ring LGAs grew faster than for the rest of Sydney (with exception of a short period between 2000 and 2003).
Article continues on next page. Please click below. 
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What It All Means
There are important clues in the above charts for property buyers. In particular:
<ul>
<li>The inner ring properties show higher volatility in median price movements at the time of economic uncertainty – which means, timing of purchase decisions is crucial and there are bargains to be found for those with contrarian views (or well informed!).</li>
</ul>
For example, median price for the inner ring increased from $515,000 in March 2009 to $822,000 in December 2013 – a jump of over $300,000 or 60% in just four and a half years, comparing to a $98,000 or 28% increase for the regional part of GMR. The bargain buys can deliver even more substantial returns than indicated by changes in median prices.
<ul>
<li>Between 2003 and the end of 2007, which is generally perceived as a period of no price growth in Sydney, the inner ring still recorded material gains in median prices.</li>
</ul>
This illustrates that attractive and desirable locations tend to maintain the momentum when the rest of the market stagnates.
<ul>
<li>Unless you buy two properties in the outer areas for the price of one in the Inner Ring, the math favours buying in the more expensive area.</li>
</ul>
That is, if you opt for a cheaper property instead of buying in the Inner Ring, even if that location experiences comparative price growth to the inner ring, the higher priced location would have delivered better overall profit.
For example, based on the above chart, a $100,000 property purchased in 1991 in regional part of Greater Metropolitan Region would quadruple in value to $400,000 by December 2013 (i.e. $300,000 rise). Not bad. However, a property purchased for a median price in the inner ring, which also quadrupled in value, would increase from $200,000 to over $800,000, delivering $600,000- a whopping $300,000 more- in capital gains.
“But the yield!” you may say. Well, in this case 1% or even 2% better rental yield on the cheaper property would not make up the difference.
<ul>
<li>Outer regions can outpace price growth of the inner ring properties over a short period and price growth in those regions generally lag the metropolitan region – which presents an opportunity for late comers who missed out on the “city boom”, including first home buyers.</li>
</ul>
However, since timing of the purchase plays a crucial role in catching the maximum price movement, investment in regional properties should be viewed as rather opportunistic (not to say speculative) and therefore as suitable for only more adventurous investors or buyers who are prepared to stick to their decision for a long time.
Zooming In For More Details
We know now that the inner ring offers the best opportunity for price growth but it has to be acknowledged that not all locations within the region perform equally well over time.
The following table summarises change in median prices in the last 10 and 20 years for LGAs located in the inner ring.
 <img src="/images/2014/07/15/Table2_change_in_median_prices_Inner_Sydney.png" alt="" style="line-height: 1.3em;">
Some locations are better for non-strata dwellings – <a href="https://www.urban.com.au/property-observer" target="_blank">Marrickville</a> for example did quite well with median price increase of almost 4.5 times over 20 years, while other are more favourable for strata properties, like <a href="https://www.urban.com.au/property-observer" target="_blank">Waverley </a>which increased by a similar proportion.
The map below highlights where the largest change in median prices was for strata dwellings over 20 year period [Click image to launch interactive map]:
<a href="https://www.propertyobserver.com.au/https://mapdeck.com/250" target="_blank"><img src="/images/2014/07/15/Sydney_LGA_20yr_price_change_strata.png" alt=""></a>
View all maps, <a href="https://mapdeck.com/?deck_id=22" target="_blank">click here</a>.
This illustrates that choice of location and compatible property type are very important considerations in making purchase decisions.
Another observation worth mentioning is that even the worst performing locations in the inner ring did better for strata and non-strata dwellings than the worst regional locations. This should give confidence to the first time buyers or novice investors that buying in the inner ring can compensate to some degree for less than optimal choice of specific location.
End Note
As a prospective buyer – whether investor, upgrader or first home buyer – you are facing three fundamental questions: What to buy?  Where to buy?  When to buy?
Each of these questions can have quite a complex answer, which I will continue to explore on Property Observer with detailed analysis as well as via regular features, like my monthly <a href="/expert-insights/buying/32611-period-of-slowing-growth-forecast-but-no-sign-cycle-has-peaked-june-state-of-the-market-analysis" target="_blank">State of the Market reports</a>.
However, in the end, it all boils down to a simple, frankly quite boring but well proven formula – location, location, location! One cannot go wrong following this simple advice.
Arek Drozda is an independent property market analyst.
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Inner ring the best bet in Sydney and here's why

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GUEST OBSERVATION
Market outlook: neutral with negative bias.
<ul>
<li>Renting is the more attractive accommodation option over buying (as at June 2014).</li>
<li>Purchase affordability is at a historically high level and steady (as at June 2014).</li>
<li>Confidence in the economy continues to deteriorate (as at July 2014).</li>
<li>Housing credit impulse is still growing, indicating continued demand for residential real estate (as at June 2014).</li>
<li>Actual prices are above what could be expected based on housing credit growth, although only marginally but the gap is not narrowing (as at May 2014).</li>
</ul>
National Real Estate Price Forecast
Pessimism about the state of the economy is threatening further price growth, despite purchase affordability remaining at a historically high level. Subdued growth in the Property Price Gauge in the last few months is the first tangible sign of market weakness.
If this situation prolongs, it has the potential to start impacting on demand and actual prices. We can therefore expect a period of slow growth, or even stabilisation, in property prices in the September 2014 quarter.
The current price level is well supported and there is still no indication that the prices have peaked in the current cycle.
Detailed Analysis
#1 optimal accommodation choice: renting more attractive than buying
 <img src="/images/2014/07/29/BRI_July2014.png" alt="">
The Buy-Rent Indicator (BRI) identifies how cost of buying is changing in relation to cost of renting.
BRI bottomed in June 2012 (indicating the lowest point in the current cycle) and it has been rising consistently since then. The indicator crossed the equilibrium line in March 2014 and continues on an upward trajectory.
