Food prices fall; Housing remains depressed

New Home Sales; Average Retail Prices

• A raft of supermarket items fell in price over the past three months. On average almost half of regularly surveyed grocery items were cheaper in the December quarter than three months ago.
• New home sales eased by 0.6 per cent in December. Over the calendar year 2010, new home sales fell by 4.4 per cent and were down by 11 per cent in the past six months.
• Private sector detached house sales inched up by 0.3 per cent in December while sales of apartments slumped by 7.3 per cent over the month.

What does it all mean?

• The hype suggests that food prices are soaring, or at least are about to soar. But the evidence reveals otherwise. In the past quarter almost half of regularly surveyed grocery prices were cheaper than three months ago. Meat meaters have been the big winners with prices of rump steak and roast beef both down around 9 per cent. Breakfast cereal, cheese and sugar are other items that, on average, were cheaper than three months ago.
• The unfortunate aspect of the grocery price data is that the Bureau of Statistics has chosen to discontinue production of the figures. Ordinary consumers can readily identify with the data on grocery prices and it provides more tangible evidence of inflationary trends than typical economic data.
• The latest home sales data clearly adds further weight to the view that the housing sector is effectively going sideways. New home sales eased just marginally in December but activity over the past six months has slumped by more than 11 per cent and is holding at levels that are well below historical averages.
• Looking forward it is likely that housing activity will remain subdued, especially given that the last rate hike in November, as well as the additional increase by the banks, is yet to be fully absorbed and factored in by households.
• The increase in borrowing costs will result in more hesitancy by home buyers and property developers to commit to new projects. And as such the housing sector is likely to see further consolidation in coming months. In fact, earlier in the week the release of the December housing credit data – a good indicator of future home sales – highlighted the lack of borrowing by owner occupiers with the growth rate holding at weakest levels in records going back 20 years.
• Fundamentally, there are good reasons for home building to increase. The rental market is still tight and population growth is healthy. And with the labour market remaining strong, the demand for investor housing is likely to pickup pace in the second half of 2011.

What do the figures show?

Average retail prices

• The Bureau of Statistics releases prices of 51 key grocery items in each capital city each quarter. On average across the capital cities, prices of 23 goods fell in price in the December quarter, up from 19 in the September quarter. And over the year to the December quarter 13 were cheaper than a year ago (in the September quarter 11 were cheaper).
• The biggest fall amongst the grocery items over the last quarter was rump steak which fell on average by 9 per cent with roast beef also down 9 per cent and chuck steak down 7 per cent.
• At the other end of the scale, eggs lifted in price by 29 per cent (although the ABS did change the specification of the product). The price of oranges lifted 25 per cent while tomatoes rose by 20 per cent. Onions, potatoes and bananas were also dearer over the quarter.
• Over the year, bananas were down by almost 32 per cent with rump steak down almost 8 per cent. Other notable price declines were recorded by strawberry jam, chuck steak and roast beef. The biggest price increase over the past year was by tomatoes (up 30 per cent), onions (up 29 per cent) and oranges up 20 per cent.

New home sales

• The Housing Industry Association reported that new home sales eased by 0.6 per cent in December after a 0.2 per cent fall in November. Private sector detached house sales inched up 0.3 per cent in December while multiunit sales dropped by 7.3 per cent.
• The Housing Industry Association noted that “New home sales fell by 4.4 per cent in calendar year 2010 and were down by 11 per cent over the second half of last year.” In the December quarter sales rose 3.6 per cent.

What is the importance of the economic data?

• The Bureau of Statistics’ releases data on Average Retail Prices of Selected Items for each capital city each quarter. These are the only regularly published figures on specific grocery items each quarter and as such tend to be a more concrete measure of inflation for the average consumer.
• The Housing Industry Association releases data on the sales of new homes each month. The HIA collects the data each month from a sample of Australia’s largest 100 home builders.

What are the implications for interest rates and investors?

• Interest rates are already restrictive and the Reserve Bank would be best staying on the interest rate sidelines in the near term – especially given that inflation is well contained at present. Food inflation is an issue in other parts of the world however it is still well contained domestically. The floods in Queensland together with Cyclone Yasi will lead to price rises for a select number of fruit and vegetable products, but the price increases are unlikely to be broad based.
• The cumulative rate hikes, hangover effect from the expiry of the first home buyer grant and appreciation in property prices has given potential home buyers a valid reason to be more circumspect about future purchases. However the rebuilding phase in flood ravaged towns is likely to support construction activity in the midterm.