• The latest housing data showed some consolidation in new lending in March. However the key is the new home building market and on that front the increase in construction loans is the jewel in the crown. Loans to build new homes have risen for the last eight straight months – the longest winning streak in records going back 25 years, and are up over 18 per cent on a year ago. An ongoing lift in construction finance is beneficial for the broader economy given that it is a key forward-looking indicator of home building.
• In February the value of loans committed to owner-occupiers to fund home construction hit record highs and while the value of loans by all borrowers (including investors) eased slightly in March, it was a healthy $2.4 billion, up over 20 per cent on a year ago. In short, more homes being built over the medium term will provide additional support to overall economic growth while also increasing housing supply, and keeping a lid on aggressive house price growth.
• And with interest rates low, population rising and housing affordability still attractive, housing is best placed to take over the leadership role from mining as the nation’s key economic driver. The ongoing lift in housing approvals, rising new home sales and higher house prices will support confidence and provide policymakers with a degree of encouragement.
• The Reserve Bank has discussed the need for interest rate stability and that should ensure that interest in property remains robust. The housing sector looks set to move ahead in leaps and bounds over the coming year. Overall the economic recovery will continue to remain patchy and as such we expect that the Reserve Bank will remain on the interest rate sidelines in the near-term.

What do the figures show?

Housing Finance:

• The number of new owner-occupier housing loans was down by 0.9 per cent in March to be up 7.3 per cent on a year ago. And the number of loans (52,013) was 17.2 per cent below the record high of 62,847 in July 2006. Excluding the refinancing of dwellings, loans were down by 0.9 per cent in March.
• The number of loans by owner-occupiers for the construction of homes rose by 2.1 per cent in March – the 12^th rise in 14 months. The value of construction loans lifted by 3.5 per cent in March after a 0.2 per cent fall in February.
• The number of loans by owner-occupiers to buy newly-erected dwellings rose by 1.6 per cent and the value of loans fell by 0.4 per cent.
• The number of loans by owner-occupiers for the purchase of established dwellings excluding refinancing fell by 1.8 per cent and the value of loans fell by 2.2 per cent in March.
• The number of refinancing transactions by owner-occupiers fell by 1.0 per cent while the value of transactions also fell by 1.3 per cent.
• The value of new housing commitments (owner occupier and investment) fell by 1.1 per cent in March with owner-occupier loans down by 1.2 per cent while investment loans fell by 0.8 per cent.
• The value of loans by owner-occupiers and investors to build new homes eased from record highs to $2.40 billion. Construction lending is up 20.7 per cent on a year ago.
• The proportion of first home buyers in the market rose from 12.5 per cent to 12.6 per cent in March, lifting marginally from the record low of 12.3 per cent in November although well below the long-term average of 20.0 per cent. Fixed rate loans fell from 15.1 per cent to 14.9 per cent of all loans in March. And the average home loan across Australia stood at $319,300 in March, up 6.0 per cent on a year ago.
• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
• Owner occupier home loans are healthy despite the latest pullback, while investors remain keen about putting their money to work in the housing market. In fact investor finance is up almost 28 per cent on a year ago. Certainly there are plenty of grounds for optimism with rising population, low interest rates, government grants for new construction and tight housing markets.
• The good news is that investors aren’t just buying established dwellings and driving up home prices, but money is being ploughed into new house and apartment developments and adding to housing supply and economic activity more generally. It is clear that home construction will play a key role in driving the broader economy in 2014, taking over from the mining sector. And arguably more industries and regions will feel the benefit of increased home building rather than mining construction.
• The Reserve Bank is comfortably on the interest rate sidelines. The patchiness of the domestic economy ensures rates remain low for an extended period. CommSec does not expect the first rate hike to take place till the latter part of 2014, when a lift in activity levels and stronger employment is firmly entrenched.

What is the importance of the economic data?

• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.

What are the implications for interest rates and investors?

• Owner occupier home loans are healthy despite the latest pullback, while investors remain keen about putting their money to work in the housing market. In fact investor finance is up almost 28 per cent on a year ago. Certainly there are plenty of grounds for optimism with rising population, low interest rates, government grants for new construction and tight housing markets.
• The good news is that investors aren’t just buying established dwellings and driving up home prices, but money is being ploughed into new house and apartment developments and adding to housing supply and economic activity more generally. It is clear that home construction will play a key role in driving the broader economy in 2014, taking over from the mining sector. And arguably more industries and regions will feel the benefit of increased home building rather than mining construction.
• The Reserve Bank is comfortably on the interest rate sidelines. The patchiness of the domestic economy ensures rates remain low for an extended period. CommSec does not expect the first rate hike to take place till the latter part of 2014, when a lift in activity levels and stronger employment is firmly entrenched.

Western Australia clings to top spot from Northern Territory & NSW.

• Western Australia remains Australia’s best performing economy, while the Northern Territory has consolidated its position ahead of the big improver in the latest quarter – NSW.
• Western Australia continues to lead the way on retail trade and is strongest on housing finance. It is second strongest on economic growth, construction work done and population growth and finished third on business investment and dwelling starts. Western Australia is weakest on unemployment (seventh).
• The Northern Territory remains the second strongest economy, and only just behind Western Australia. The main strengths are economic growth, business investment, unemployment and construction work. The Northern Territory is now second strongest on retail trade. But it also is in last place on housing finance.
  • New South Wales has lifted from equal fifth spot to third, courtesy of improvements in economic growth, business investment, population growth and dwelling starts – on the latter two indicators it leads other states and territories.
  • Queensland is now the fourth strongest economy, but largely because the ACT has slipped down the leader-board rather Queensland improving its position on some of the key indicators. Queensland is second strongest on business investment but seventh on population growth.
  • Victoria remains the fifth strongest economy with little change in its relative position against other states and territories on any of the key indicators. Victoria is second strongest on housing finance and third strongest on population growth.
  • The ACT economy has slipped from the equal third-best performing economy to sixth. While the Territory is second strongest on dwelling starts and unemployment, it is the weakest on business investment and construction work and its relative position on population growth and construction work have weakened markedly.
  • There remains a sizeable gap in the rankings to South Australia and then another gap to Tasmania. South Australia generally is sixth or seventh on most of the key indicators although it is middle-ranked on construction work, assisted by a number of public sector projects.
  • Tasmania remains locked at the bottom of the Australian economic performance table. Tasmania lags other economies on five of the eight the indicators although it has improved its relative position on unemployment and business investment.