This indicator is constructed based on the simple concept that renting and buying are substitute accommodation options, hence the optimal choice depends on which accommodation cost is rising in relation to the other. The practical use of this indicator is for identifying market cycles and for timing purchase and sale decisions.
The crossing of the indicator from buy to rent zone gives a signal that buying costs are starting to rise faster than rental costs.
In a market where property prices are rising, this marks the point in time when opportunities to purchase a property at attractive prices are limited.
For those intending to sell in the current cycle, it marks a time to start preparing for the sale - the optimal point for selling the property will be when the indicator peaks, which should coincide with a peak in property prices.
If prices continue to advance, buying costs will rise further in relation to rental costs and the value of the indicator will keep growing. However, stagnant or declining prices may flatten that growth.
#2 purchase affordability: at a historically high level, unchanged from last month 
<img src="/images/2014/07/29/PAI_July2014.png" alt=""> 
The Purchase Affordability Indicator (PAI) compares changes in the annual cost of buying to changes in average full time adult income, therefore it identifies how purchase affordability has changed over time.
PAI is at historically high level and June 2014 estimated value has not change in relation to the previous month reading.
Relative to incomes of Australians working full time, property prices are still very affordable. Since purchase affordability is not declining at the moment, the overall support for the current price level appears to be strong. If Australia were to experience a case a mild economic turbulence, property prices would be unlikely to fall by far, if at all.
Prices have still a lot of room to move before they can be considered unaffordable despite some prominent commentators declaring that Australian property market is in a bubble.
#3 perceptions about economy: negative
 <img src="/images/2014/07/29/EWI_July2014.png" alt="">
The Economic Wellbeing Index (EWI) is designed to reflect general perceptions of Australians about the current economic conditions.
The EWI is falling since June 2013. June 2014 estimate is in the negative territory and continues to fall. A more volatile raw measure is up for the second month in the row but by a very small margin.
The key premise behind this indicator is that people are generally less inclined to make big purchases when they are worried about the state of the economy.
Actual prices are not expected to advance strongly if there is no substantial rebound in the indicator.
If this situation continues, it is also possible that growing pessimism, as implied by this indicator, may soon start to affect demand and prices of Australian properties.
This article continues on the next page. Please click below.
<hr class="system-pagebreak">
#4 demand: still strong and well underpinned with housing credit growth
<img src="/images/2014/07/29/PHCI_July2014.png" alt="">
The Private Housing Credit Impulse (PHCI) provides an indication of the level of buyer activity in the residential property market in Australia, hence it reflects underlying demand for properties.
The June 2014 PHCI estimate is positive and the value of the indicator is at its highest since December 2011.
The June value of PHCI is subject to revision. Although the current value is revised down from previous month estimate it would take a significant decline in growth of housing credit to reverse the current trend.
The practical use of this indicator is to provide early warning about impending changes in housing credit uptake, and hence, changes in the underlying demand for residential property.
A positive and rising value of the indicator reflects continued strong demand for residential property. Consequently, market weakness observed on RP Data daily property price index in May and early June was only short lived and prices rebounded strongly in recent weeks. This was the most probable medium term outcome as outlined in the last month’s report.
#5 property price expectation: growth to slow or possibly even flatten 
<img src="/images/2014/07/29/PPG_July2014.png" alt="">
The Property Prices Gauge (PPG) is a proxy of a property price index. It becomes a leading indicator when combined with House Price Index (HPI).
PPG recorded almost no change in May 2014. Actual prices (March 2014 House Price Index) remain above of what could be expected based on housing credit growth and the gap between PPG and HPI is not narrowing.
Although the current price level appears to be well supported, a flattening PPG points to softer property prices in the coming months. In other words, unless there is a rebound in PPG growth in June and July, actual prices, as measured by the ABS’s House Price Index, are expected to record only minimal growth in June quarter and remain flat in September quarter.
Caveat
The information is provided in good faith and does not constitute financial advice. Use with caution and at own risk.
Background information
For more extended description of individual measures and how to apply this information please refer to the first report in this series: <a href="/expert-insights/buying/30639-state-of-the-property-market-april-2014" target="_blank">State of the Property Market, April 2014</a>. 
Arek Drozda is an independent property market analyst.
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Pessimism threatening further price growth: July state of the market analysis

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Market Outlook: unchanged - neutral with negative bias
<ul>
<li>Attractiveness of renting as a preferred accommodation option has further increased (as at June 2014).</li>
<li>Purchase affordability is still very high, although slowly declining - this provides strong support for prices at the current level (as at June 2014).</li>
<li>Confidence in the economy continues to deteriorate with no signs of improvement (as at August 2014).</li>
<li>Housing Credit Impulse continues to grow, indicating there is still plenty of demand for residential real estate (as at June 2014).</li>
<li>Actual prices are above what could be expected based on changes in housing credit - although the margin is reasonable it makes prices very sensitive to adverse changes in economic conditions (as at June 2014). </li>
</ul>
National Real Estate Price Forecast
With purchase affordability at a decade high, the underlying demand for residential real estate in Australia remains strong and property prices continue on the upward trajectory, albeit at a slowing pace.
The current price level remains slightly elevated in relation to the underlying mortgage credit flowing into the market, indicating that prices are vulnerable and may suffer an unexpected stall or even reversal at this level (slowing price growth is a manifestation of this vulnerability).
Since buyers are now at disadvantage to renters due to faster rising costs of buying, return to wide spread optimism about the economy is a prerequisite for the continuation of strong price growth.
However, pessimism about the state of the economy is not improving, and hence, it poses a serious threat of derailing what is otherwise quite a robust market.
A sudden return of optimism could reinvigorate buyers and lead to a very substantial jump in prices in the coming months (since buying costs compared to average incomes are still at historical lows).
However, the more likely scenarios at present are either no improvement in perceptions about the state of economy, or a further rise in pessimism. Although this will not crash the market in the short-term, nevertheless, it can potentially put the lid on further price growth in September and December quarters.
Detailed analysis starts on the next page. Please click below.
