Housing boom hasn’t peaked; Confidence lifts

Dwelling starts; Consumer confidence; Chinese inflation data

• Consumer sentiment: The Westpac/Melbourne Institute index of consumer confidence rose by 4.2 per cent in October to 97.8. A reading of 100 is the dividing line separating optimism from pessimism.
• Job market outlook: The Westpac-Melbourne Institute Unemployment Expectations Index decreased by 13.7 per cent in October to the lowest (best) levels in almost four years.
• Dwelling starts: Starts fell by 3.2 per cent in the June quarter after an upwardly-revised 11.6 per cent increase in the March quarter. Work started on a record 211,484 new dwellings over the year to June, up 16.9 per cent on the previous year.
• Building pipeline: There were a record 35,770 homes in the June quarter that has been approved for construction but where work hadn’t commenced.
• Chinese inflation: Consumers prices rose 1.6 per cent in the year to September while producer prices fell by 5.9 per cent.

What does it all mean?

• Home building is at record highs, but it has by no means peaked. In the latest quarter, work had yet to start on a record number of homes that have previously been approved for construction. In fact the backlog is 20 per cent higher than the former record high. The home building boom is mirroring the former engineering construction boom but the benefits are more evenly spread. There are more homes being built in Australia at the moment (over 183,000) than at any point in the past.
• Chinese authorities have plenty of wiggle room to add more stimulus to the economy. Excluding food, consumer prices are up just 1 per cent over the year. And producer prices continue to slide at a near 6 per cent annual rate. The lower cost of energy (especially oil) is providing a boost to Chinese producers and consumers.
• The monthly consumer confidence data has lost relevance given that a weekly version is released with a similar sampling regime. Confidence has risen over the past month due to a more settled political environment, stable interest rate outlook and improved economic activity.

What do the figures show?

Dwelling starts

• Dwelling starts (commencements) fell by 3.2 per cent in the June quarter after an upwardly-revised 11.6 per cent increase in the March quarter. House approvals fell by 2.9 per cent and apartments fell by 4.9 per cent. Work started on a record 211,484 new dwellings over the year to June, up 16.9 per cent on the previous year.
• At present a record 183,935 homes are under construction.
• Across Australia, starts in the June quarter fell in five states: NSW (down 1.6 per cent); Victoria (down 0.5 per cent); Queensland (down 9.6 per cent); South Australia (up 12.0 per cent); Western Australia (down 10.5 per cent); Tasmania (up 54 per cent); Northern Territory (down 36.1 per cent); and the ACT (up 76.4 per cent)
• In the year to June, dwelling starts were higher than the decade average in all the states & territories except for South Australia (down 5.2 per cent). Starts were at record highs in Victoria (64,967).
• Dwelling starts in NSW in the June quarter were 52.5 per cent above the decade average.

Chinese inflation

• Chinese consumer prices rose by 0.1 per cent in September to be up 1.6 per cent over the year. Food prices fell by 0.1 per cent in the month to be up 2.7 per cent over the year. Non-food prices rose by 0.2 per cent to be up 1.0 per cent over the year.
• In September pork prices rose by 0.4 per cent (17.4 per cent over the year); eggs rose 2.9 per cent and vegetables fell by 1.0 per cent. Transport & communications prices fell 0.4 per cent in the month; Clothing lifted 0.8 per cent; Health Care rose 0.2 per cent; Entertainment & Education rose 0.5 per cent with education services up 1.1 per cent.
• Chinese producer prices fell by 0.4 per cent in September after falling 0.8 per cent in August. Prices fell 5.9 per cent in the year to September – equalling the biggest fall in six years. Prices in petroleum processing, coking and the nuclear fuel processing industry fell by 24.5 per cent over the year.
  Consumer sentiment:
• The Westpac/Melbourne Institute index of consumer confidence rose by 4.2 per cent in October after falling by 5.6 per cent in September. The confidence index is up 3.2 per cent on a year ago.
• The current conditions index rose by 4.0 per cent while the expectations index rose by 4.4 per cent.
• Four of the five components of the index rose in October:
  Ø The estimate of family finances compared with a year ago was up by 1.3 per cent;
  Ø The estimate of family finances over the next year was up by 3.5 per cent;
  Ø Economic conditions over the next 12 months was up by 20.0 per cent;
  Ø Economic conditions over the next 5 years was down by 7.9 per cent;
  Ø The measure on whether it was a good time to buy a major household item was up by 6.3 per cent.
• Gender & demographics: Men (index reading of 99.3, up 2.3 per cent) are still more optimistic than Women (96.3, up 6.1 per cent). Young people (18-24 years) are more optimistic than other demographics, although the index fell by 3.9 per cent to 108.1. Across the other demographics: 25-44 years (index 103.8, up 8.7 per cent); 45 years plus (index 92.7, up 3.9 per cent).
• State sentiment levels: NSW (up 2.4 per cent), Victoria (up 8.6 per cent), Queensland (down 0.5 per cent), Western Australia (up 8.4 per cent) and South Australia (down 1.2 per cent).
• Job market outlook: The Westpac-Melbourne Institute Unemployment Expectations Index decreased by 13.7 per cent to 134.9 in October, after an increase of 5.8 per cent in September. The index is now at its lowest level since November 2011 and is 9.2 per cent below its value a year ago.

What is the importance of the economic data?

• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.
• The Australian Bureau of Statistics releases data on dwelling commencements (starts) each quarter. The figures provide guidance on future construction activity. If construction begins on new houses or apartments, it signifies work for building trades.

What are the implications for interest rates and investors?

• Consumers are more positive, and that suggests they will be more inclined to spend. But there are no guarantees.
• The home construction boom is a response to strong demand, that is, the solid population growth recorded in previous years. It won’t last forever, so building-dependent firms should enjoy the boom now while planning for softer activity in 12-18 months.
• CommSec expects no change to interest rate settings in coming months.