The latest housing price figures released by the Bureau of Statistics showed a sharp rise in prices in the past quarter. But the news is very much limited to Sydney and Melbourne and reflects less strength in the economy than a recovery from the large falls of last year.
In the September quarter the weighted average of residential house prices across all capital cities rose a fairly stunning 2.4% – the strongest growth since 2016:
Given just six months ago prices were falling 3%, this was a pretty amazing turnaround.
And yet it was not all that surprising. When we look at housing finance growth, the increase in house prices is not out of step:
But we also need to maintain some sense of proportion. Yes, this has been a big quarterly increase, but the average house price remains below what they were this time last year. Again this is in keeping with the level of housing finance:
It is likely that by the first quarter of next year we will be back showing positive annual growth, but as I noted in June the recent house price increase is some way yet from being a boom. And when we look at the prices in each capita city, we see that it is also very much a Sydney and Melbourne story.
In the most recent quarter, house prices in both Sydney and Melbourne grew by 3.6%, but in Brisbane, Adelaide, Perth, Darwin and Canberra they fell:
And in all capital cities except Hobart prices are lower than they were a year ago:
So yes, prices in the two major markets are increasing, but for the rest of the country, the reality of weak household income growth is reflected in the overall weak house price growth.
Sydney and Melbourne are to an extent not surprisingly seeing the strongest growth in prices recently because they also had the strongest recent price falls.
The Sydney market has also moved differently to others. Right now the median established house price in Sydney is around the same is was in September 2015 at $885,000 and well down on the peak of $1.05m in 2017.
But all other capital cities except for Perth and Darwin (which are affected by the end of the mining boom) have higher median prices now than in 2015:
For the most part all capital cities still have house prices below what they were 12 months ago, and the only growth is occurring in Melbourne and Sydney. This is why despite the headlines about house prices taking off, the market still expects the Reserve Bank to cut interest rates at least once next year.
Currently the market has priced in a cut in the cash rate to 0.50% to occur by May next year and a nearly even money chance for a cut to 0.25% to occur by August:
Given the Reserve Bank considers 0.25% effectively the zero-bound, this displays just how weak the overall economy is. Even in an environment where house prices are rising, the expectation remains that we need more interest rate cuts to spur growth.
It also highlights just how lacking is the economy in fiscal stimulus. The drive to a surplus over everything continues to place the burden of lifting the economy on monetary policy. It also means that housing prices are more likely to move out of step with household incomes.
Because while house prices are generally a sign of strength, we should not forget that when prices rise ahead of incomes, housing affordability falls.
On Tuesday the latest figures for median weekly earnings were released. They showed another year of weak growth:
If we take a proxy of median household earnings as a combination of male median full-time earnings and female median part-time earnings, we are able to get a guide for housing affordability.
It is clear that Sydney remains much less affordable than other cities, but at least it has come down from the absurd heights of 2015-2018:
But if the bottom of the housing market in Sydney has been reached and we are about to see another increase in prices beyond household incomes, this suggests neither a good future for housing affordability, or stability of house prices in our largest city.
• Greg Jericho writes on economics for Guardian Australia