What does it all mean?

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Home Prices; Manufacturing gauge; Retail trade; New home sales

• 

  Home sales, retail and manufacturing all on the up.

  Home prices up: The RP Data – Rismark Home Value index of capital city home prices rose by 1.6 per cent in September to record highs. Home prices are up 5.5 per cent on a year ago. But prices rose in just three capital cities in September.

• Manufacturing activity up; now at a 2-year high: The Performance of Manufacturing index rose by 5.3 points to a 2-year high of 51.7 in September. Any reading above 50 suggests manufacturing is expanding.
• Home sales up: New home sales rose by 3.4 per cent in August after a 4.7 per cent decline in July.
• Retail spending up: Retail trade rose by 0.4 per cent in August, just above market forecasts.
• Chinese manufacturing improves: The “official” purchasing manager’s index (from National Bureau of Statistics) rose from 51.0 to 51.1 in September, below forecasts for a result near 51.5.

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The big picture

• There is an old adage in economics – there are lies, damned lies and statistics. And when it comes to the issue of housing valuations and affordability, there is a lot of data that can be categorised in the two former terms and much less in the latter.
• As we go across the country we are amazed at the number of people concerned that our home prices are overvalued. Magazines like The Economist must take some of the blame, together with web sites like Demographia and even some industry groups like the Housing Industry Association.
• Home prices in Australia are determined by demand and supply. In recent years demand has been strong, driven by the biggest in-bound migration in history. But in some parts of the country, supply – new dwelling construction – has not kept pace. In large part this has been in NSW as well as Queensland. In other parts of the country, governments have increased land supply, reduced barriers for developers and rezoned land for housing. And as a result dwelling starts are running above long-term averages.
• The Reserve Bank Governor was asked a question on Australian home prices when he delivered a speech in London on March 10. The comments weren’t well reported, but he highlighted the fact that home prices aren’t rising strongly at present, that arrears rates on mortgages are low, gearing isn’t high and that, overall, home prices “are probably not top of my list of worries.”
• However Glenn Stevens did say something else: “But I think – the other thing I’ll say is that it’s quite often quoted very high ratios of price to income for Australia, but if you get the broadest measures, a country-wide price and a country-wide measure of income, the ratio is about 4 ½ and it hasn’t moved much either way for 10 years. And that is higher than it used to be, but it’s actually not exceptional by a global standard as far as I can see.”
• What he was quoting here was the analysis by Rismark International and RP Data on housing affordability. To measure home affordability you need to compare all incomes across Australia with all home prices across Australia – city and regional. Unfortunately a raft of industry bodies don’t do that and it produces spurious outcomes.
• The bottom-line is that Australian home prices aren’t so extraordinary after all. Once foreign investors start focussing on the facts rather than fiction then perhaps a few more dollars will start flowing Down Under. Because it is a concern abroad, and it’s not being helped by misinformation.

The week ahead

• Most of the ‘top-shelf’ economic indicators aren’t released until late in the coming week. But there is still a good spattering of indicators for investors to focus on in the next few days. And in the US, the main game is also late in the week with data on employment (non-farm payrolls) on Friday.
• On Tuesday, Reserve Bank Assistant Governor Malcolm Edey will speak at a credit/debit cards conference while population data will be released the same day. Population growth has slowed markedly over the past 18-months, easing from a 40-year high of 2.2 per cent to 1.7 per cent. Australia’s population growth is still one of the fastest rates in the world, but arguably it should be higher given our tight job market and urgent need for skilled migrants. Australia has been poorly served by political debate on migration.
• On Wednesday, the Department of Education, Employment and Workplace Relations releases data on skilled job vacancies while the Bureau of Statistics releases broader data on job vacancies. The job market is tight, but the Reserve Bank says it isn’t overly tight. Home sales data for February is also issued.
• On Thursday, February data on retail sales, building approvals and lending (private sector credit) are released. Retail spending certainly hasn’t been flash of late, up 0.4 per cent in January and up 1.8 per cent over the year – below the rate of inflation. But the Commonwealth Bank Business Sales Indicator lifted in February, and as a result we tip a 0.6 per cent increase in retail trade in the month.
• And building approvals have also been weak, although the Queensland floods and cyclone make analysis tougher. Approvals slumped by 15.9 per cent in January, although we expect a modest 4 per cent lift in February. The floods will depress readings on approvals in the short-term but boost data from mid-year.
• In the US, most investors will only have eyes for one indicator – non-farm payrolls (or employment) to be released on Friday. The job market is clearly picking up with new claims for unemployment insurance sliding. In fact the four-week average of claims is the lowest since July 2008. Economists tip a rise in non-farm payrolls of around 180,000 in March after gains of 192,000 in February. But the jobless rate is expected to remain high near 8.9 per cent.
• The other indicator that will be in focus is the ISM manufacturing gauge for March, also released on Friday. The gauge stands at 61.4 – a reading that hasn’t been surpassed in just over 27 years – so it is clear that a solid economic recovery is underway. Economists tip a March ISM reading near 61.6.
• Of the other indicators, personal income and spending data are released on Monday together with pending home sales. On Tuesday, the Standard & Poor’s/Case-Shiller home price index is released together with consumer confidence. On Wednesday the ADP employment index is issued together with the Challenger job layoffs series. On Thursday regional purchasing manger surveys are released in New York and Chicago together with data on factory orders. And on Friday car sales figures are released.
• Australian investors will also closely watch the Chinese purchasing managers survey on Friday.