How was performance judged?

• Each of the states and territory economies were assessed on eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.
• The aim was to find how each economy was performing compared with “normal”. And just like the Reserve Bank does with interest rates, we used decade-averages to judge the “normal” state of affairs. For each economy, the latest level of the indicator – such as retail spending or economic growth – was compared with the decade average.
• While we also looked at the current pace of growth to look at economic momentum, it may yield perverse results to judge performance. For instance retail spending may be up sharply on a year ago but from depressed levels. Overall spending may still be well below “normal”. And clearly some states such as Queensland and Western Australia consistently have faster economic growth rates due to historically faster population growth. So the best way to assess economic performance is to look at each indicator in relation to what would be considered ‘normal’ for that state or territory.
• For instance, the trend jobless rate in the ACT of 3.4 per cent is lower than all economies. But this jobless rate is broadly in line with its ‘normal’ or decade-average rate of 3.4 per cent, whereas the jobless rate in Northern Territory is just over 12 per cent below its decade-average level.
• Trend measures of the economic indicators were used to assess performance rather than more volatile seasonally adjusted or original estimates.

Economic growth

• Ideally gross state product (GSP) would be used to assess broad economic growth. But the data isn’t available quarterly. Rather state final demand (household and business spending) is added to exports less imports to act as a proxy for GSP. Exclusion of the trade sector would provide an incorrect assessment of growth for economies such as Western Australia and Queensland.
• The Northern Territory continues to lead the rankings on economic activity. Activity in the ‘top end’ is almost 52 per cent above its ‘normal’ or decade-average level of output.
• Next strongest is Western Australia, with output around 30 per cent higher than the decade average level of output. Then follows Queensland (up 18.6 per cent) from the ACT (up 15.2 per cent).
• At the other end of the scale, economic activity in Tasmania in the December quarter was just 5.1 per cent above its decade average while South Australian activity was up 10.0 per cent on its “normal” or average output over the past decade.
• There would be no change in the rankings if “final demand” was used instead, providing added confidence about the results achieved.
• The Northern Territory also maintains the fastest annual economic growth rate in the nation, up by 11.5 per cent on a year ago, ahead of Queensland with 4.1 per cent and NSW (3.0 per cent).
• The weakest trend annual economic growth rate was recorded in Victoria (1.7 per cent) followed by Western Australia (1.8 per cent) and Tasmania and ACT (both up 2.0 per cent on a year ago).

Retail trade

• The measure used was real (inflation-adjusted) retail trade in trend terms with December quarter data the latest available.
• Western Australia retains top spot on the retail rankings with spending in the December quarter just over 20 per cent above decade average levels. Solid population growth, solid turnover of existing homes and higher wages underpins the relative strength in consumer spending.
• Northern Territory was next strongest, supported by lower-than-normal unemployment, with spending 18.0 per cent above decade-average levels.
• Queensland was next strongest, with spending 13.7 per cent above decade averages, followed by Victoria (up 11.3 per cent).
• Tasmania still maintains the weakest result on retail spending, up just 4.1 per cent on the decade average (but up from 2.6 per cent in the September quarter), and below South Australia with growth of 7.5 per cent.
• If monthly retail trade was assessed instead (February data available), there would be no change in the relative performance rankings, which is quite remarkable.
• In terms of the monthly retail trade series, encouragingly Tasmania is 9.2 per cent higher than a year ago, ahead of NSW with 7.7 per cent growth, Victoria with 6.8 per cent growth, Northern Territory with 5.8 per cent growth, South Australia, up 4.9 per cent. At the other end of the scale, ACT spending was up just 2.4 per cent on a year ago with Western Australian spending up 2.6 per cent, suggesting the two economies may slip further in next quarter’s economic performance rankings.

Equipment investment

• Northern Territory now leads other states and territories when it comes to equipment investment, moving up from third-strongest to the top spot. Spending in the December quarter was over 34 per cent above “normal” – or decade-average levels. Mining investment still remained relatively strong across the resource states. Equipment investment in Queensland is now 17.5 per cent above decade-average levels followed by Western Australia (up 16.1 per cent) and NSW (up 0.7 per cent).
• By contrast, new equipment spending in the ACT was 20.8 per cent below its longer-term average in the December quarter with Tasmania down 8 per cent.
• On a shorter-run analysis, equipment investment in the December quarter was lower than a year ago in all of the state and territory economies except Northern Territory (up 38.1 per cent). Equipment investment is down most on a year ago in the ACT (down 40.7 per cent), followed by Western Australia (down 29.3 per cent). By contrast new equipment investment in South Australia was down by just 1.5 per cent and down by 2.9 per cent in both Victoria and Tasmania.

Unemployment

• The Northern Territory and the ACT have arguably the strongest job markets in the nation. Northern Territory has the second lowest trend unemployment rate in the nation at 3.8 per cent, but this jobless rate is actually over 12 per cent below its “normal” or decade average level of 4.3 per cent.
• Similarly in the ACT, trend unemployment is the lowest in the nation at 3.4 per cent and this rate is just 0.3 per cent below its “normal” or decade average rate level.
• In other states, the latest unemployment rates are all above their decade-average levels. In NSW, unemployment stands at 5.5 per cent, up 5 per cent on its normal” or decade-average level of 5.2 per cent.
• At the other end of the scale, South Australia’s 6.9 per cent jobless rate is up almost 28 per cent on the decade average level of 5.4 per cent. Interestingly next weakest is Western Australia where its 5.3 per cent jobless rate is just over 27 per cent above the decade-average level. While Tasmania’s jobless rate stands at 7.4 per cent, this is just under 24 per cent above its decade-average level.

