Has increased turnover been driving recent price growth?

House and unit prices for the June quarter will be released at the end of July and it’s very likely we’ll see some slowing of price growth across most capital cities in Australia, including Sydney. The effect of six nearly consecutive interest rate rises should finally have flowed through to demand and property prices this quarter.

March was surprisingly strong in terms of price growth in most capitals, even as housing finance for owner-occupiers had fallen steeply, and really capped an amazing year of house price growth. The question has been asked by some commentators whether this price growth was based on economic fundamentals, or was fuelled by speculative behaviour.

It’s an important enough issue that the Reserve Bank Governor went on prime-time television to dissuade anyone from thinking that the property market was the place for a quick buck to be made by flipping property.   In a separate speech by Dr. Luci Ellis in May, the RBA made it clear that they didn’t believe that it was speculative excesses that had driven the price growth of the previous year.

I’ve had it put to me recently that the “velocity of housing”, that is, the frequency at which individual properties are transacting, has doubled recently. If this was the case, it would a good indicator that speculative behaviour was driving at least part of recent house price growth.  Given that transaction costs associated with buying property are extremely high and there are still significant risks out there in the world economy, it struck me that this would be an extraordinary finding, if true.

In the latest Reserve Bank Bulletin, some excellent analysis dispels this myth. In a focus on housing turnover, the research finds that since 1994, the share of the number of dwellings sold each year has moved between 4.5% and 8%.  Over the past 5 years, 6% of dwellings on average have been bought and sold each year.  It peaked at just under 8% during the period of very strong house price growth in 2002-2003, with the RBA noting that this partly reflected the higher level of investor activity.

With regard to the proposition that speculation has been driving prices in the last year, the analysis concludes that the recent rise in housing prices has been accompanied by only a modest increase in turnover, to around average levels.  In fact, in late 2009, when prices were rising fastest, they estimate that turnover levels were well below the levels reached earlier in the decade.  It seems that housing is currently being bought and sold at about the same rate as it has been for nearly 20 years. It’s much more likely that less newsworthy culprits like population and income growth are behind recent price rises.