Sharemarket

• CommSec has adjusted its forecasts for the All Ordinaries/ASX 200 for the remainder of the year. The Japanese earthquake, tsunami and nuclear shock have clearly had a depressing influence on investor confidence together with air strikes against Libya. Separately, foreign investors remain cold on the Australian market. Our economy is treading water and both the mining resource rent tax and proposed carbon tax are seen to have depressed the outlook for the economy. The high Australian dollar is also crimping foreign interest in our sharemarket. Sure, China continues to expand, boosting earnings and profits for resource companies. But mining represents just 9 per cent of the economy. It is the other 91 per cent that investors are worried about.
• We now expect the All Ordinaries/ASX 200 to be around 4,900 points mid-year and 5,200 points by the end of the year. Our expectation of a softer Australian dollar in the second half of 2011 (US92 cents by end year) should boost interest of foreign investors – a group owning 40-45 per cent of our shares. And high corporate profits do point to a firmer sharemarket as well.

Interest rates, currencies & commodities

• The Japanese nuclear shock has certainly thrown the spotlight on energy prices. Most would have expected that uranium prices would have weakened in response to the problems experienced by a number of Japanese nuclear plants. And certainly that has been the case with the spot U308 price down from around US$73 a pound to US$60 a pound in the past few weeks. But its worth pointing out that the current price is well up from recent lows of US$40 a pound in June last year and most nuclear plants still are tied to longer-term price contracts.
• The price of competing natural gas has lifted from US$3.75/mmbtu to US$4.25/mmbtu, but this is still in the middle of the US$3.25-5.25/mmbtu range over the past year. And the price of the other fuel that Japan could switch to – thermal coal – has actually fallen by 4 per cent since the earthquake. Still Tohoku Electric Power had to suspend its coal imports because of earthquake damage. The longer-term outlook is more positive, especially given that Germany has decided to suspend seven nuclear reactors and plans by other countries are also under review. And this longer-term outlook is an important consideration for investors in the energy sector.

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• Capital city home prices were unchanged in seasonally adjusted terms in February after a 1.5 per cent slide in the prior month according to the RP Data-Rismark Hedonic Australian Home Value Index – the largest property database in Australia. Outside capital cities, prices fell by 0.5 per cent in February.
• Capital city home prices are up just 0.8 per cent on a year ago – the slowest growth rate in 23 months. Prices in the ‘Rest of State’ markets were up down 0.2 per cent in annualised terms.=
• Prices rose in just three of the seven capital cities in February with Canberra prices up 1.9 per cent, followed by Sydney up 0.6 per cent, and Melbourne up 0.1 per cent).Prices fell most in Darwin (down 6.7 per cent), followed by Brisbane (down 1.2 per cent).
• Prices are higher than a year ago in all capital cities except Perth, Darwin and Brisbane.

What does it all mean?

