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Amongst mixed economic indicators, home prices are surging

In CommSec’s regular economic update Savanth Sebastian reported that the latest economic indicators were mixed.

He reported that some prices are lifting, while at the same time manufacturing continues to contract and inflation remains relatively contained.

Here are the details:

Home prices rose for the eighth consecutive month:

The RP Data – Rismark Home Value Index reported that capital city home prices rose by 1.2 per cent in January to be up 9.8 per cent over the year.

Total returns on capital city houses were up 14.7 per cent on a year earlier and units were up 13.3 per cent.

Manufacturing contracts:

The Performance of Manufacturing index fell by 0.9 points to 46.7 in January. Any reading below 50 suggests manufacturing is contracting.

Inflation contained:

The TD Securities-Melbourne Institute monthly inflation gauge rose by 0.1 per cent in January to stand 2.5 per cent higher than a year ago.

What does it all mean?

The latest economic indicators were mixed. Home prices are lifting, manufacturing continues to contract and inflation remains relatively contained.

After essentially going nowhere for two years, home prices have lifted for the past eight months, (up a cumulative 9.4 per cent – the largest gain for a similar period in over four years).

In addition total returns on capital city dwellings are 14.5 per cent higher than a year ago – highlighting the underlying strength in residential property.

The pent up demand for housing, low vacancy rates and strong rental yields have increased the attractiveness of property as an investment class. In addition substantial cuts to interest rates continue to drive activity. In Sydney, total returns (capital appreciation plus rental yields) on homes have lifted by over 18 per cent over the past year.

While the discussion of a housing bubble will continue to dominate media headlines, it is likely that increases in land sales, building approvals and new home sales will result in a greater supply of homes over the first half of 2014. And, as a result of increased home supply, price gains will become more restrained later in 2014.

The domestic manufacturing sector showed glimmers of hope in the latter part of last year; however those gains have been eroded in recent months. Granted the sector is struggling, however there does seem to be light at the end of the tunnel.[sam id=36 codes=’true’]

Although it will be a while yet before a healthy, sustained expansion in activity takes place, the key is the ongoing depreciation of the Aussie dollar – providing a further boost to exports. In fact the export component contracted at a slower pace in January, while new orders showed signs of a slower contraction over the month.

The Reserve Bank is unlikely to be overly troubled by the lift in home prices. This is particularly the case given that inflation remains well contained and home price growth has added to a lift in household wealth and confidence – all of which will support a lift in retail activity in coming months.

The Reserve Bank looks set to remain on the interest rate sidelines over the next few months. However given the medium term lift in the inflation outlook, it is likely that the central bank will shift to a more neutral stance.

 

What do the figures show?

House price prices

The RP Data-Rismark Hedonic Australian Home Value index of capital city home prices rose by 1.2 per cent in January. Home prices are up 9.8 per cent on a year ago.

House prices rose by 1.4 per cent in January while apartments rose by 0.1 per cent. House prices are up 10.1 per cent on a year ago and apartments are up 8.0 per cent.

The average Australian capital city house price (median price based on settled sales over quarter) was $565,000 and the average unit price was $470,000.

Dwelling prices rose in five of the eight capital cities in January: Melbourne (up by 3.2 per cent) followed by Hobart (up 2.0 per cent), Sydney (up 0.8 per cent), Brisbane and Canberra (both up 0.7 per cent). Prices fell in Darwin and Perth (both down by 1.1 per cent). Prices were flat in Adelaide.

Home prices are higher than a year ago across all capital cities except for Hobart (down 0.2 per cent). Prices rose most in Sydney (up 13.4 per cent), followed by Melbourne (up 11.5 per cent), Perth (up 6.9 per cent), Darwin (up 4.6 per cent), Brisbane (up 3.8 per cent), Canberra (up 2.7 per cent) and Adelaide (up 2.5 per cent).

Total returns on capital city houses were up 14.7 per cent on a year earlier and units were up 13.3 per cent.

Performance of Manufacturing

The Performance of Manufacturing index fell by 0.9 points to 46.7 points in January. A reading below 50.0 indicates that the sector is contracting.

Of the components, production fell from 48.6 to 45.2; new orders rose from 47.8 to 48.8; employment rose from 47.0 to 48.3; and exports orders rose from 30.1 to 34.1.

Inflation gauge:

The monthly inflation gauge rose by 0.1 per cent in January after a 0.7 per cent rise in December. The annual rate of inflation fell from 2.7 per cent to 2.5 per cent.

The underlying rate (trimmed mean) was flat in January. The annual rate eased from 2.9 per cent to 2.7 per cent.

Excluding volatile items like petrol and fruit & vegetables, the inflation gauge rose by 0.1 per cent in January after rising 0.4 per cent in December. The annual rate of inflation fell from 1.8 per cent to 1.6 per cent.

TD Securities noted that “Contributing to the overall change in January were price rises for education, urban transport fares and utilities, all seasonal adjustments.

These were offset by falls in clothing and footwear, holiday travel and accommodation, and newspapers, books and stationery. The price of automotive fuel rose by 0.7 per cent in January while the price of fruit and vegetables fell by 0.8 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.

Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties. Home prices are an important driver of wealth and spending.

The Australian Industry Group and PricewaterhouseCoopers compile the Performance of Manufacturing Index (PMI) each month.

The Australian PMI is the Australian equivalent of the US ISM manufacturing gauge.

The PMI is one of the timeliest economic indicators released in Australia.

The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

The Reserve Bank would be justifiably content with the way the domestic economy is panning out. Consumer confidence is lifting, supporting an improvement in retail activity.

There is nothing to suggest that official interest rates need to budge from current levels. However tamer growth in home prices would be welcome to avoid worries about a potential ‘bubble” developing.

Source: Commsec

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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