Construction work

• The measure used for analysis was the total amount of residential, commercial and engineering work actually completed in trend terms in the December quarter.
• In all states/territories except Tasmania construction work is higher than decade averages. And there remains a large gap between the strongest states (the resource states) and weakest states (Tasmania).
• In Tasmania, overall new construction work completed is 12.2 per cent below its decade average. By contrast construction work done in Northern Territory was over 112 per cent above its decade average followed by Western Australia (up 60.9 per cent) and Queensland (up 49.2 per cent).
• Next weakest to Tasmania is the ACT where construction work is 1.4 per cent above decade averages, followed by Victoria (up 9.9 per cent on the decade average).
• In terms of annual growth rates, Northern Territory construction work done in the December quarter was up 34.1 per cent on a year ago, followed by Queensland (up 8.3 per cent) and South Australia (up 5.9 per cent). But at the other end of the scale, ACT construction work was 18.2 per cent down on a year ago.

Population growth

• To assess population performance we looked at the current annual growth rate and compared it with each economy’s decade-average growth pace. And the good news is that population growth is above ‘normal’ in five states or territories although growth has lifted in only four jurisdictions over the past quarter.
• Western Australia is the clear leader in population growth with an annual growth rate of 3.10 per cent. But while NSW has a lower growth rate at 1.47 per cent, this is 31.2 per cent above the decade average. Western Australia’s population growth is 21.4 per cent above the decade average, and below that of NSW.
• Victoria is third strongest in annual population growth as well as the differential with the decade average rate. Victoria’s population is up 1.95 per cent higher than a year ago and this growth rate is 19.2 per cent higher than the “normal” or decade-average level.
• At the other end of the leader-board is Tasmania where the annual population growth of 0.24 per cent was 67 per cent below the decade average rate of 0.71 per cent but growth did lift in the September quarter from 0.21 per cent.

Housing finance

• The measure used was the trend number of housing finance commitments and this was compared with the decade-average for each respective state and territory.
• Housing finance is not just a lead indicator for real estate activity and housing construction but also is a useful indicator of activity in the financial sector. It would be useful to compare figures on commercial, personal and lease finance, but unfortunately trend data is not available for states and territories.
• In four of the states and territories – the Victoria, Western Australia, NSW and the ACT – trend housing finance commitments are above decade averages. Even more encouragingly commitments in February were above year-ago levels in all states and territories, except for the Northern Territory.
• Western Australia climbed into top spot for housing finance, with the number of commitments 10 per cent above the long-term average. Next strongest was Victoria, up 6.1 per cent on the decade-average.
• NSW remains in third spot on housing finance, up 5.6 per cent on the decade average followed by the ACT (up 1.9 per cent).
• Northern Territory remains the weakest economy for housing finance with trend commitments 21.6 per cent lower than its decade average. Next weakest was South Australia with trend commitments down 13.3 per cent on the decade average, but encouragingly commitments were up 8.1 per cent on a year ago.

Dwelling starts

• The measure used was the trend number of dwelling commencements (starts) with the comparison made to the decade-average level of starts. Starts are driven in part by population growth and housing finance and can affect retail trade, unemployment and overall economic growth. However any over-building or under-building in previous years can affect the current level of starts.
• The outlook for housing construction continues to strengthen, underpinned by low interest rates and strong demand by investors. Dwelling starts are above decade averages in six of the states and territories and starts in five states and territories are above levels of a year ago.
• NSW is now the strongest in the nation for new housing construction, with starts just over 39 per cent above decade averages. In addition in the December quarter the number of dwellings started was 18.1 per cent higher than a year earlier.
• In second spot was the ACT, with starts almost 29 per cent above decade averages followed by Western Australia with starts up 23.4 per cent on decade averages and Northern Territory, up almost 20 per cent.
• At the other end of the scale, Tasmanian dwelling starts were 35 per cent below decade averages, while starts in the December quarter were 3.5 per cent down on a year earlier. Next weakest was South Australia (down 2.2 per cent), Queensland (up 0.8 per cent) and Victoria (up 1.6 per cent).
• However encouragingly Queensland starts were 23.7 per cent higher than a year ago with South Australian starts up 21.5 per cent and Western Australian starts up 19.2 per cent.

Other indicators

•  Real wages were positive in just three of the eight state and territory economies in the December quarter compared with seven economies in the September quarter. Strongest growth was in South Australia at 1.2 percentage points, followed by the ACT and Western Australia (0.1 percentage points).
• Even using “underlying” inflation than “headline” inflation, real wages either flat or slightly negative in most economies, putting pressure on retail spending.
• But for home owners and buyers, home prices are higher than a year ago in all capital cities, boosting wealth levels. Strongest growth in home prices was in Sydney (up 15.6 per cent) followed by Melbourne (up 11.6 per cent).
• At the other end of the scale, home prices in Hobart are up just 0.9 per cent on a year ago while Canberra prices are up just 1.9 per cent.

Implications and outlook

• The mining construction boom is over, replaced by the home construction boom. As a result, winners and losers will change across Australia, not just industries but also state and territory economies.
• Western Australia continues to lead the rankings of best-performing economies but in the latest quarter there was little to separate it from the Northern Territory economy. Interestingly, while mining is waning as a driver of the Western Australian economy, population growth is not only the highest in the nation but above decade-average levels, providing the economy with momentum in the housing sector.
  • Momentum in the Northern Territory economy continues to be largely propelled by commercial and engineering construction but is being checked by weaker growth in the housing sector.
  • In contrast, momentum in the NSW is building, and underpinned by stronger activity in home construction although the upturn for the economy is still in its relative infancy.
  • Low unemployment is a clear strength for the ACT economy but weak confidence is constraining retail and business spending and future economic performance.
  • Home construction is still the fundamental plank of support for the Victorian economy although rising unemployment clouds the outlook for the economy.
  • The outlook remains challenging for the Tasmanian and South Australian economies. The hope is that property investors will soon switch attention away from NSW and Victoria to more affordable housing sectors.

