Aussie housing wealth falls; Sydney home sales activity hits 15½-year low

Home prices; Consumer sentiment; Reserve Bank Board minutes

• Home prices: The Bureau of Statistics reports that Australian home prices fell by 2.4 per cent in the December quarter to stand 5.1 per cent lower over the year. The number of established house and attached home transfers in Sydney fell to 13,991 in the December quarter – the lowest level in 15½ years.
• Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating rose by 2.2 per cent – the biggest lift in four months – to 111.9 points. But consumer sentiment remains below both the average of 114.3 points held since 2014 and the longer term average of 113.1 points since 1990.
• Reserve Bank: Minutes of the last Reserve Bank Board meeting were released. The Board kept the cash rate unchanged at a record low 1.5 per cent on March 5 and said “members agreed that there was not a strong case for a near-term adjustment in monetary policy. Rather, they assessed that it would be appropriate to hold the cash rate steady while new information became available that could help resolve the current tensions in the domestic economic data.”

Home price data is important for retailers, especially those focussed on consumer durables. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The Reserve Bank Board minutes provides guidance on interest rate settings.

What does it all mean?

• The Reserve Bank released its monetary policy Board minutes today. Its neutral stance was retained with policymakers again highlighting tensions between softening economic activity and the solid labour market, with ongoing jobs market strength considered “particularly important” to its outlook.
• But the Board’s resolve continues to be tested by the property downturn, noting that “dwelling investment was expected to subtract from growth in output…. this decline could be sharper than currently expected.” In particular, policymakers appear particularly concerned about the spillover effect of falling property prices on household spending.
• And the negative wealth effect from falling property prices is most acute in Sydney and NSW with the Reserve Bank minutes highlighting that “growth in retail sales had been particularly weak in NSW….Some part of the slowdown in retail and motor vehicle spending in NSW was likely to have been related to declines in housing prices and, in particular, lower turnover in the housing market.” In fact, according to Bureau of Statistics data, the number of transfers of established houses and attached dwellings in Sydney has fallen to the lowest since March 2003.
• Consumer confidence bounces around from week-to-week. The lift in the value of the Aussie dollar last week likely boosted sentiment. But the tragic events in New Zealand on Friday would’ve been ‘front of mind’ for most Aussies, adding to the growing sense of consumer unease.

What do the figures show?

Consumer Sentiment

• The weekly ANZ-Roy Morgan consumer confidence rating rose by 2.2 per cent – the biggest lift in four months – to 111.9 points. But consumer sentiment remains below both the average of 114.3 points held since 2014 and the longer term average of 113.1 points since 1990.
• Four out of the five major components of the index rose last week:
  • The estimate of family finances compared with a year ago was up from +2.0 points to +8.1 points;
  • The estimate of family finances over the next year was up from +22.2 points to +24.3 points;
  • Economic conditions over the next 12 months was up from -5.4 points to -0.9 points;
  • Economic conditions over the next 5 years was up from +5.4 points to +5.5 points;
  • The measure of whether it was a good time to buy a major household item was down from +23.4 points to +22.8 points.
• The measure of inflation expectations fell from 4.1 per cent to 4.0 per cent.

Residential property prices

• The Bureau of Statistics (ABS) has released its Residential Property Price indexes for the December quarter. The ABS noted:
• “The price index for residential properties for the weighted average of the eight capital cities fell 2.4 per cent in the December quarter 2018. The index fell 5.1 per cent through the year to the December quarter 2018.”
• “The capital city residential property price indexes fell in Sydney (-3.7 per cent), Melbourne (-2.4 per cent), Brisbane (-1.1 per cent), Perth (-1.0 per cent), Canberra (-0.2 per cent) and Darwin (-0.6 per cent), and rose in Hobart (+0.7 per cent) and Adelaide (+0.1 per cent).”
• “Annually, residential property prices fell in Sydney (-7.8 per cent), Melbourne (-6.4 per cent), Darwin (-3.5 per cent), Perth (-2.5 per cent) and Brisbane (-0.3 per cent) and rose in Hobart (+9.6 per cent), Canberra (+1.8 per cent) and Adelaide (+1.5 per cent).”
• “The total value of residential dwellings in Australia was $6,677,797.4m at the end of the December quarter 2018, falling $133,057.1m over the quarter.” (The decline was 2 per cent).
• “The mean price of residential dwellings fell $15,700 to $651,100 and the number of residential dwellings rose by 42,600 to 10,256,700 in the December quarter 2018.”
• CommSec estimates that the number of people per home was steady at 2.46 in the December quarter.
• The value of all dwellings in Australia in the December quarter was 3.9 per cent lower than a year ago. Over the year, the value of homes was higher in Tasmania (up 8.0 per cent); Queensland (up 2.5 per cent); South Australia and the ACT (both up 1.4 per cent). But home values were lower in NSW (down 6.6 per cent); Victoria (down 5.5 per cent); Northern Territory (down 4.9 per cent) and Western Australia (down 2.3 per cent).
• The number of all homes in Australia rose by 42,600 in the December quarter and rose by 184,900 over the year.

