Home price soar but inflation contained

Home Value Index; Inflation gauge; Manufacturing

• Home prices soar: The CoreLogic RP Data Home Value Index of capital city home prices rose by 2.8 per cent in July to stand 11.1 per cent higher over the year. Dwelling prices rose in seven of the eight capital cities in July led by Melbourne (up 4.9 per cent).
• Tame inflation: The TD Securities-Melbourne Institute monthly inflation gauge was up 0.2 per cent in July to be up 1.6 per cent over the year. The trimmed mean measure was up 1.5 per cent over the year.
• The Performance of Manufacturing index rose by 6.2 points to 50.4 in July. A reading above 50.0 indicates that the sector is expanding.
• New home sales rise: New home sales rose 0.5 per cent in June.

What does it all mean?

• The growth in Sydney and Melbourne home prices remains a tricky issue for the Reserve Bank and financial institutions regular APRA. The strong lift in new building (supply) will eventually cause the growth in home prices to ease to more sustainable levels. But it shouldn’t be lost on investors and businesses that the lift in home prices is boosting wealth, and underpinning consumer spending.
• Inflation remains under control, allowing the Reserve Bank to leave the cash rate at a record low of 2 per cent. Prices are certainly not easing into deflation territory, but nor are they indicating a potential inflation problem down the track.

What do the figures show?

Home prices

• The CoreLogic RP Data Hedonic Australian Home Value index of capital city home prices rose by 2.8 per cent in July to stand 11.1 per cent higher than a year ago.
• House prices rose by 2.8 per cent in July while apartments rose by 2.5 per cent. House prices were up 11.6 per cent on a year ago and apartments were up by 7.2 per cent.
• The average Australian capital city house price (median price based on settled sales over quarter) was $608,000 and the average unit price was $505,000. The average Sydney house price was $921,500 – still well short of a $1 million.
• Dwelling prices rose in seven of the eight capital cities in July: Melbourne (up 4.9 per cent), Sydney (up 3.3 per cent), Hobart (up 1.1 per cent), Brisbane (up 0.5 per cent), Darwin (up 0.4 per cent), Canberra (up 0.3 per cent), Perth (up 0.1 per cent). Prices fell in Adelaide (down 1.1 per cent).
• Home prices were higher than a year ago in six of the eight capital cities. Prices rose most in Sydney (up 18.4 per cent), followed by Melbourne (up 11.5 per cent), Brisbane (up 3.9 per cent), Adelaide (up 3.4 per cent), Hobart (up 2.5 per cent) and Canberra (up 1.2 per cent). Price fell in Darwin (down 5.3 per cent) and Perth (down 0.3 per cent).
• Total returns on capital city dwellings in the year to July rose by 15.3 per cent with houses up 15.8 per cent on a year earlier and units up 12.1 per cent.
• RP Data report: “Twelve months ago, CoreLogic RP Data estimated that the gross value of the total residential property asset class was $5.5 trillion. In July 2015 our estimates have now reached $6 trillion as a result of value growth and dwelling construction. Based on APRA data through to March, approximately $1.3 trillion of bank debt remains outstanding against the asset class. Taking into account housing debt from the non-bank sector as well suggests that the overall debt to valuation ratio across the national housing portfolio is likely to be around the mid 20 per cent mark.”
• “With value growth once again accelerating across Sydney and Melbourne, the market evolution in mortgage lending policies will provide a timely test for housing demand, particularly from investors.”
• “The combined effect of tighter lending parameters with more focus on serviceability and low LVR’s, potentially higher mortgage rates for investment loans as well as limitations on the pace of investment lending imposed by APRA on Australia’s banks should conspire to slow investor demand in the market.
• “Add to this the growing concern about the Sydney and Melbourne housing markets being overheated and the record low rental yields and the outlook being painted for investment is likely to be one of diminishing demand,”

Inflation gauge

• The monthly inflation gauge was up 0.2 per cent in July after a 0.1 per cent rise in June. The annual rate of inflation rose from 1.5 per cent to 1.6 per cent.
• Tradable good prices rose by 0.1 cent over the year to July to be up 1.1 per cent on the year. Non-tradable prices rose 0.2 per cent in July to be up 2.0 per cent over the year.
• The underlying rate (trimmed mean) rose by 0.1 per cent in July after a similar rise in June. The annual rate rose from 1.4 per cent to 1.5 per cent.
• Excluding volatile items like petrol and fruit & vegetables, the inflation gauge rose by 0.3 per cent in July after falling 0.1 per cent in June. The annual rate of inflation rose from 1.3 per cent to 1.8 per cent.
• TD Securities noted that: “Contributing to the overall change in July were price rises for property rates and charges (+3.3 per cent), other foods (+5.5 per cent) and non-alcoholic beverages (+2.8 per cent). These were offset by price falls in water and sewerage (-3.6 per cent), alcohol and tobacco (-1.6 per cent), and automotive fuel (-2.3 per cent).).”

Performance of Manufacturing

•  The Performance of Manufacturing index rose by 6.2 points to 50.4 in July. A reading above 50.0 indicates that the sector is expanding. The survey is volatile from month to month and is not providing accurate guidance on economic conditions. All key indices rose in July after slumping in June.

New home sales

• New home sales rose by 0.5 per cent in June after dropping by 2.3 per cent in May. Sales of multi-units fell by 2.9 per cent in June while detached house sales rose by 1.7 per cent.
• The Housing Industry Association reported: “In the month of June 2015 detached house sales increased by 3.5 per cent in NSW, 1.5 per cent in Victoria, and 4.2 per cent in Queensland. Detached house sales fell by 2.0 per cent in South Australia in June, while in Western Australia sales eased by 0.9 per cent. In the June 2015 quarter detached house sales increased by 7.9 per cent in NSW and 0.6 per cent in Victoria. Sales fell for the quarter in Queensland (-7.0 per cent), SA (-10.2 per cent), and WA (-3.1 per cent).”

What is the importance of the economic data?

• The CoreLogic RP Data Hedonic Australian Home Value Index is based on Australia’s biggest property database. Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the CoreLogic- RP Data Hedonic Index includes all properties. Home prices are an important driver of wealth and spending.
• The Australian Industry Group and PricewaterhouseCoopers compile the Performance of Manufacturing Index (PMI) each month. The Australian PMI is the Australian equivalent of the US ISM manufacturing gauge. The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.
• The TD Securities/Melbourne Institute Monthly Inflation Gauge is designed to “provide a timely and accurate monthly measure of inflation in Australia”. The Bureau of Statistics only releases the Consumer Price Index on a quarterly basis.
• 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. The survey covers around 14 per cent of the home building industry.

What are the implications for interest rates and investors?

• The Reserve Bank won’t be lifting or cutting interest rates any time soon. The strong gains in Sydney and Melbourne home prices aren’t influencing policy decisions – there is just no fundamental reason to change interest rate settings at present.
• CommSec expects interest rate settings to remain unchanged over 2015.
• Inflation remains historically low, but is showing more of a tendency to trend modestly higher rather than ease. In July, 39 per cent of industry classes surveyed recorded price increases – the most in six months.
• The volatility in the Performance of Manufacturing index means that the survey isn’t helpful for policymakers at present.