• Australian home prices are effectively going nowhere. In March 2010, prices were seemingly going gangbusters with annual growth standing at 14.1 per cent. But home prices are now tracking at a 0.8 per cent annual rate – the lowest growth rate in almost two years and well below the long-term average pace of 8.0 per cent.
• Effectively you can strike another item off the Reserve Bank’s worry list. The rate hikes delivered over 2010 have taken the heat out of the housing market ensuring that the normal supply-demand fundamentals are ruling the roost across capital city housing markets.
• Interestingly there are marked differences in home prices across the nation and it is a similar story when you look at rental yields. States like NSW has seen a significant amount of under building compared to the likes Victoria however the lack of supply – lower vacancy rates – in NSW has resulted in higher rental yields on offer.
• It is likely that housing conditions will remain soft in the near term, however the long term fundamentals certainly look more attractive Importantly the longer term fundamentals for the housing sector remains sound. More importantly as the Reserve Bank Governor has highlighted on many an occasion housing affordability has remained relatively stable over the last decade. And RP Data & Rismark has also added further weight to this argument noting that real wage gains over the past decade has ensured that affordability remains sound. In fact Australia’s dwelling price-to-disposable income ratio was at 4½ times at the end of 2010 and has not significantly changed since the end of the last property cycle in 2003.

• It is important to highlight that while the housing sector is cooling it is not about to collapse in a heap. Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5 per cent. The Reserve Bank is likely to remain on the interest rate sidelines in the near term, while healthy jobs growth, rising population and sliding rental vacancy rates will support housing activity in the medium term.

What do the figures show?

House price prices

• The RP Data-Rismark Hedonic Australian Home Value Index was unchanged in February after a 1.5 per cent fall in the previous month.
• House prices fell by 0.4 per cent in the month while apartments rose by 0.5 per cent.
• Capital city home (dwelling) prices are up 0.8 per cent on a year ago, the slowest growth rate in 23 months. House prices are up 0.2 per cent and apartment prices are up by 2.4 per cent.
• Prices rose in three of the seven capital cities in February with Canberra prices up 1.9 per cent, followed by Sydney (up 0.6 per cent), and Melbourne (up 0.1 per cent). Across the other cities prices fell most in Darwin (down 6.7 per cent), Brisbane (down 1.2 per cent), and both Perth and Adelaide (down 0.4 per cent). In Hobart, prices fell by 7.4 per cent in January (February data not yet available).
• Home prices are higher than a year ago across all capital cities except in Brisbane (down 5.3 per cent), Darwin (down 5.2 per cent) and Perth (down 4.1 per cent). Prices are up most in Sydney (up 3.3 per cent), followed by Melbourne (up 2.5 per cent), Canberra (up 0.7 per cent), and Adelaide (up 0.6 per cent).
• February home prices aren’t available yet for Hobart. In the year to January, home prices in Hobart were down by 4.1 per cent.

What is the importance of the economic data?

• The RP Data-Rismark Hedonic Australian Home Value Index is based on Australia’s biggest property database covering more than 340,000 sales during 2010. Unlike the ABS Index, which excludes terraces, semidetached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.
• The monthly RP Data-Rismark Hedonic Index compares month-to-month index results. Quarterly results are measured comparing end months rather than averaging each month in the quarter. For example, the first quarter of 2009 index results would compare the end of March index with the end of December index.

What are the implications for interest rates and investors?

• The rate hikes have certainly taken their toll on the housing sector over the past year and unfortunately for the sector it is unlikely that a turnaround is going to take place anytime soon. Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5 per cent.
• A softening in home prices combined with the prospect of interest rates remaining unchanged until mid year is clearly positive for budding home buyers. Less doom and gloom stories about interest rates and unsustainable home prices will be beneficial for consumer sentiment more generally.