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Detailed Analysis
<ul>
<li>optimal accommodation choice: attraction of renting is increasing</li>
</ul>
 <img src="/images/2014/08/26/BRI_August2014.png" alt="">
The Buy-Rent Indicator (BRI) identifies how cost of buying is changing in relation to cost of renting.
BRI bottomed in June 2012 (indicating the lowest point in the current cycle) and it has been rising consistently since then. The indicator crossed the equilibrium line in March 2014 and continues on an upward trajectory.
This indicator is constructed based on the simple concept that renting and buying are substitute accommodation options, hence the optimal choice depends on which accommodation cost is rising in relation to the other. The practical use of this indicator is for identifying market cycles and for timing purchase and sale decisions.
The crossing of the indicator from buy to rent zone gives a signal that buying costs are starting to rise faster than rental costs.
In a market where property prices are rising, this marks the point in time when opportunities to purchase a property at attractive prices are limited.
For those intending to sell in the current cycle, it marks a time to start preparing for the sale - the optimal point for selling the property will be when the indicator peaks, which should coincide with an interim peak in property prices.
We are already two years into the current cycle and the next peak should be anticipated sooner rather than later.
Trough-to-peak of two years in duration was not uncommon in the last 30 years but there were also a few cycles with an uptrend as short a 16 months and the longest recorded was just over 3.5 years in duration. 
Further strong increases in property prices and/or a rise in interest rates will increase the cost of buying relative to the cost of renting, making purchasing a much harder option to choose than it is at present. Therefore, fast moving prices can lead to a quite dramatic reduction in the demand for properties and, in effect, shorten the overall cycle.
Stagnating or slowly growing prices can potentially limit the negative impact on demand as growth in buying costs will be offset to a large degree by rising rental costs. This can delay the peak and extend the duration of the overall cycle.
Indicators show that this cycle is a slow moving one and therefore the next peak may be still some way off (i.e. up to two years based on historical evidence). However, it all depends how fast prices and/or interest rates move up from here onwards.
<ul>
<li>purchase affordability: at a historically high level and falling, but only just</li>
</ul>
 <img src="/images/2014/08/26/PAI_August2014.png" alt="">
The Purchase Affordability Indicator (PAI) compares changes in the annual cost of buying to changes in average full time adult income, therefore it identifies how purchase affordability has changed over time.
PAI is at historically high level and the revised June 2014 value has recorded only a small fall in relation to the previous month reading.
This indicator explains that, relative to incomes of Australians working full time, property prices are still very affordable.
In fact, the cost of buying a median priced property relative to average income is now 27.4% lower than it was in 1986. So, given the expectations of long term low interest rates, there is still a lot of room for prices to move before Australian property can be considered overvalued.
Since purchase affordability is declining very slowly at the moment, the support for current prices appears to be strong. It means that the property market should be very resilient if Australia were to experience a case a mild economic turbulence in the near future.
Article continues on the next page. Please click below.
<hr class="system-pagebreak">
<ul>
<li>perceptions about economy: negative and deteriorating</li>
</ul>
 <img src="/images/2014/08/26/EWI_August2014.png" alt="">
The Economic Wellbeing Index (EWI) is designed to reflect general perceptions of Australians about the current economic conditions.
The EWI is falling since June 2013. August 2014 estimate is in the negative territory and continues to fall. A more volatile raw measure is also down and the signs of recovery highlighted last month were short lived.
The key premise behind this indicator is that people are generally less inclined to make big purchases when they are worried about the state of the economy.
Actual prices cannot be expected to advance strongly for much longer if there is no substantial change in perceptions about the economy.
If such a change comes soon, we should experience a very vibrant spring selling season, where prices continue to rise strongly.
However, if pessimism prevails, which as this stage seems to be the more likely scenario, it will most likely put a dampener on the pace of further price growth due to reduction in demand for properties.
Nevertheless, there is no reason to panic just yet as the likelihood of prices falling is still very minimal. However, a flat-lining market is not totally out of the question. 
<ul>
<li>demand: still strong and trend is not yet changing</li>
</ul>
 <img src="/images/2014/08/26/PHCI_August2014.png" alt="">
The Private Housing Credit Impulse (PHCI) provides an indication of the level of buyer activity in the residential property market in Australia, hence it reflects underlying demand for properties.
The June 2014 PHCI estimate is positive and the value of the indicator is at its highest since December 2011.
The June value of PHCI is subject to final revision but it is very unlikely the indicator will change from its current direction.
The practical use of this indicator is to provide early warning about impending changes in housing credit uptake, and hence, changes in the underlying demand for residential property.
A positive and rising value of the indicator reflects continued strong demand for residential property. When the indicator turns down, it will signal a change in the underlying demand.
Investors stepping aside, as reported recently in the media, may prove to be the catalyst for change if they are not replaced by home-upgraders and first home buyers. However, so far, the demand holds quite strongly despite rising pessimism about the economy. 
<ul>
<li>property price expectation: growth to slow or flatten</li>
</ul>
 <img src="/images/2014/08/26/PPG_August2014.png" alt="">
The Property Prices Gauge (PPG) is a proxy of a property price index. It becomes a leading indicator when combined with House Price Index (HPI).
PPG recorded a small jump in June 2014. However, actual prices (June 2014 House Price Index) also increased by a similar margin and remain above what could be expected based on housing credit growth. 
The rebound in PPG provided evidence of a relatively strong support for the current prices.
However, the 12 month rate of growth in prices has now started to slow, reflecting softer market conditions in the last few months, as indicated by a flattening PPG.
Despite the rate of growth in prices moderating and PPG recording some gains in June, the gap between the two is not narrowing. It implies that property prices are vulnerable at this level and can unexpectedly stall or maybe even record a small fall.
If the rebound in PPG continues in coming months it will indicate a strong probability of further rises in property prices in the September quarter and beyond. However, any divergence from this uptrend will imply an underlying weakness in the market and hence greater uncertainty about the direction of property prices.
Arek Drozda is an independent property market analyst.