• There is yet more evidence that the housing market is taking over as the key economic driver of the economy. The value of home loans lifted to record highs in December as investors continued to shift their affections from bank deposits to property ownership. In addition the value of all Aussie homes lifted by 8.6 per cent in 2013 boosting wealth and supporting spending.
• The latest housing data showed a consolidation in housing loans in January. However the key is the new home building market and on that front the increase in construction loans is the jewel in the crown. Loans to build new homes have risen for 11 out of the past 13 months and are up almost 15 per cent on a year ago. An ongoing lift in construction finance is beneficial for the broader economy given that it is a key forward looking indicator. More homes being built over the medium term will provide additional support to overall economic growth while also increasing housing supply, and keeping a lid on aggressive house price growth.
• And with interest rates low, population rising and housing affordability still attractive, housing is best placed to take over the leadership role from mining as the nation’s key economic driver. The ongoing lift in housing approvals, rising new home sales and higher house prices will support confidence and provide policymakers with a degree of encouragement.
• Businesses are certainly feeling a lot chipper about life. Not only are business confidence levels healthy but actual business conditions have gone from strength to strength and are now holding at the best levels in almost three years. It is clear that the healing process is underway and Aussie businesses are noticing much more favourable conditions.
• One of the key reasons that businesses are feeling more confident is that order books are starting to fill up. Forward orders lifted in January to the best levels in four years. And while profitability eased, it was from the fastest pace in 33 months. In addition the lift in retail prices suggests that retailers are finally able to pass on higher costs to consumers – a result that should improve margins in coming months. The Commonwealth Bank Business Sales Index confirmed similar trends in recent months with solid growth in broad-based economy wide spending. No doubt the low interest rate environment, increase in housing activity and lift in retail spending are all contributing to the improvement in business activity and overall profitability.
• The Reserve Bank would be encouraged by the way the economic recovery is panning out. The lower Australian dollar is helping with the structural rebalancing across the domestic economy, while consumers and businesses are starting to feel more confident to spend. Importantly, if the lift in business profitability and conditions is sustained in coming months, it should translate to a lift in employment. CommSec expects employment growth to lift towards mid-2014. Interest rates look likely to remain unchanged over the medium term.

What do the figures show?

Housing Finance:

• The number of new owner-occupier housing loans fell by 1.9 per cent in December, just the second fall in the past 11 months. Housing finance commitments are up 14.1 per cent on a year ago.
• Excluding the refinancing of dwellings, loans were down 1 per cent in January.
• The number of loans for the construction of homes rose by 0.4 per cent in December – the 11^th rise in 13 months. The value of construction loans fell by 0.2 per cent in December.
• The number of loans to buy newly-erected dwellings fell by 1.9 per cent and the value of loans fell by 3.8 per cent.
• The number of loans for the purchase of established dwellings excluding refinancing fell by 1.2 per cent and the value of loans fell by 0.8 per cent in December.
• The number of refinancing transactions fell by 3.7 per cent while the value of transactions fell by 2.9 per cent.
• The value of new housing commitments (owner occupier and investment) rose by 0.2 per cent in December after a 2.2 per cent increase in November. Owner-occupier loans fell by 1.5 per cent while investment loans rose by 2.9 per cent.
• The proportion of first home buyers in the market rose from a record low 12.3 per cent to 12.7 per cent in December, but remains well below the long-term average of 20.0 per cent. Fixed rate loans fell from 17.4 per cent to 16.8 per cent of all loans in December. And the average home loan across Australia stood at $322,100 in December, up 4.5 per cent on a year ago.

National Australia Bank Business Survey:

• The NAB business confidence index rose from +6.3 points to +7.8 points in January. The business conditions index improved from +3.4 points to a 34-month high of +4.4 points.
• The index of trading conditions weakened from +11.7 points to +7.5 points; employment weakened from minus 4.1 points to +0.8 points; profitability weakened from +4.8 points to +3.3 points; and forward orders improved from minus 2.0 points to +5.7 points – a four year high.
• Inflationary pressures increased in January with labour and purchase costs rising at a faster pace than prices. The monthly reading of labour costs rose at a 1.2 per cent quarterly rate in January after a 0.6 per cent rise in December. And purchase costs rose at a 1.2 per cent quarterly rate in January, after a 0.8 per cent rise in December. Prices rose by 0.6 per cent after a 0.3 per cent rise in December. Retail prices rose at a 0.5 per cent quarterly rate in January, up from 0.2 per cent in December.
• Capacity utilisation lifted from 80.2 per cent in December to 80.6 per cent in January, but below the long-term average of 81.2 per cent.
• The proportion of firms reporting that they did not require credit fell from around 72 per cent in December to around 70 per cent in January.

ABS Residential Property Prices

• The average value (mean) of all residential homes rose by 8.6 per cent over 2013 to $539,400. While the number of homes rose by 1.5 per cent to 9.3 million.

What is the importance of the economic data?

• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
• The latest business survey is certainly encouraging. Confidence and conditions are both lifting, while the order book and profitability looks a lot healthier than a few months ago. If the improvements are sustained it should translate through to healthy growth in employment over the medium term.
• Investors remain keen about putting their money to work in the housing market. Certainly there are plenty of grounds for optimism with rising population, low interest rates, government grants for new construction and tight housing markets.
• The good news is that investors aren’t just buying established dwellings and driving up home prices, but money is being ploughed into new house and apartment developments and adding to housing supply and economic activity more generally. It is clear that home construction will play a key role in driving the broader economy in 2014, taking over from the mining sector. And arguably more industries and regions will feel the benefit of increased home building rather than mining construction.
• But while investors are keen to pick up attractive income-producing assets, first home buyers are still reticent to wade in. Despite some of the most attractive buying conditions in years, the proportion of first home buyer loans has lifted from the lowest level on record. There is anecdotal evidence that some first home buyers are being squeezed out by investors given tight housing supply. But the lower numbers of first home buyers also reflects the preference for young people to rent, rather than buy.