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• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 1.2 cents per litre to 136.3 cents a litre in the week to February 27 – a fresh 28 month high.
• Motorists are likely to see a further increase in petrol prices. While the Singapore unleaded price rose by more than US$8 a barrel, it has only partially filtered through to the terminal gate (wholesale) price – which gained 3 cents a litre in the past week. CommSec expects pump prices to rise by a further 4-5 cents a litre in the next fortnight.
• The TD Securities-Melbourne Institute monthly inflation gauge rose by just 0.2 per cent in February. Excluding volatile items, prices were up just 0.1 per cent – the seventh straight month of negligible growth.
• Private sector credit rose by 0.3 per cent in January to stand 3.4 per cent higher than a year ago.
• Capital city home prices fell by 1.6 per cent in seasonally adjusted terms in January after rising by 0.3 per cent in December according to the RP Data-Rismark Hedonic Australian Home Value Index – the largest property database in Australia. Outside capital cities, prices fell by 1.2 per cent in January.
• Company profits fell by 2.8 per cent in the December quarter. Profits rose in just four of the 15 industry sectors. However sales rose in ten of the 15 industry sectors in the December quarter with aggregate sales up by 0.9 per cent. Inventories (stocks) held by businesses rose by 0.7 per cent in the December quarter in inflation-adjusted terms.

What does it all mean?

• All the data released today points to a soft economy that does not need any further interest rate hikes in the near term. Inflation remains well under control, consumers and businesses are still refusing to borrow, house prices are recording modest falls and the sustained rise in petrol prices will add further pressure to household budgets – further slowing down spending.
• After largely going sideways for the last month pump prices have resumed their upward trajectory. Petrol prices are now holding at fresh 28-month highs and unfortunately for motorists it is unlikely to get any better over the next couple of weeks.
• The political instability in the Middle East and North Africa has resulted in the Singapore unleaded price surging by over US$8 a barrel in the past week. And given that the Australian dollar was largely unchanged, the entire increase in the global oil price will need to filter through to domestic pump prices.

• Already the terminal gate price (wholesale) has started to react rising by a sizeable three cents a litre in the past week. But a further increase in the wholesale prices will take place over the rest of this week and given the lag effect motorists should see the impact on petrol signboards around Australia early next week. CommSec expects prices to increase by 4-5 cents a litre in the next fortnight, taking the national average price to above $1.40 a litre. At the high point of the discounting cycle petrol will be trading at well above a $1.50 a litre.
• The latest TD inflation gauge suggests that inflation remains well and truly under control at present. In February prices rose by 0.2 per cent. Interestingly the rise in fruit and vegetable prices may be the first indication of the impact from the floods. But strip out volatile elements like fruit and vegetable prices, and petrol and inflation is largely non-existent in Australia. Over the past seven months inflation has been negligible and the annualised core result is holding at a more sedate level of 2.3 per cent. Even the three month annualised rate of inflation is amazingly just 0.3 per cent.

• The latest lending data adds further weight to the view that interest rates should remain on hold in the near term. Overall lending ticked higher but the sub components suggest that activity levels are still shaky. Business credit fell for the seventh straight month, while consumer borrowings were unchanged after sliding in the prior month, and housing credit ticked modestly higher. Even within housing credit, lending to home owners continued to slide, with the annual growth rate at the weakest levels since records began 20 years ago.
• Australian home prices have completed a soft landing. In March 2010, prices were seemingly going gangbusters with annual growth standing at 14.1 per cent. But home prices are now tracking at just a 1.2 per cent annual rate – the slowest growth rate in 23 months and well below the long-term average pace of 8.0 per cent.
• The rate hikes delivered over 2010 have taken the heat out of the housing market, while the wet weather conditions has also added another degree of weakness to the result. Property prices across Australia fell by 1.6 per cent in January however it is important to highlight that sales volumes were less than 50 per cent of a typical months flows.
• It is likely that housing conditions will remain soft in the near term, however the long term fundamentals certainly look more attractive. The Reserve Bank is likely to remain on the interest rate sidelines in the near term, while healthy jobs growth, rising population and sliding rental vacancy rates will support housing activity in the medium term.

What do the figures show?

Petrol prices:

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 1.2 cents a litre to 136.3 cents a litre in the week to February 27. The metropolitan price rose by 1.0 c/l to 136.1 c/l, while the regional average price rose by 1.3 c/l to 136.6 c/l.
• Average petrol prices across states over the past week were: Sydney (up 2.1 cents to 136.6 c/l), Melbourne (up 0.9 cents to 135.2 c/l), Brisbane (up 0.1 cents to 137.7 c/l), Adelaide (up 1.1 cents to 134.7 c/l), Perth (up 0.2 cents to 135.6 c/l), Darwin (up 1.3 cents to 139.0 c/l), Canberra (down 1.7 cents to 133.7 c/l) and Hobart (up 0.3 cents to 141.0 c/l).
• Today, the national average wholesale (terminal gate) stands at a 28-month high of 130.0 cents a litre, up 3 cents a litre over the past week. The wholesale price has been hovering around 126-127 cents a litre since late January 2011.
• Last week, the key Singapore unleaded petrol price rose by US$8.67 (7.9 per cent) to US$118.77 a barrel – a 30 month high. And in Australian dollar terms the Singapore gasoline price rose by $8.47 (7.8 per cent) over the week to $117.20 a barrel.