Caveat: The information is provided in good faith and does not constitute financial advice. Use with caution and at own risk.
For more extended description of individual measures and how to apply this information please refer to the first report in this series: <a href="/expert-insights/buying/30639-state-of-the-property-market-april-2014" target="_blank">State of the Property Market, April 2014</a>.
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Pessimistic market outlook likely to put a lid on price growth: August state of the market analysis

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GUEST OBSERVATION
Market Outlook: unchanged - neutral with negative bias
<ul>
<li>Attractiveness of renting as a preferred accommodation option has further increased (as at September 2014).</li>
<li>Purchase affordability is still very high but declining - it provides support for prices at the current level (as at June 2014).</li>
<li>Confidence in the economy continues to deteriorate with no signs of improvement (as at September 2014).</li>
<li>Housing Credit Impulse has turned down, indicating change in the underlying demand for residential real estate (as at September 2014).</li>
<li>Actual prices are above what could be expected based on changes in housing credit, making them sensitive to adverse changes in economic conditions (as at July 2014). </li>
</ul>
National Real Estate Price Forecast
The latest indicators provide further evidence of weakening market conditions.  
The pessimism about the economy and the rising purchase costs that detract potential buyers from the market have started to impact on overall demand.
Purchase affordability is deteriorating but it still remains high, providing support for the current price level. Nevertheless, prices are quite vulnerable at present and the prospect of further strong growth is rather limited - and conditional on the return of optimism.
In the absence of evidence that demonstrates prices have reached their peak in the current cycle, the outlook for the property market in Australia remains neutral. The scenario of subdued market conditions, leading to no or small growth in prices, remains the most probable outcome for September and December quarters. 
#1 optimal accommodation choice: attraction of renting is increasing
<img src="/images/2014/09/17/BRI_September2014.png" alt="">
The Buy-Rent Indicator (BRI) identifies how cost of buying is changing in relation to cost of renting.
BRI bottomed in June 2012 (indicating the lowest point in the current cycle) and it has been rising consistently since then. The indicator crossed the equilibrium line in March 2014. The September 2014 estimate points to a continuation of an upward trend for this indicator.
BRI is constructed based on the simple concept that renting and buying are substitute accommodation options, hence the optimal choice depends on which accommodation cost is rising in relation to the other. The practical use of this indicator is for identifying market cycles and for timing purchase and sale decisions.
The crossing of the indicator from buy to rent zone gives a signal that buying costs are starting to rise faster than rental costs.
In a market where purchasing costs are rising mainly due to price increases, the optimal point for selling the property will be when the indicator peaks, which should coincide with an interim peak in property prices.
As outlined in the last report, we are already two years into the current cycle.  The longest uptrend in the last 30 years was 3.5 years in duration, hence current cycle peak in property prices can be expected before the end on 2015.
Unless, of course, this cycle turns into an exceptionally long one - for example, due to historically high purchase affordability, if confidence in the economy improves.
All in all, fast moving prices from this point onwards can lead to a quite dramatic reduction in the demand for properties and, in effect, shorten the overall cycle.
Stagnating or slowly growing prices, which seems to be the more likely scenario, can potentially limit the negative impact on demand as growth in buying costs will be offset to a large degree by rising rental costs. This can delay the peak and extend the duration of the overall cycle.
 #2 purchase affordability: at a historically high level but falling 
<img src="/images/2014/09/17/PAI_September2014.png" alt="">
The Purchase Affordability Indicator (PAI) compares changes in the annual cost of buying to changes in average full time adult income, therefore it identifies how purchase affordability has changed over time.
PAI is still at a historically high level despite the September 2014 estimate falling in value. 
This indicator explains that, relative to incomes of Australians working full time, property prices are still very affordable.
The cost of buying a median priced property relative to average income is now 26.1% lower than it was in 1986. So, given the expectations of long term low interest rates, there is still a lot of room for prices to move before Australian property can be considered overvalued.
Article continues on the next paqe. Please click below.
<hr class="system-pagebreak">
#3 perceptions about economy: negative and deteriorating
<img src="/images/2014/09/17/EWI_September2014.png" alt="">
The Economic Wellbeing Index (EWI) is designed to reflect general perceptions of Australians about the current economic conditions.
The EWI is falling since June 2013. The September 2014 estimate is in the negative territory and continues trending downwards.
The key premise behind this indicator is that people are generally less inclined to make big purchases when they are worried about the state of the economy.
Actual prices cannot be expected to advance strongly in an environment where a gloomy outlook on the future prevails.
If there is no substantial change in perceptions about the economy, market conditions will be rather soft for the reminder of the spring selling season.
A scenario of subdued market conditions, flagged in earlier reports, has already started to play out in real time - RP Data’s daily price index for five capital cities shows that prices have fallen in mid September from the peak reached at the end of August.
#4 demand: weakening as trend has changed
<img src="/images/2014/09/17/PHCI_September2014.png" alt="">
The Private Housing Credit Impulse (PHCI) provides an indication of the level of buyer activity in the residential property market in Australia, hence it reflects underlying demand for properties.
The September 2014 PHCI estimate is positive but the indicator has just turned south. This is a very strong negative signal indicating change in the underlying demand for properties. The September value of PHCI is subject to final revision.
The practical use of this indicator is to provide early warning about impending changes in housing credit uptake, and hence, changes in the underlying demand for residential property.
A positive but declining value of PHCI indicates that credit uptake is slowing down and therefore, that the underlying demand for residential property is softening.
#5 property price expectation: growth to slow or flatten 
<img src="/images/2014/09/17/PPG_September2014.png" alt="">
The Property Prices Gauge (PPG) is a proxy of a property price index. It becomes a leading indicator when combined with House Price Index (HPI).
PPG recorded a small increase in July 2014 but remains well below HPI.
The PPG is rising but not very strongly. Hence, the support for the current price level is weakening and, as outlined in the last report, this situation can make prices quite vulnerable.
In other words, the fact that PPG cannot move closer to the current HPI level can only imply an underlying weakness in the market and hence, greater uncertainty about the future direction of property prices.