What are the implications for interest rates and investors?

• The latest business survey is certainly encouraging. Confidence and conditions are both lifting, while the order book and profitability looks a lot healthier than a few months ago. If the improvements are sustained it should translate through to healthy growth in employment over the medium term.
• Investors remain keen about putting their money to work in the housing market. Certainly there are plenty of grounds for optimism with rising population, low interest rates, government grants for new construction and tight housing markets.
• The good news is that investors aren’t just buying established dwellings and driving up home prices, but money is being ploughed into new house and apartment developments and adding to housing supply and economic activity more generally. It is clear that home construction will play a key role in driving the broader economy in 2014, taking over from the mining sector. And arguably more industries and regions will feel the benefit of increased home building rather than mining construction.
• But while investors are keen to pick up attractive income-producing assets, first home buyers are still reticent to wade in. Despite some of the most attractive buying conditions in years, the proportion of first home buyer loans has lifted from the lowest level on record. There is anecdotal evidence that some first home buyers are being squeezed out by investors given tight housing supply. But the lower numbers of first home buyers also reflects the preference for young people to rent, rather than buy.

What does it all mean?

• Investors remain keen about putting their money to work in the housing market. Certainly there are plenty of grounds for optimism with rising population, low interest rates, government grants for new construction and tight housing markets.
• The good news is that investors aren’t just buying established dwellings and driving up home prices, but money is being ploughed into new house and apartment developments and adding to housing supply and economic activity more generally. It is clear that home construction will play a key role in driving the broader economy in 2014, taking over from the mining sector. And arguably more industries and regions will feel the benefit of increased home building rather than mining construction.
• Some believe that first home buyers are being pushed out of the housing market. Rather many young Australians are banking on investors funding new housing developments, given that preferences have shifted to renting rather than buying in recent years. Home supply is rising and that will keep growth in rents under control.
• The healing process is underway, but Aussie businesses are still wary about the future. Both business conditions and business conditions barely budged in November although there were encouraging signs in terms of general trading conditions and profitability. No doubt many businesses want to see sustained improvements in consumer spending and foreign demand before getting too excited about the future.

What do the figures show?

Housing Finance:

• The number of new owner-occupier housing loans rose by 1.0 per cent in October, the ninth increase in the past 10 months. Housing finance commitments are up 13.3 per cent on a year ago.
• Excluding the refinancing of dwellings, loans were up by 2.0 per cent in October.
• The number of loans for the construction of homes rose by 1.0 per cent in October – the 10^th rise in 11 months. The value of construction loans rose by 0.5 per cent in October.
• The number of loans to buy newly-erected dwellings rose by 3.6 per cent and the value of loans rose by 0.3 per cent.
• The number of loans for the purchase of established dwellings excluding refinancing rose by 6.6 per cent and the value of loans rose by 2.4 per cent.
• The number of refinancing transactions fell by 1.0 per cent from record highs while the value of transactions rose by 1.0 per cent.
• The value of new housing commitments (owner occupier and investment) rose by 4.1 per cent in October after a 6.3 per cent increase in September. Owner-occupier loans rose by 1.7 per cent while investment loans rose by 8.2 per cent.
• The value of home loan commitments made, but not advanced, stood at a record $25.2 billion in October.
• The proportion of first home buyers in the market rose from a record low of 12.5 per cent in September to 12.6 per cent in October but remains well below the long-term average of 20.0 per cent. Fixed rate loans were steady at 16.6 per cent of all loans in October. And the average home loan across Australia stood at $311,100 in October, up 4.0 per cent on a year ago.

National Australia Bank Business Survey:

• The NAB business confidence index eased from +6.1 to +5.3 in November. The business conditions index improved from minus 3.6 points to a 15-month high of minus 2.7 points.
• The index of trading conditions improved from minus 1.7 points to a 15-month high of +2.1 points; employment weakened from minus 3.4 points to minus 8.2 points; profitabilityimproved from minus 5.8 points to a 10-month high of minus 3.2 points; and forward orders weakened from minus 1.7 points to minus 1.8 points.
• Inflationary pressures increased in November with labour and purchase costs rising at a faster pace than prices. The monthly reading of labour costs rose at a 0.6 per cent quarterly rate in November after a 0.6 per cent rise in October. And purchase costs rose at a 0.7 per cent quarterly rate in November, down from 0.8 per cent in October. Prices rose by 0.2 per cent after a 0.3 per cent rise in October. Retail prices rose at a 0.4 per cent quarterly rate in November, unchanged from October.
• Capacity utilisation lifted from a nine-month low of 79.3 per cent in October to 79.7 per cent in November, but below the long-term average of 81.2 per cent.
• The proportion of firms reporting that they did not require credit fell from around 66 per cent in October to around 48 per cent in November.
• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
• Investors and owner occupiers are actively taking out new loans, and encouragingly the construction sector is a source of interest. The good news is that new home construction has significant multiplier effects across the economy, meaning that the Reserve Bank can stay on the interest rate sidelines.
• The latest business survey has few implications for either interest rates or investors. Confidence is OK but business conditions are still soft. However the lift in labour and purchase costs deserves watching.
• There is a mountain of undrawn home loans, ensuring that new and existing housing markets will remain healthy for some time.

What is the importance of the economic data?

• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.

What are the implications for interest rates and investors?

• Investors and owner occupiers are actively taking out new loans, and encouragingly the construction sector is a source of interest. The good news is that new home construction has significant multiplier effects across the economy, meaning that the Reserve Bank can stay on the interest rate sidelines.
• The latest business survey has few implications for either interest rates or investors. Confidence is OK but business conditions are still soft. However the lift in labour and purchase costs deserves watching.
• There is a mountain of undrawn home loans, ensuring that new and existing housing markets will remain healthy for some time.

