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Where house prices are headed

Later this morning, the RP Data house price data series will confirm that house prices rose by around 1.2 per cent in January.

This is a solid rise after a house prices were broadly flat over the second half of 2012 and after they dipped by around 6 per cent between early 2011 and mid-2012. P Data have innovatively published a daily house price series for the past year and while debate will inevitably rage over the veracity of daily price changes in an item so large and illiquid as houses, there is no doubt that a greater amount of data and more timely house price information is better than old and less frequent news.

Just imagine if only once a quarter we got to find out stock prices or the level of the Australian dollar? It is easy to see the benefits of a daily house price series. Each day, RP Data publish their estimate of the change in house prices for Australia's five major cities, covering Sydney, Melbourne, Brisbane (including the Gold Coast), Adelaide and Perth.

As a result, there is a daily run of house price momentum; On the first day of each new month, they publish the full data set for the month just past, for all of Australia, to give the overall movement in house prices for the prior month. Given the dominant weights of housing in the five major cities, it is rare for the aggregate house price series for the month to be more than 0.1 or 0.2 percentage points different from the five major cities number that evolves though each month.

This is why today's release from RP Data will show house prices up by 1.2 per cent or so in January. Clearly, any daily move is all but irrelevant to any assessment of the health of the housing market, risks for consumers and banks of default or a wealth effect from significant house price changes. It is a bit like judging the trend for share prices or the Australian dollar based on daily movements. Each day the moves can be interesting but only a couple of times per decade will a daily market move be significant.

That aside, the daily update provides some indication of the momentum of house prices through each month and as a result it gives news on the pressures unfolding in the housing market. It is worth noting that the Reserve Bank has a strong preference for using the RP Data when analysing trends in house prices. Last month, I looked at the key fundamentals surrounding the housing market in 2013 and the outlook for house prices in the column All signs point to a house price hike (January 10). The bottom line was that the current favourable level of affordability would spur a rise in house prices by something around 10 per cent this year. Nothing has happened in recent weeks to change that view.

Importantly for the national economy, other housing indicators are also increasingly positive, suggesting that 2013 is likely to be one where housing will pick up some of the slack left by the topping out of mining investment. The data for new home sales is pointing to a powerfully strong upswing. The Housing Industry Association’s new home sales rose 6.2 per cent in December after rising 3 per cent in November and 3.6 per cent in October.

That is a thumping 13 per cent lift in sales in the final three months of 2012, an impressive lift after home sales were in the doldrums around the middle of last year. The sales lift is all the more impressive given the full effect of the interest rate cuts have yet to be felt. At the same time, home building approvals (future construction) are lifting. From the low in April 2012, the number of approvals has lifted more than 20 per cent which points to the housing making a decent contribution to GDP growth. The share price in companies related to the home building industry have skyrocketed in recent times. Boral is up 60 per cent since the middle of 2012 while Leighton Holdings is up close to 50 per cent over a similar time frame.

These moves are consistent with the market looking for a decent construction rebound over the medium term. The housing sector is set for a strong performance in 2013. There are likely to be strong rising house prices, higher home sales and a lift in construction. Low interest rates, high immigration and improved affordability are the trifecta of positive news that make this close to certain.