We can already see some tangible evidence of that weakness. In particular, last weekend RP Data reported a reduction in auction clearance rates and their daily index of 5 capital city prices recorded a small decline.
Arek Drozda is an independent property market analyst.
Caveat: The information is provided in good faith and does not constitute financial advice. Use with caution and at own risk.
Background information: For more extended description of individual measures and how to apply this information please refer to the first report in this series: <a href="/expert-insights/buying/30639-state-of-the-property-market-april-2014" target="_blank" style="line-height: 1.3em;">State of the Property Market, April 2014</a>. 
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Market conditions continue to weaken: September state of the market analysis

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GUEST OBSERVATION
Market outlook: unchanged - neutral with negative bias
<ul>
<li>Attractiveness of renting as a preferred accommodation option continues (as at December 2014). </li>
<li>Purchase affordability is still very high but declining (as at December 2014). </li>
<li>Confidence in the economy is low but conditions are not deteriorating (as at November 2014). </li>
<li>Housing Credit Impulse points again to a strong demand for real estate (as at September 2014). </li>
<li>Prices are vulnerable at current levels, but can be sustained if flow of funds into the market continues (as at September 2014).</li>
</ul>
<h3>National Real Estate Price Forecast</h3>
The latest set of statistics paints a more positive picture than initial estimates and preliminary results indicated just a month ago.
In particular, we can see a small improvement in perception about the economy (but this is not yet reflected in the main indicator, only by a row measure), the actual demand for properties turned out to be much stronger than originally anticipated and there was a small but important lift in Property Price Gauge, indicating a notable increase in the flow of funds into the market.
The rebound in several indicators and the fact that prices are still very affordable, signal that the market remains relatively strong.
However, we will have to wait a few more months for confirmation if the rebound in the indicators is a sign of a return to fast paced growth in prices or just a late sprout of activity that will soon subside.
Without this confirmation, the overall outlook for the Australian property market remains at a neutral level and unchanged from previous month.
<h3>Detailed Analysis</h3>
#1 optimal accommodation choice: renting still the more favourable option
<img src="/images/2014/11/28/BRI_November2014.png" alt="">
The Buy-Rent Indicator (BRI) identifies how cost of buying is changing in relation to cost of renting.
The September 2014 BRI final value is higher than in previous quarter, confirming that buying costs are growing faster than rental costs. However, the first estimate of BRI for December 2014 quarter points to a likely reversal of this trend.
BRI is constructed based on the simple concept that renting and buying are substitute accommodation options; hence the optimal choice depends on which accommodation cost is rising in relation to the other.
The practical use of this indicator is for identifying market cycles and for timing purchase and sale decisions.
The BRI shows that renting is currently still a more attractive option than buying. The reversal of the direction of the indicator is a result of the recent slowdown in the growth of national property prices and hence, the slowdown in the growth of purchasing costs. At the same time, the rental costs continue to increase at a steady pace.
In a market where purchasing costs are rising primarily due to price increases, the optimal point for selling a property is when the indicator peaks and then starts to decline.
Based on the previous behaviour of this indicator, the peak of the current cycle is anticipated to happen before the end of 2016.
If the currently observed change in trend is confirmed in the next few months, it would indicate that the fast price growth phase of the cycle has ended. The December 2014 quarter will therefore mark the end of the “seller market” and the beginning of “buyer market” conditions.
#2 purchase affordability: at a historically high level but falling
<img src="/images/2014/11/28/PAI_November2014.png" alt="">
The Purchase Affordability Indicator (PAI) compares changes in the annual cost of buying to changes in average full time adult income; therefore, it identifies how purchase affordability has changed over time.
The December 2014 PAI estimate points to a continued, gradual decline of the indicator.
This indicator explains that, relative to incomes of Australians working full time, property prices are still very affordable.
Since the cost of buying a median priced property relative to average income is significantly lower than in the late 1980s, there is still a lot of room for prices to move before Australian real estate can be considered overvalued. 
Article continues on the next page. Please click below. 
<hr class="system-pagebreak">
#3 perceptions about economy: still negative
<img src="/images/2014/11/28/EWI_November2014.png" alt="">
The Economic Wellbeing Index (EWI) is designed to reflect general perceptions of Australians about the current economic conditions.
The EWI is falling since June 2013. The November 2014 preliminary value is in negative territory and continues trending downwards. The raw measure recorded a small rise for the second consecutive month.
The key premise behind this indicator is that people are generally less inclined to make big purchases when they are worried about the state of the economy.
The reversal of the raw measure in October and a small uptick in November 2014 are positive signs, giving hope that perception about the Australian economy has started to improve, or at least, that it is not deteriorating any further.
However, the overall outlook for the economy is still fairly negative and property prices cannot be expected to advance strongly in such an environment.
#4 demand: much stronger than indicated by original estimates
<img src="/images/2014/11/28/PHCI_November2014.png" alt="">
The Private Housing Credit Impulse (PHCI) provides an indication of the level of buyer activity in the residential property market in Australia, hence it reflects underlying demand for properties.
The September 2014 PHCI preliminary reading is much stronger than the last month’s estimate and this latest update did not confirm the previously reported reversal in the direction of the indicator. That is, the PHCI value has actually increased, not declined. However, the increase is very small.
The practical use of this indicator is to provide early warning about impending changes in housing credit uptake, and hence, changes in the underlying demand for residential property.
Housing credit data for September 2014 was very strong which impacted on the overall result for the quarter.
It implies that, after an initial slowdown in July and August, buyers have returned in force in the last month of the quarter. Therefore, the underlying demand for residential property is actually much stronger than initial estimates suggested.
Nevertheless, the increase in PHCI is only marginal which does not give confidence that this high level of demand can continue unabated beyond the December quarter.
#5 property price expectation: further growth possible but at risk
<img src="/images/2014/11/28/PPG_November2014.png" alt="">
The Property Prices Gauge (PPG) is a proxy of a property price index. It becomes a leading indicator when combined with House Price Index (HPI).
