Okay, as I expected, the first of the crude “median” house price data has started coming through and it is sprightly to say the least. APM, which is owned by Fairfax, produces the stratified median price index — not a bad substitute for RP Data-Rismark’s more advanced “hedonic” index if you don’t have high resolution property attribute data (i.e. data on land size, property type, longitude, latitude, number of beds/baths, etc), and you are not comfortable running sophisticated “regression” methods.

Anyhow, APM tells us that detached house prices were up 3.1% in the March quarter and 16.2% on a year-on-year basis. Unit prices, on the other hand, did not increase in the first three months of the year (+0.2%), although they were up 10.4% year-on-year. For a rough, back-of-the-envelope calculation, assuming a 75:25 split between “detached” houses and “attached” dwellings, the national market was up 2.4% in the March quarter, or 9.5% on an annualised basis.

So what does this tell us? It suggests the ABS house price data, which is also based on a stratified median price index, and only focuses on detached houses, will be healthy next week. Since the most closely-followed index (which is the hedonic benchmark produced by RP Data-Rismark) reports monthly, we already know the January and February results. Unless there was a slow-down in March, we should expect a bumper first-quarter outcome.

This is not necessarily great news for policy makers. We have had a strong housing rebound following the GFC-induced correction, yet one that — to date — has been accompanied by pretty weak credit growth. The risk is that the “persistence” in house prices eventually starts feeding back into finance.

We have already seen some of the major lenders relax credit standards (such as ANZ), although they were reversing out silly policy decisions made during the GFC (another story for another day). I would say that overall lending standards remain very conservative, as the RBA has also noted. But we would not really want to see any material relaxation in the banks’ approach, which could give rise to credit-driven asset price appreciation.

Set against this backdrop is the fact that the house price growth is, as I have mentioned too many times to count, just the “market” doing its job: signaling via the price mechanism to builders and developers that they need to invest more scarce resources into producing new housing. Recall that the government’s National Housing Supply Council, which I presented to last month, has just significantly upgraded its estimates of Australia’s housing shortage to nearly 200,000 homes.

Absent being spooked by some external event, these capital gains will give skittish lenders supplying much-needed finance to developers a little more comfort that they have greater collateral protection and, more significantly, that the underlying demand-supply fundamentals are sound (since we have genuine asset price growth that is not being fuelled by debt).

Contrary to what some commentators might have you believe (the ABC’s Stephen Long is the most recent example), owning a home is a highly “productive” economic activity. No sane person would dispute this. When you purchase a property, you are supplying either yourself or another family with something economists call “housing services”. Put more simply, this is “shelter”, which, like the food produced by farms or the clothes manufactured in factories, is a fundamental necessity for productive economic life (e.g. you need well-located, high-quality shelter to be able to participate as a functioning member of the labour force). More on housing’s productivity in an economic context here.

As a final point, as sure as my poodle wakes me every morning with a lick on the face, the current housing momentum will slow. The RBA is on the case, and the cost of capital is being quickly normalised. We have been forecasting a cooling in growth for some time now, and I remain confident that this will come to pass, if only a little later than we initially anticipated.

*Christopher Joye is the managing director of Rismark International

Peter Fray

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