Inflation gauge:

• The monthly inflation gauge rose by 0.2 per cent in February after lifting by 0.4 per cent in January. The annual rate of inflation rose from 3.4 per cent to 3.6 per cent.
• Excluding volatile items like petrol and fruit & vegetables, the inflation gauge rose by 0.1 per cent after remaining unchanged for the two prior months. The annual rate of core inflation remained steady at 2.3 per cent. The threemonth annualised rate of inflation rose eased from 0.4 per
  cent to 0.3 per cent.
• TD Securities noted that “Contributing most to the overall change in February were price rises for fruit and vegetables, meat and seafood, and automotive fuel. These were offset by a sharp seasonal fall in holiday travel and accommodation, and a fall in rents. The price of fruit and vegetables rose by 5.1 per cent in February, following the 12.1 per cent rise in January. Excluding a grocery chain milk price discount war, the Inflation Gauge rose by 0.3 per cent.”

Private sector credit

• Private sector credit (lending) rose by 0.3 per cent in January after rising by 0.2 per cent in December. Credit growth is up 3.3 per cent on a year ago.
• Housing credit grew by 0.6 per cent with lending to owner-occupiers rising by 0.5 per cent and investor housing up 0.6 per cent. Housing credit is up 7.3 per cent on a year ago – the weakest annual growth in 18 months. Owner occupier housing credit is up 7.0 per cent on a year ago – slowest pace in records going back 20 years. Investor housing lending was up 7.9 per cent on a year ago.
• Personal credit remained flat in January after sliding by 0.4 per cent in December. Personal credit was up 0.8 per cent over the year – still well below the rate of inflation. Business credit fell for the seventh straight month in January, easing by 0.2 per cent. Business credit is down 2.4 per cent on a year ago and has been consistently contracting for the past 19 months.

House price prices

• The RP Data-Rismark Hedonic Australian Home Value Index fell by 1.6 per cent in seasonally adjusted terms in Janaury after a 0.3 per cent rise in the previous month.
• House prices fell by 1.0 per cent in the month while apartments fell by 2.2 per cent.
• Capital city home (dwelling) prices are up 1.2 per cent on a year ago, the slowest growth rate in 23 months. House prices are up 0.9 per cent and apartment prices are up by 2.1 per cent.
• Prices rose in just one of the seven capital cities in January with Darwin prices up 3.3 per cent. Across the other cities prices fell most in Melbourne (down 2.3 per cent), followed by Sydney and Brisbane (down 1.8 per cent), Canberra (down 1.6 per cent), Perth (down 1.5 per cent), Adelaide (down 0.7 per cent). In Hobart, prices rose by 2.1 per cent in December (January data not yet available).
• Home prices are higher than a year ago across all capital cities except Perth (down 4.1 per cent), Brisbane (down 3.5 per cent), and Canberra (down 0.6 per cent). Prices are up most in Darwin (up 4.7 per cent), followed by Melbourne (up 3.8 per cent), Sydney (up 2.6 per cent), and Adelaide (up 2.2 per cent).
• January home prices aren’t available yet for Hobart. In the year to December, home prices in Hobart were up by 2.2 per cent.