PPG increased slightly in September 2014, more than in the previous several months, but the indicator continues to lag well below HPI.
A noticeable increase in the value of the PPG points to a possible resumption of an upward trend after several months of relatively flat results. While it is a positive sign, there would need to be a much stronger upward movement in the indicator in the coming months to confirm that the flow of money into the market is substantial enough to support further growth in prices.
Otherwise, the previously experienced rate of price growth is not sustainable and prices will be vulnerable to a sudden halt at the current level.
Caveat - The information is provided in good faith and does not constitute financial advice. Use with caution and at own risk.
Background information - For more extended description of individual measures and how to apply this information please refer to the first report in this series: <a href="/expert-insights/buying/30639-state-of-the-property-market-april-2014" target="_blank">State of the Property Market, April 2014</a>.
Arek Drozda is an independent property market analyst.
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Market set to tip in favour of buyers: November state of the market analysis

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GUEST OBSERVATION
Market Outlook: unchanged - neutral with negative bias
<ul>
<li>Attractiveness of renting as a preferred accommodation option continues (as at September 2014).</li>
<li>Purchase affordability is still very high but declining (as at September 2014).</li>
<li>Confidence in the economy is low but conditions are no longer deteriorating so rapidly (as at October 2014).</li>
<li>Housing Credit Impulse has turned down, indicating change in the underlying demand for residential real estate (as at September 2014).</li>
<li>Actual prices are above what could be expected based on changes in housing credit, making them sensitive to adverse changes in economic conditions (as at August 2014). </li>
</ul>
National Real Estate Price Forecast 
Limited new data was released over the last month hence, the October 2014 report represents only a minor revision of previously released charts.
New data points were added only to the Economic Wellbeing Index and Property Price Gauge; however, both measures register almost no change on the previous month values.
In general, indicators continue to point to softer market conditions. Significant pessimism about the economy, elevated purchase costs, declining affordability and falling demand are well evident in the data.
These conditions do not indicate a crash but without a major turnaround in the indicators, prices are very unlikely to increase for much longer.
In the absence of evidence that demonstrates prices have reached their peak in the current cycle, the outlook for the property market in Australia remains neutral.
Detailed Analysis
#1 optimal accommodation choice: attraction of renting over buying is increasing
 <img src="/images/2014/10/29/BRI_October2014.png" alt="">
The Buy-Rent Indicator (BRI) identifies how cost of buying is changing in relation to cost of renting.
BRI bottomed in June 2012 (indicating the lowest point in the current cycle) and it has been rising consistently since then. The indicator crossed the equilibrium line in March 2014. The September 2014 estimate points to a continuation of an upward trend for this indicator.
BRI is constructed based on the simple concept that renting and buying are substitute accommodation options, hence the optimal choice depends on which accommodation cost is rising in relation to the other.
The practical use of this indicator is for identifying market cycles and for timing purchase and sale decisions.
The crossing of the indicator from the buy to rent zone gives a signal that buying costs are starting to rise faster than rental costs. So, currently, renting appears a more advantageous accommodation option than buying. 
In a market where purchasing costs are rising mainly due to price increases, the optimal point for selling the property will be when the indicator peaks, which should coincide with an interim peak in property prices. That point can be anticipated any time now, within the next 12-24 months.
 #2 purchase affordability: at a historically high level but falling
 <img src="/images/2014/10/29/PAI_October2014.png" alt="">
The Purchase Affordability Indicator (PAI) compares changes in the annual cost of buying to changes in average full time adult income, therefore it identifies how purchase affordability has changed over time.
PAI is still at a historically high level despite the September 2014 estimate falling in value. 
This indicator explains that, relative to incomes of Australians working full time, property prices are still very affordable. There has been no significant change in the estimate since last month. 
The cost of buying a median priced property relative to average income is still lower than in late 1980s.  So, given the expectations of long-term low interest rates, there is still a lot of room for prices to move before Australian property can be considered overvalued.
This article continues on the next page. Please click below.
<hr class="system-pagebreak">
#3 perceptions about economy: negative
 <img src="/images/2014/10/29/EWI_October2014.png" alt="">
The Economic Wellbeing Index (EWI) is designed to reflect general perceptions of Australians about the current economic conditions.
The EWI is falling since June 2013. The October 2014 estimate is in negative territory and continues trending downwards. The raw measure estimate recorded a tiny increase in October 2014.
The key premise behind this indicator is that people are generally less inclined to make big purchases when they are worried about the state of the economy.
The reversal of the raw measure in October, and the fact that it did not fall in the previous month significantly below June 2014 low, rise expectations that the outlook for the Australian economy may be stabilising and that perceptions will not deteriorate much further. 
Nevertheless, gloomy perspective on the future still prevails and property prices cannot be expected to advance strongly in such an environment.
 #4 demand: weakening as trend has changed
<img src="/images/2014/10/29/PHCI_October2014.png" alt=""> 
The Private Housing Credit Impulse (PHCI) provides an indication of the level of buyer activity in the residential property market in Australia, hence it reflects underlying demand for properties.
The updated September 2014 PHCI estimate is positive but the turn downwards is now almost certain (final reading of this indicator will be confirmed next month). This is a very strong negative signal indicating change in the underlying demand for properties.
The practical use of this indicator is to provide early warning about impending changes in housing credit uptake, and hence, changes in the underlying demand for residential property.
A positive but declining value of PHCI indicates that credit uptake is slowing down and therefore, that the underlying demand for residential property is softening.
#5 property price expectation: growth to slow further
<img src="/images/2014/10/29/PPG_October2014.png" alt=""> 
The Property Prices Gauge (PPG) is a proxy of a property price index. It becomes a leading indicator when combined with House Price Index (HPI).
PPG did not increase in August 2014 and continue to record value well below HPI.
The PPG is almost flat since June 2014 and changed very little since March 2014, implying that the previously experienced price growth is not sustainable and that prices are vulnerable to sudden halt at current level, or even a small reversal.