Reserve Bank March Board minutes:

• Economic outlook: “Looking forward, the central forecast scenario was still for growth in GDP of around 3 per cent over 2019.”
• Jobs market outlook: “…the central forecast scenario was still for a further decline in the unemployment rate to 4¾ per cent over the next couple of years. This further reduction in spare capacity underpinned the forecast of a gradual pick-up in wage pressures and inflation. Given this, members agreed that developments in the labour market were particularly important….leading indicators continued to suggest that employment growth was likely to remain above average, although some indicators had turned down a little recently.”
• Wages growth: “Private sector wages growth had picked up further in the December quarter, consistent with the Bank’s forecasts and survey evidence that a significant share of firms were finding it difficult to attract suitable labour.”
• Consumer spending: “…there continued to be considerable uncertainty around the outlook for consumption given the environment of declining housing prices in some cities, low growth in household income and high debt levels.”
• Housing outlook: “Dwelling investment was expected to subtract from growth in output over the forecast period and, unless pre-sales volumes started to increase, this decline could be sharper than currently expected.”
• Business lending: “Members observed, however, that the growth in business lending had been entirely to large businesses, with one estimate suggesting that lending to small businesses had declined slightly over the preceding year. There had been greater caution around lending to small businesses in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Lower housing prices had also reduced the value of collateral for loans to small businesses.”
• Trade: “…the increases in tariffs implemented in 2018 had continued to weigh on trade between the United States and China, and there had been spillover effects on some other economies. Notably, a decline in Chinese imports, both to meet domestic demand and facilitate export production, had been apparent in export growth in the September quarter in east Asia. Intra-regional export growth had also eased.”
• Inflation outlook: “While the labour market had continued to strengthen, less progress had been made on inflation.”
• Change in rate stance: “..members assessed that the current stance of monetary policy was supporting jobs growth and a gradual lift in inflation. However, members noted that significant uncertainties around the forecasts remained, with scenarios where an increase in the cash rate would be appropriate at some point and other scenarios where a decrease in the cash rate would be appropriate. The probabilities around these scenarios were more evenly balanced than they had been over the preceding year.”
• Rates on hold: “..members agreed that there was not a strong case for a near-term adjustment in monetary policy. Rather, they assessed that it would be appropriate to hold the cash rate steady while new information became available that could help resolve the current tensions in the domestic economic data.”

What is the importance of the economic data?

• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
• The Australian Bureau of Statistics (ABS) provides quarterly data on residential prices. The figures provide further perspectives on the state of the housing purchase sector.
• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

• Recent surveys suggest that most Aussie households remain cautious, preferring to pay down mortgage and credit card debt, rather than lift discretionary spending on household goods. The solid job market, however, has been a support for consumers, despite slow wages growth.
• Consumer sentiment is expected to remain volatile, given increased household anxiety about their financial situation with home prices down and petrol prices up across the country. And recent news that the Aussie economy shrank for two consecutive quarters (in the second half of 2018) on a per capita basis – for the first time since 2006 – has weighed on consumers’ views of the economy.
• Given continuing uncertainty around consumer spending, the future direction of interest rates appears contingent on a continuation of solid jobs growth, tepid wages growth and a recovery in global economic activity in the second half of this year. But the ‘wildcard’ remains political uncertainty and business confidence, especially in NSW. If the state’s election on Saturday results in a hung parliament, business and consumer confidence could be eroded, despite unemployment being at multi-decade lows.
• It appears that whoever wins Federal government in May will need to unleash some fiscal initiatives, including a bring-forward of proposed tax cuts, to encourage consumers to spend.
• CommSec expects interest rates to be unchanged for the foreseeable future.