Business indicators

• Company gross operating profits fell by 2.8 per cent in the December quarter. Profits now stand 14.7 per cent higher than a year ago.
• Profits rose in four of the 15 industry sectors, led by Financial and insurance service (up 201.6 per cent), Administrative and support services (up 26.9 per cent), and Accommodation & food services (up 8.5 per cent), Mining profits fell by 8.5 per cent following the 1.6 per cent fall in profits in the September quarter.
• Excluding the financial and insurance sector, profits fell by a much larger 4.6 per cent in the quarter.
• Profits fell 10.6 per cent in construction.
• Sales rose in ten of the 15 industry groupings in real (inflation-adjusted) terms in the December quarter. Of the major sectors, sales rose 1.4 per cent in accommodation and food services. Sales fell by 4.1 per cent in Rental, hiring & real estate services, and by 1.4 per cent in Mining.
• In real terms, aggregate sales rose by 0.9 per cent in the December quarter.
• In nominal terms sales fell most in December quarter in both Queensland (down 2.5 per cent). Sales rose most in both Victoria and South Australia (up 1.6 per cent) followed by Western Australia (1.4 per cent).
• Inventories fell in three of the six sectors, with overall stocks up by 0.5 per cent. Mining stocks fell by 3.5 per cent with retail trade up 0.7 per cent. Utilities fell 6.0 per cent.

What is the importance of the economic data?

• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum. National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions.
• 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.
• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
• The RP Data-Rismark Hedonic Australian Home Value Index is based on Australia’s biggest property database covering more than 340,000 sales during 2010. Unlike the ABS Index, which excludes terraces, semidetached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.
• The monthly RP Data-Rismark Hedonic Index compares month-to-month index results. Quarterly results are measured comparing end months rather than averaging each month in the quarter. For example, the first quarter of 2009 index results would compare the end of March index with the end of December index.

What are the implications for interest rates and investors?

• It is clear that rising petrol prices will boost the inflation rate in coming months. However there is not a lot that the Reserve Bank can do about changes at the petrol bowser or the floods in Queensland – a key driver of changes in fruit and vegetable prices. If underlying inflationary pressures remain contained, then the Reserve Bank can stay on the sidelines until well into 2011.
• Businesses are still cutting debt at a faster rate than new loans are being taken out. Overall this is a good reason to remain cautious on the outlook for the economy.
• Home prices are off the Reserve Bank’s worry list – at least for now. A softening in home prices combined with the prospect of interest rates remaining unchanged until mid year is clearly positive for budding home buyers.

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• Capital city home prices rose by 0.2 per cent in seasonally adjusted terms in December after falling by 0.1 per cent in November according to the RP Data-Rismark Hedonic Australian Home Value Index – the largest property database in Australia. Outside capital cities, prices fell by 0.3 per cent in December.
• Capital city home prices are up 4.7 per cent on a year ago – the slowest growth rate in 18 months. Prices in the ‘Rest of State’ markets were up just 0.8 per cent in 2010.
• Prices rose in just two of the seven capital cities in December with Sydney up 1.0 per cent, and Melbourne prices up 0.4 per cent. Prices fell most in Darwin (down 3.3 per cent), followed by Canberra (down 2.5 per cent), and Perth (down 0.9 per cent).
• Prices are higher than a year ago in all capital cities except Perth and Brisbane.

What does it all mean?

• Australian home prices have completed a soft landing. In March 2010, prices were seemingly going gangbusters with annual growth standing at 14.1 per cent. But home prices are now tracking at a 4.7 per cent annual rate – modestly below the long-term average pace of 8.0 per cent.
• Effectively you can strike another item off the Reserve Bank’s worry list. The rate hikes delivered over 2010 have taken the heat out of the housing market ensuring that the normal supply-demand fundamentals are ruling the roost across capital city housing markets.
• While the Reserve Bank has done its bit to restore order to housing markets, having lifted interest rates to ‘normal’ levels, now it is up to state governments to ensure that there is adequate housing stock being supplied to meet latent demand.
• There are now marked differences in home prices across the nation. Melbourne prices are up more than eight per cent over the year while Perth home prices are going backwards by more than two per cent. Certainly it is inappropriate to refer to one single national home market – conditions vary significantly from state to state and region to region.

What do the figures show?