Western Australia still on top; Queensland and NSW now equal fourth

• Western Australia remains Australia’s best performing economy, while ACT has widened the gap to Northern Territory from Queensland and NSW, now equal fourth.
• Western Australia leads the way on retail trade. It is second strongest on economic growth, business investment, construction work done, housing finance and population growth; and finished third on unemployment and fourth on dwelling starts.
• The ACT economy remains the second strongest economy with the main strengths being dwelling starts, housing finance and population growth. The ACT is now third strongest on business investment and fourth on economic growth.
• The Northern Territory finished first for economic growth and construction work done. But it also finished seventh on business investment, unemployment and housing finance, signalling a loss of momentum.
• There is still little separating Queensland, NSW, and Victoria in terms of relative economic performance. Queensland is strongest on business investment and third strongest on economic growth, retail trade and construction work. NSW is strongest on unemployment, and third strongest on population growth. Victoria is second strongest on unemployment and third strongest on housing finance. But at the other end of the scale, NSW is seventh on economic growth while Victoria is seventh on construction work.
• There is then a gap in the rankings to South Australia. While the state is middle ranking on construction work, and fifth on housing finance it is sixth or seventh on every other indicator.
• Tasmania remains locked at the bottom of the Australian economic performance table. Tasmania lags all other economies on all of the eight indicators. The economy is still growing – economic growth and retail spending are growing faster than ‘normal’ or decade-average levels. But stagnant population growth is reducing activity in home building and home purchase, as well as commercial and engineering construction and business investment.

How was performance judged?

• Each of the states and territory economies were assessed on eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.
• The aim was to find how each economy was performing compared with “normal”. And just like the Reserve Bank does with interest rates, we used decade-averages to judge the “normal” state of affairs. For each economy, the latest level of the indicator – such as retail spending or economic growth – was compared with the decade average.
• While we also looked at the current pace of growth to look at economic momentum, it may yield perverse results to judge performance. For instance retail spending may be up sharply on a year ago but from depressed levels. Overall spending may still be well below “normal”. And clearly some states such as Queensland and Western Australia consistently have faster economic growth rates due to historically faster population growth. So the best way to assess economic performance is to look at each indicator in relation to what would be considered ‘normal’ for that state or territory.
• For instance, the trend jobless rate in the ACT of 4.1 per cent is lower than all economies. But compared with its ‘normal’ or decade-average rate of 3.4 per cent, the jobless rate is actually higher in percentage terms than four of the state and territory economies, thus restraining activity in the retail sector. Trend measures of the economic indicators were used to assess performance rather than more volatile seasonally adjusted or original estimates.

Economic growth

• Ideally gross state product (GSP) would be used to assess broad economic growth. But the data isn’t available quarterly. Rather state final demand (household and business spending) is added to exports less imports to act as a proxy for GSP. Exclusion of the trade sector would provide an incorrect assessment of growth for economies such as Western Australia and Queensland.
• The Northern Territory continues to lead the rankings on economic activity. Activity in the ‘top end’ is 42 per cent above its ‘normal’ or decade-average level of output.

• Next strongest is Western Australia, with output around 29 per cent higher than the decade average level of output. Then follows Queensland (up 19.3 per cent) from the ACT (up 17.1 per cent).
• At the other end of the scale, economic activity in Tasmania in the June quarter was just 3.1 per cent above its decade average while NSW activity was up 10.6 per cent on its “normal” or average output over the past decade.
• There would be little change in the rankings if “final demand” was used instead. But NSW would move from seventh to fifth spot.
• The Northern Territory also maintains the fastest annual economic growth rate in the nation, up by 7.0 per cent on a year ago, ahead of Queensland with 4.3 per cent and Western Australia (2.8 per cent).
• The weakest trend economic growth rate was recorded in Tasmania (-1.8 per cent) followed by South Australia (0.2 per cent) and ACT (0.3 per cent).

Retail trade

• The measure used was real (inflation-adjusted) retail trade in trend terms with June quarter data the latest available. If monthly retail trade was assessed instead (August data available), ACT would move marginally ahead of NSW in the rankings. This result provides added confidence about the overall results on consumer spending.
• Western Australia retains top spot on the retail rankings with spending in the June quarter, 23.9 per cent above decade average levels. Solid population growth, a lift in home purchases and firm wage growth underpin the relative strength in consumer spending.
• Northern Territory was next strongest, supported by a lift in dwelling construction, with spending 16.6 per cent above decade-average levels
• Queensland was next strongest, with spending 15.4 per cent above decade averages, followed by Victoria (up 11.1 per cent)
• Tasmania has the weakest result on retail spending, up just 2.0 per cent on the decade average (down from 2.7 per cent in the March quarter), and below South Australia with growth of 6.5 per cent.
• In terms of the monthly retail trade series, Queensland spending is 3.1 per cent higher than a year ago, just in front of Northern Territory with 2.9 per cent growth, South Australia with 1.9 per cent growth and Tasmania, up 1.7 per cent. At the other end of the scale, Victorian spending is 1.0 per cent up on a year ago with NSW and Western Australian spending both up by 1.4 per cent and ACT spending up 1.6 per cent.

Equipment investment

• Queensland now leads other states and territories when it comes to equipment investment. Spending in the June quarter was almost 37 per cent above “normal” – or decade-average levels. Western Australia was leading the way but is experiencing a slowdown of mining investment. Equipment investment in Western Australia is now 33.1 per cent above decade-average levels followed by ACT (up 16.5 per cent), NSW (up 7.6 per cent) and Victoria (up 3.3 per cent).

• By contrast, new equipment spending in Tasmania was 14.3 per cent below its longer-term average in the June quarter with Northern Territory down 12.1 per cent and South Australia, down 0.9 per cent.
• On a shorter-run analysis, equipment investment in the June quarter was lower than a year ago in six of the state and territory economies. Currently equipment investment is down on a year ago in Northern Territory (down 31.8 per cent), Tasmania (down 29.7 per cent), Western Australia (down 23.2 per cent), South Australia (down 10.4 per cent), NSW (down 8.2 per cent) and Victoria (down 0.4 per cent). By contrast new equipment investment in Queensland is up 13.5 per cent on a year earlier followed by ACT (up 8.3 per cent).