Historically, when PPG diverged from HPI over a longer term, this pattern preceded a period of increased turbulence in the Australian property market (as was the case in 2003 and 2007). The likelihood of the same scenario playing out in coming months is high if PPG does not move higher soon (for example, as in 2006 or 2013). 
# Caveat:
The information is provided in good faith and does not constitute financial advice. Use with caution and at own risk.
# Background information:
For more extended description of individual measures and how to apply this information please refer to the first report in this series: <a href="/expert-insights/buying/30639-state-of-the-property-market-april-2014" target="_blank">State of the Property Market, April 2014</a>. 
Arek Drozda is an independent property market analyst.
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Growth to slow further: October state of the market analysis

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GUEST OBSERVATION
I don’t usually get many comments in response to my articles, so it was a real thrill to receive a full length dissection of key points from my latest story titled '<a href="/expert-insights/buying/36658-lies-damned-lies-and-housing-statistics" target="_blank">Lies, damned lies and housing statistics</a>'.
I always welcome constructive criticism since variety of well argued opinions promote better understanding of facts. Ultimately, this is what we are all after – an informed community with well balanced opinions and not prone to fall under the spell of any particular ideology. 
In the interest of promoting that better understanding of property market in Australia, I would like to revisit a few points from <a href="/expert-insights/buying/36746-subjectivity-damned-subjectivity-and-housing-statistics-boullion-baron" target="_blank">Joseph's (aka Bullion Barron) commentary</a> to reinforce the original point made in my article – data does not lie, only people interpret it incorrectly or deliberately omit inconvenient truths to advance their own agendas.
My intention is to highlight that if one is prepared to dig deeper, there is much more to official data than often realised and that too narrow an interpretation of facts can lead to completely incorrect conclusions. 
In my previous article I presented a chart showing that, in relative terms, Brisbane, Melbourne and Perth housing prices grew much stronger in the last 28 years than Sydney prices. It concluded that the recent jump in Sydney prices may be just a long overdue catch up – the recent strong growth is nothing out of ordinary.
Further evidence was that Sydney prices grew only a tad over and above the weighted average of eight capital cities and that purchase affordability is still very good, in historical terms.
My objective was to demonstrate that if Sydney property prices were indeed out of control, we would have seen the evidence no matter what statistic was used. This was clearly not the case.
To counter my arguments Joseph (Bullion Barron) referred to information published on the internet by him and other property market commentators. Let’s examine a couple of pieces of information in detail to determine if indeed this information can decisively undermine my earlier conclusion. 
Case One:  Low rental yields as a proof of high level of speculation and overvaluation
The following chart was presented as the evidence (sourced from RESIDEX August 2014 report, indicating median values and rental yields for houses).
<img src="/images/2014/10/27/arek%20oct%2027%20one.jpg" alt="">
Source: RESIDEX
In order to determine if this data really proves speculation and overvaluation we would need to know if Sydney and Melbourne yields are indeed out of ordinary. That is, we would need to find out at least “how low is low” - by comparing current yields to those from the past, as well as to other risk free options. So, let’s put this information into a broader context.
Firstly, as any avid follower of the property market will know:
<ul>
<li>Rental yields are always higher in smaller capital cities and in the country than in larger cities. This pattern is clearly visible in the provided data but we cannot determine whether the gap between Sydney and other cities is reasonable or not;</li>
<li>Yields always fall when prices grow strongly (simply because rental contracts are usually a year in duration; as well, in many states rents cannot be adjusted more than once a year and more than by a certain percentage, so it takes time for rents to adjust to rising prices) – the table does not contain historical information for comparison so we cannot determine whether rental yields were always like this or whether they are declining or rising.</li>
</ul>
Please note, the author omitted yields for apartments which are in mid to high 4% for Sydney and Melbourne and do not show such a dramatic difference in comparison to other states and capital cities.
Examining rental yields from a historical perspective reveals that the current numbers are not the exception. For example, data published by SQM Research indicates that Sydney had similar yields in July 2010 (unfortunately, the data series does not go any further than that and I don’t have access to historical information from RESIDEX).
<img src="/images/2014/10/27/SQM_gross_rental_yield_Sydney.png" alt="">
Yields for apartments are currently at the lowest point since July 2009 but they are still well above 4%.
SQM Research charts for capital cities confirm the pattern that rental yield for houses are generally higher in smaller cities. However, the difference between the cities appears to be smaller than RESIDEX data implies (different methodologies may explain that discrepancy).
An interesting point to note is that Perth used to have yields in the low 3% in 2010, which is much lower than Sydney and Melbourne now. This is another indication that things may not be that extreme as yet.
And comparing alternatives, Sydney and Melbourne rental yields still look pretty reasonable. For example, the Reserve Bank of Australia (RBA) publishes cash deposit rates for financial institutions which in September 2014 were ranging from 1.25% per annum for a one month term deposit to 3.75% per annum for retail deposit and investment rates on savings accounts (for banks' bonus savings accounts with balances of $10,000 plus). So, even Melbourne’s 3.58% yield is not as bad in comparison as it can appear at the first glance.
I know what many are going to say: “But rental yields are gross yields, there are costs that need to be taken out; it makes more sense to keep the money in the bank…”
True, there are costs to be accounted for but commentators tend to forget that in case of property, total return consists of rental income and capital appreciation.
Keeping money in the bank returns only interest income. Property, even if not leveraged, can therefore deliver substantially more than cash in the bank.
That is why investors can accept lower yields, especially in the current low interest rate environment and when the stock market delivers so little in comparison.
Considering Sydney and Melbourne are our largest cities (so rental yields are expected to be lower than for the rest of the country), and that alternative investments appear too risky in comparison (i.e. the share market is not delivering), it would be hard to conclude that current rental yields are the undisputed proof that property market is out of control. Rather, it looks more like just a normal stage of the property cycle where prices jumped ahead and rents have not yet caught up to these higher prices. 