• The RP Data-Rismark Hedonic Australian Home Value Index rose by 0.2 per cent in seasonally adjusted terms in December after falling by 0.1 per cent in the previous month.
• House prices rose by 0.3 per cent in the month while apartments fell by 0.2 per cent.
• Capital city home (dwelling) prices are up 4.7 per cent on a year ago, the slowest growth rate in 18 months. House prices are up 4.7 per cent and apartment prices are up by 4.8 per cent.
• Prices rose in just two of the seven capital cities in December with Sydney prices up 1.0 per cent, and Melbourne up 0.4 per cent. Prices fell most in Darwin (down 3.3 per cent), followed by Canberra (down 2.5 per cent), Perth (down 0.9 per cent) and Brisbane (down 0.1 per cent). Prices were unchanged in Adelaide. In Hobart, prices rose by 0.3 per cent in November (December data not yet available).
• Home prices are higher than a year ago across all capital cities except Perth (down 2.3 per cent) and Brisbane (down 1.0 per cent). Prices are up most in Melbourne (up 8.4 per cent), followed by Sydney (up 6.6 per cent), Darwin (up 4.8 per cent), Adelaide (up 3.6 per cent) and Canberra (up 2.5 per cent).
• December home prices aren’t available yet for Hobart. In the year to November, home prices in Hobart were up by 1.3 per cent.
• Across the capital cities, the rental yield on houses stood at 4.0 per cent in December with the rental yield on apartments at 4.7 per cent.

What is the importance of the economic data?

• The RP Data-Rismark Hedonic Australian Home Value Index is based on Australia’s biggest property database covering more than 340,000 sales during 2010. Unlike the ABS Index, which excludes terraces, semidetached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.
• The monthly RP Data-Rismark Hedonic Index compares month-to-month index results. Quarterly results are measured comparing end months rather than averaging each month in the quarter. For example, the first quarter of 2009 index results would compare the end of March index with the end of December index.

What are the implications for interest rates and investors?

• Home prices are off the Reserve Bank’s worry list – at least for now. But state governments can’t rest easy – they need to ensure that barriers aren’t being put in front of developers and investors and also need to ensure that markets are well supplied by affordable land.
• A softening in home prices combined with the prospect of interest rates remaining unchanged until mid year is clearly positive for budding home buyers. Less doom and gloom stories about interest rates and unsustainable home prices will be beneficial for consumer sentiment more generally, boosting the outlook for retailers.

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The big picture

One of the biggest furphies in 2009 was the claim that Australia had a ‘bubble’ in the housing market. It didn’t and still doesn’t but to some extent you can understand where some commentators were coming from with the claims. In Europe and the US, home prices generally tanked in 2009 but Australian home prices softened, didn’t crash and then began to grow again. The view was that the day of reckoning had merely been delayed.

Where the commentators got it wrong was by glossing over a key fundamental determinant of housing demand – population. In most advanced nations population growth is very modest. In fact in many European economies population is barely growing or is flat. In Japan, the population is actually contracting and in the US, annual population growth is around 1 per cent.

But in Australia, population growth had been steadily lifting since the mid noughties. In June quarter 2004, annual population growth was just 1.2 per cent or an extra 230,000 people. And of that total, migration accounted for an extra 100,000 people.

But those migration levels began to lift markedly over the noughties in response to the PPP policy of Federal Treasury – productivity, participation and population. The PPP strategy is an attempt to soften the blow on the economy from the ageing of the population.

In the year to March 2007, over 200,000 extra migrants came to our shores. And by December 2008 annual migration numbers had lifted to over 300,000 people. Now given that the ‘normal’ number of homes built in Australia each year is around 150,000, a lift in annual migration numbers of around 200,000 would be expected to have a big impact.

And as always appears to be the case, the lift in migration numbers wasn’t universally understood by businesses, government departments and builders. Demand for homes has tended to outpace supply over the past 3-4 years. In late 2007/early 2008 there was double-digit growth in home prices. Demand for homes was temporaily choked off by higher interest rates but at the trough, home prices were down just 2.5 per cent on a year ago.

Home prices returned to double-digit levels in early 2010 in response to lower interest rates but a combination of increased home building (more supply), slower migration and higher interest rates again have caused home prices to soften with annual growth now around 6.5 per cent.

It’s important to note that, despite the ebbs and flows of interest rates and building over time, there is no evidence of a generalised over-supply of homes. In fact in the Sydney market the rental vacancy rate stands at just 1.2 per cent. And affordability? The RP Data/Rismark measure that is well accepted by the Reserve Bank has continued to go sideways over the past six years. Hopefully we will hear a lot less about ‘bubbles’ in 2011.

