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Property prices skyrocket

Property prices in our two largest capital cities, Sydney and Melbourne are skyrocketing on the back of record low interest rates.

According to the latest RPData-Rismark Home Value Index out today, capital city home values have increased taking the combined capitals index to a record high, beating the previous record set in October 2010.

Since the beginning of June 2012, capital city dwelling values have increased by 8.7% through to the end of September 2013. For the month of September, residential property values in Sydney and Melbourne were up by more than 2% over the previous month.

RPData research director Tim Lawless says we haven’t seen market conditions this strong since April 2009 for Sydney and May 2010 for Melbourne. While the two largest housing markets are pushing higher, most other capital cities saw subdued conditions, with home values falling in Brisbane, Perth, Hobart, Darwin and Canberra.

With the RBA’s official cash rate at a record low of 2.5%, and mortgage rates available for around 5%, the strong housing market conditions are driving growth in new housing construction – good news for our building industry – and a sector of the economy that the Reserve Bank has been trying to stimulate. Mr Lawless says we have already seen a trend towards more dwelling approvals and higher credit demand for newly constructed homes.

Building materials companies like Boral (ASX: BLD), Adelaide Brighton (ASX: ABC), CSR (ASX: CSR) and Brickworks (ASX: BKW) should start to see improving conditions, including more work and higher revenues.

However, talks of a property bubble are premature according to RPData-Rismark. 10 year compound growth is only 2.5%, and it was common for some cities to experience growth spurts. Annualising the short-term quarterly spurts can be misleading, according to Rismark CEO, Ben Skilbeck.

Foolish takeaway

The RBA is likely to closely scrutinise the data, before the board meeting today, but it appears unlikely that the central bank will change the official cash rate today.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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