<address>Article continues on the next page. Please click below.</address>
<hr class="system-pagebreak">
Case Two: Value of investor loans for Australian states (12 months rolling basis) as a proof of out of control speculation by investors 
The following chart was presented as the evidence (sourced from Pete Wargent - a regular commentator on Property Observer):
<img src="/images/2014/10/27/arek%20oct%2027%20three.jpg" alt="">
Source: Pete Wargent
This chart is full of interesting twists. There is nothing wrong with charting raw data but special care needs to be taken with interpretation of such charts, and especially with comparisons between presented data series. Otherwise it is easy to draw totally incorrect conclusions. Let’s examine this chart a bit closer.
You will notice that it compares total value (i.e. 12 months running total) of property investment loans for states which have:
<ul>
<li>Widely varying population sizes,</li>
<li>Varying rates of population change, and</li>
<li>
Big differences in property prices. 
</li>
</ul>
Furthermore, the information is represented as nominal values (i.e. is not adjusted for the effect of inflation over time –a billion dollars nowadays is not equal to a billion 30 years ago). Not to mention there were differences in lending rules now and then…
In other words, a lot of the difference between the presented data series and the steepness of the rise in individual lines can be explained by the above listed factors. That is, in order to make a meaningful comparison between states, as well as relative change over time, we would firstly need to adjust the data to eliminate the effect of all these factors on the original data series. 
So, yet again “the proof” ends up raising more questions than providing answers.
I will leave the exercise of recalculating the data for another occasion since this is quite a time consuming task. Then and only then we will be in a position to confirm whether what is happening in Sydney with respect to property investing by individuals is indeed out of ordinary or only proportional to changes in the Australian economy and demographics.
There is one more interesting point to be noted about this chart. That is, it starts with values close to 0. Does it indicate then that in the 1980s there was hardly any investment in residential property by individuals?
Yet, as another set of data from ABS demonstrates, the proportion of rental properties in Australia remains relatively stable over time, ranging between 27-32% for many decades…
You will have to wait until another opportunity for the explanation of this apparent inconsistency. For now, I will just point out that “the rise of individual property investor” phenomenon dramatically exaggerates what is really happening in the rental end of the property market.
I have no doubt that Joseph’s (Bullion Barron) intentions are noble and that he and other commentators proclaiming that Sydney property market is out of control strongly believe this is the reality. However, as you can see, the data does not decisively support such a conclusion.
There are more inconsistencies and erroneous conclusions I could address in Joseph’s article but I think I have already made my point. I sincerely hope that you have enough insight and wisdom now to not accept any claims about the Australian property market without a dose of realism. 
Arek Drozda is an independent property market analyst.
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A dose of reality: Populist opinions v the property stats

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GUEST OBSERVATION
Saul Eslake, chief economist at Bank of America’s Merrill Lynch financial services division, released a chart last week that confirms the median house price in Australia is below implied price based on income growth and interest rates.
<img src="/images/2014/11/18/estlake-housing.png" alt="">
<a href="https://www.businessinsider.com.au/merrill-lynch-housing-price-growth-will-weaken-in-2015-2014-11" target="_blank">In Chris Pash’ article </a>published in Business Insider last week, Eslake is quoted as saying that “house prices will converge with ‘fair value’ estimates based on household income growth and mortgage rates” after an anticipated 3.5-4% increase in 2015, if there is no change in interest rates.
Eslake sees possible deceleration in growth of nominal prices, or even a decline in real prices, in 2016 as the Reserve Bank of Australia starts to raise interest rates.
Eslake’s finding that property prices are below fair value confirms conclusions from my own research I have been sharing with Property Observer readers since last year:
<ul>
<li><a href="https://www.propertyobserver.com.au/finance/australian-property-prices-explained-independent-analyst/2014011367181/Page-1" style="line-height: 1.3em;">Australian property prices explained: Independent analyst</a></li>
<li><a href="https://www.propertyobserver.com.au/residential/australian-property-prices-in-2014-and-beyond-a-peek-into-the-future/2014013167457" target="_blank" style="line-height: 1.3em;">Australian property prices in 2014 and beyond - a peek into the future</a></li>
<li>
<a href="/expert-insights/buying/65-first-home-buyers/29615-crisis-of-confidence-or-crisis-of-affordability" target="_blank" style="line-height: 1.3em;">Crisis of confidence or crisis of affordability?</a> 
</li>
</ul>
Saul Eslake is better known to the property industry observers as an avid critic of negative gearing on property and a frequent commentator on housing affordability issues.
Therefore I have nothing but praise for Saul that he was prepared to publish a piece of research that contradicts his previous, very strong stance, on these issues.
As John Maynard Keynes said: “When my information changes, I alter my conclusions. What do you do, sir?”
Since I have not seen this chart before, I can only assume it is just the latest revelation from the research that Eslake and his team at Merrill Lynch undertook recently.
I can only hope that Merrill Lynch will be prepared to fund further investigations into specific nuances of the Australian property market - for the benefit of their clients but also, as a by-product of their PR, to keep the Australian public informed with key findings.
I have no doubt that this research will only confirm that property prices in Australia are primarily driven by changes in incomes and interest rates, that affordability is not an issue for working Australians (i.e. as in most developed countries, is only an issue for specific underprivileged groups), that there is no bubble in the property market and that prices are well within expected range. And, of course, that negative gearing plays only a minor role, if at all, in the whole scheme of things.
In essence, all these are already proven by the above chart, but additional research would broaden the evidence.
Oh, and one more comment to finish off – it demonstrates that price-to-income measures, favourite with many economists, property commentators and some publications that purport to be a serious economic research, are grossly out of touch with the reality. But this fact is already well known to Property Observer readers from my previous articles.
I am looking forward to more research revelations from Saul Eslake and Merrill Lynch team. Thanks a lot for this first little gem!
It is a most welcome development and I sincerely hope that propagation of this and similar information in the public domain will bring balance to the debate on the state of the property market in Australia.
Arek Drozda is an independent property market analyst.
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