The week ahead

For those unlucky enough not to be on holidays, there is little economic data to digest in the coming week. In Australia the offerings are confined to population data on Tuesday accompanied on the same day by minutes of the last Reserve Bank Board meeting held a fortnight ago.

In the US there is a bit more to focus on, but all the indicators are congregated on just two days – Wednesday and Thursday.

Turning to Australia first, it is likely that the latest estimates will show a further slowing of population growth. In the March quarter of 2009 Australia’s population was growing at a 2.2 per cent annual rate – the fastest rate in 40 years with both migration and the birth rate boosting the result. But in the latest result for the March quarter of 2010, population growth has slowed to 1.84 per cent – still above the longer-term average but clearly a softer result.

The slowdown in population growth is due entirely to a reduction in migration. When the job market weakened over 2009, the Federal Government thought it would be appropriate to cut back migrant numbers. However the softer job market was very much a temporary situation. Now businesses are crying out for staff but the government has been slow to respond by allowing migration levels to rise. Clearly this is a situation that must be addressed over the next few months otherwise it risks a marked tightening in the job market, forcing up wages, prices and interest rates.

Hopefully the release of the June quarter population figures on Tuesday will revive the debate on migration and population growth rates. It is very much in Australia’s short and longer-term interest to have a well balanced labour market.

The other event of note in the coming week is the minutes of the December 7 Reserve Bank Board meeting. As widely expected, the Reserve Bank left rates on hold at that meeting. This was well flagged by the Reserve Bank Governor and he also provided guidance that the next move in rates wouldn’t occur any time soon. Clearly investors will be looking for further guidance in the Board minutes. Investors will also be seeking to identify the ‘hot button’ issues that bear watching. That is, those issues that are in the middle of the Reserve Bank’s radar screen and therefore may be triggers for the next move in rates.

In the US, the main focus is on the housing market. On Wednesday the FHFA home price index is released with data on existing home sales released the same day. Economists expect that home sales rose by more than 5 per cent in October to a 4.7 million annual rate. As always the amount of stock on hand and movement in home prices will also be watched closely.

And on Thursday, economists similarly expect that new home sales recorded a solid lift of almost 7 per cent. Again stock levels and prices will also be in focus. Overall there is evidence that the housing market has found a floor. But with unemployment still high and a significant amount of stock on the market, no one is expecting building activity to lift markedly any time soon.

Also in focus over the week is the final estimate of economic growth for the September quarter. Currently the economy is tracking at a 2.5 per cent annual pace but some economists believe that growth could accelerate to 3.5-4.0 per cent in 2011 given the amount of stimulus being applied to the economy.

The economic growth (GDP) data is due on Wednesday. And on Thursday, orders of durable goods, personal income & spending, weekly jobless claim and consumer sentiment data are all scheduled. Economists tip another solid result for spending, up another 0.4 per cent in November after a similar gain in October. But the measure of business investment – durable goods – may prove soft with most tipping a fall of just under 1 per cent in November.

Sharemarket

While there is still just over a fortnight until the end of the year, it is already clear that Autos & components has been the strongest sector this year (up 62 per cent) but it is dominated by one stock – Fleetwood Corp. Next best has been Pharmaceuticals and biotech’s (up 10.5 per cent), followed by Materials (up 10.1 per cent). However only six of the 21 sub sectors actually recorded gains over 2010. The weakest performing sector was Consumer durables and apparel (down 19.2 per cent) followed by Retailing and Telecom (both down 18.8 per cent). The insurance sector also took a hit losing 17.3 per cent.
Interest rates, currencies & commodities.

There is still plenty of data to be released over the next two months before the Reserve Bank next meets to decide interest rate settings. Financial market pricing suggests a rate hike in February is pretty much a non event. In fact the pricing for a 25 basis point rate hike is just 7 per cent – which is entirely appropriate. While parts of the economy like mining will do well in 2011, exporters and tourism will continue to do it tough. And then there is the added uncertainty in activity levels given the inherent conservatism being shown by consumers and weakness in business trading conditions. CommSec expects the next rate hike to take place in April with the cash rate lifting to around 5.25-5.50 per cent end of 2011.

The post Investor Signposts: Week Beginning December 19 2010 appeared first on AdviserVoice.