Unemployment

• NSW and Victoria arguably have the strongest job markets in the nation. While its trend unemployment rate of 5.5 per cent is not the lowest in the nation, the NSW jobless rate is just 9.0 per cent above its “normal” or decade average level.
• Similarly in Victoria, trend unemployment stands at 5.7 per cent and this is 9.2 per cent above its decade average rate of 5.2 per cent.
• In Western Australia, unemployment is lower at 4.7 per cent but this is 11.7 per cent above the “normal” or decade-average level of 4.2 per cent.
• At the other end of the scale, Tasmania’s 8.5 per cent jobless rate is the highest in the nation and up almost 43 per cent on the decade average. The Northern Territory job market is next weakest. In the past 10 months the jobless rate has lifted from 3.9 per cent to 5.5 per cent and it is now 28 per cent above its decade average level of 4.3 per cent.

Construction work

• The measure used for analysis was the total amount of residential, commercial and engineering work actually completed in trend terms in the June quarter.
• In all states/territories except Tasmania construction work is higher than decade averages. And there remains a large gap between the strongest states (the resource states) and weakest states (Tasmania).
• In Tasmania, overall new construction work completed is 9.7 per cent below its decade average. By contrast construction work done in Northern Territory was 72 per cent above its decade average followed by Western Australia (up 65 per cent) and Queensland (up 45 per cent).
• Next weakest to Tasmania is Victoria where construction work is 10.1 per cent above decade averages, followed by NSW (up 15.4 per cent on the decade average).
• In terms of annual growth rates, Northern Territory construction work done in the June quarter was up 30 per cent on a year ago, followed by Queensland (up 2.6 per cent) and South Australia (up 0.7 per cent). In the ACT, construction work was 16.5 per cent below decade averages but new dwelling starts soared in the June quarter.

Population growth

• To assess population performance we looked at the current annual growth rate and compared it with each economy’s decade-average growth pace. And the good news is that population growth is above ‘normal’ in five states or territories but growth only picked up in two jurisdictions over the past quarter.
• Western Australia is the clear leader in population growth. Not only is the annual growth rate of 3.42 per cent the strongest in the nation, it is also almost 40 per cent above the decade average. But the actual leader in the rankings is the ACT. Annual population growth of 2.17 per cent is 43 per cent above “normal’.

• In NSW current annual population growth of 1.27 per cent is 18.2 per cent above the decade average.
• At the other end of the leader-board is Tasmania where the annual population growth of 0.11 per cent was 85 per cent below the decade average rate of 0.75 per cent but growth did lift in the March quarter from 0.06 per cent.

Housing finance

• The measure used was the trend number of housing finance commitments and this was compared with the decade-average for each respective state and territory.
• Housing finance is not just a lead indicator for real estate activity and housing construction but also is a useful indicator of activity in the financial sector. It would be useful to compare figures on commercial, personal and lease finance, but unfortunately trend data is not available for states and territories.
• In all but three states and territories – the ACT, Western Australia and Victoria – trend housing finance commitments are below decade averages. But encouragingly commitments in August were above year-ago levels in all states and territories.
• In the strongest economy of the ACT, the number of housing finance commitments was 10.7 per cent above the decade-average level and commitments in August were 18.9 per cent higher than a year ago.
• Western Australia was in second spot for housing finance, with the number of commitments 8.8 per cent above the long-term average. And importantly the market has momentum with home lending 14.2 per cent higher than a year ago in trend terms.
• Victoria has slipped to third spot on housing finance, up 8.2 per cent on the decade average followed by NSW (down 1.5 per cent).
• Tasmania is the weakest economy for housing finance with trend commitments 22.4 per cent lower than its decade average, but encouragingly commitments were up 2.9 on a year ago. Next weakest was the Northern Territory with trend commitments down 17.4 per cent on the decade average.

Dwelling starts

• The measure used was the trend number of dwelling commencements (starts) with the comparison made to the decade-average level of starts. Starts are driven in part by population growth and housing finance and can affect retail trade, unemployment and overall economic growth. However any over-building or under-building in previous years can affect the current level of starts.
• The outlook for housing construction has improved, underpinned by state government grants for new construction and low interest rates. Dwelling starts are above decade averages in five of the states and territories and starts in six states and territories are above levels of a year ago.

• The ACT is in the strongest position for new housing construction, with starts almost 53 per cent above decade averages. In addition in the June quarter the number of dwellings started was 11.7 per cent higher than a year earlier, the first annual gain in almost two years.
• In second spot was Northern Territory, with starts almost 52 per cent above decade averages. But momentum is lagging with starts in the quarter up 10.7 per cent on a year ago, down from 31.9 per cent in the March quarter. In NSW, dwelling starts in the June quarter were up 19.0 per cent on the ‘normal’ or “decade average” level with starts in Western Australia up almost 14 per cent on decade averages and Victoria up 0.8 per cent.

• At the other end of the scale, Tasmanian dwelling starts were 36.7 per cent below decade averages, while starts in the June quarter were 20 per cent down on a year earlier. Next weakest was South Australia (down 16.0 per cent) and Queensland (down 13.7 per cent). However encouragingly Queensland starts were 9.4 per cent higher than a year ago. Western Australian starts were up 38 per cent on a year ago with NSW up 25.3 per cent.

Other indicators

• Real wages were positive in all economies in the June quarter except for the Northern Territory. Strongest growth occurred South Australia at 1.2 percentage points, followed by Tasmania (1.1 percentage points) and Western Australia (0.9 percentage points).

• Even using “underlying” inflation than “headline” inflation, real wages are growing on average by around 0.5-1.0 percentage points.
• Home prices are now higher than a year ago in all but Hobart (down 2.9 per cent) and Adelaide (down 0.8 per cent). Strongest growth in home prices was in Sydney (up 8.0 per cent) followed by Perth (up 7.6 per cent). But growth rates of home prices are below decade averages in all capital cities except Sydney. The decade average growth in Sydney is 2.7 per cent, well below other capital cities of between 5.4-10.5 per cent.

Implications and outlook

• State and territory economies continued to grow in the June quarter, but below the more “normal” growth rates over the past 5 years or 10 years. Western Australia continues to lead other economies in a relative sense with little slippage over the past three months. The ACT has consolidated second position and momentum will be provided in coming months by the housing sector in response to a surge in new dwelling starts in the June quarter.

• But you could effectively throw a blanket over the three largest states and Northern Territory. Northern Territory is just ahead of Queensland and NSW which jointly share fourth position, and they are closely followed by Victoria. There is then a gap to South Australia and then another gap to Tasmania.
• All economies should lift now that the uncertainty of the Federal Election is finally out of the way. While a slowdown in mining investment will affect some regions, this will be offset by a lift in residential building. NSW, Western Australia, Queensland and ACT are expected to benefit most from a lift in home building.
• Firm real wages and improved housing affordability are being reflected in a lift in retail spending in Tasmania. If this leads to increased employment then there will be potential for stronger economic momentum in coming months.

 Craig James, Chief Economist, CommSec

What does it all mean?

• Apparently Australian borrowers haven’t had it this good for over 50 years. But you wouldn’t know it from looking at the home loan data. While there has been an encouraging lift in new lending over 2013, the value of all new loans still is over 4 per cent below the highs set five years ago.
• In short, borrowers remain cautious – especially first home buyers. Despite some of the most attractive buying conditions in years, the proportion of first home buyers in the market is still well down on the average levels recorded over the past 22 years.
• The good news is that more people are taking out loans to build new homes rather than buying established properties. The revised grants from state governments are helping to lift construction, as is the low level of interest rates.
• Once the election is out of the road, we would expect more people to seriously contemplate buying homes to either live in or as a form of investment. Certainly interest rates are low enough, affordability has improved, the population is growing and rental markets are reasonably tight across the country.

What do the figures show?

Housing Finance:

• The number of new owner-occupier housing loans rose by 2.7 per cent in June after a 1.7 per cent lift in May and was the sixth straight monthly lift in lending. Over the first six months of 2013 housing finance has increased by 13.8 per cent – the strongest start to a calendar year in four years. Housing finance commitments are up 12.7 per cent on a year ago.
• Excluding the refinancing of dwellings, loans were up 2.3 per cent in June after lifting by 2.1 per cent in May.
• The number of loans for the construction of homes rose by 0.9 per cent and the value of loans rose by 0.7 per cent.
• The number of loans to buy newly-erected dwellings rose by 0.2 per cent but the value of loans fell by 0.2 per cent.
• The number of loans for the purchase of established dwellings excluding refinancing rose by 2.8 per cent and the value of loans was up by 0.8 per cent.
• The number of refinancing transactions rose by 3.8 per cent and the value rose by 5.7 per cent.
• The value of new housing commitments (owner occupier and investment) rose by 1.2 per cent in June after lifting by 1.8 per cent in May. Owner-occupier loans rose by 2.1 per cent in June but investment loans fell by 0.5 per cent – only the first fall in six months.
• The proportion of first home buyers in the market rose from 14.6 per cent to 15.1 per cent in June but is still down on the long-term average of 20.0 per cent. Fixed rate loans eased from 19.1 per cent of all loans to 17.8 per cent in June. And the average home loan across Australia stood at $304,300 in June, up 0.9 per cent on a year ago.
• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
• More home loans being taken out will equate to more homes being bought and more homes being built. So housing is well placed to provide a boost to the economy and take over growth leadership from mining.
• The value of committed home loans that haven’t been taken up as yet stands at a four-year high of almost $24 billion, up 16.3 per cent over the year. So buyers are armed with cash; they just need the confidence to act.
• Stronger housing activity is positive for banks, home builders, developers, retailers and building material suppliers.
• Those with mortgages are taking advantage of low interest rates to refinance their loans, unlocking purchasing power, and representing good news for retailers.

Why is the data important?

• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.

What are the implications?

• More home loans being taken out will equate to more homes being bought and more homes being built. So housing is well placed to provide a boost to the economy and take over growth leadership from mining.
• The value of committed home loans that haven’t been taken up as yet stands at a four-year high of almost $24 billion, up 16.3 per cent over the year. So buyers are armed with cash; they just need the confidence to act.
• Stronger housing activity is positive for banks, home builders, developers, retailers and building material suppliers.
• Those with mortgages are taking advantage of low interest rates to refinance their loans, unlocking purchasing power, and representing good news for retailers.

Economic growth

• Ideally gross state product (GSP) would be used to assess broad economic growth. But the data isn’t available quarterly. Rather state final demand (household and business spending) is added to exports less imports to act as a proxy for GSP. Exclusion of the trade sector would provide an incorrect assessment of growth for economies such as Western Australia and Queensland.
• The Northern Territory continues to lead the rankings on economic activity. Activity in the ‘top end’ is almost 40 per cent above its ‘normal’ or decade-average level of output.
• Next strongest is Western Australia, with output around 33 per cent higher than the decade average level of output. Then follows Queensland (up 18.3 per cent) from the ACT (up 17.3 per cent).
• At the other end of the scale, economic activity in Tasmania in the March quarter was just 3.0 per cent above its decade average while South Australian activity was up almost 10 per cent on its “normal” or average output over the past decade.
• There would be little change in the rankings if “final demand” was used instead. But NSW would move ahead of Victoria in fifth spot.
• The Northern Territory also maintains the fastest annual economic growth rate in the nation, up by 13.5 per cent on a year ago, ahead of Western Australia with 7.9 per cent and NSW (3.0 per cent).
• The weakest trend economic growth rate was recorded in Tasmania (-2.6 per cent) followed by South Australia (-2.1 per cent) and Victoria (-0.1 per cent).