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Economics | January 2 2020

Broadening gains for Aussie home prices Home prices; Manufacturing; Credit cards Home prices: The CoreLogic Home Value Index of national home prices rose by 1.1 per cent in December,

to be up 2.3 per cent on the year. Capital city home prices rose by 1.2 per cent (up 3.0 per cent on the year). Regional home prices rose by 0.5 per cent (down 0.5 per cent on the year).

Regional results: Of the 88 SA4 regions across Australia, home prices were up on a year ago in 55 regions (39 in November). Home prices in the Melbourne Inner East rose by 12.1 per cent over the year.

Manufacturing sector: The CBA/IHS Markit Manufacturing Purchasing Managers' Index fell from 49.9 points to 49.2 points in December. Any reading below 50 indicates contraction in activity.

Home price data is important for retailers, especially those focussed on consumer durables. The manufacturing data provides guidance for companies in the Industrials sector.

What does it all mean? Not such good news on manufacturing, but home prices continue to lift across the nation. The CBA purchasing

managers index has been in operation for just 3½ years so investors will need to review other business surveys over January to see what messages they provide. The good news though is that the US-China ‘Phase 1’ trade deal will be signed in mid-January. The hope is that the easing of trade tensions will lead to a lift in domestic and international manufacturing conditions and a broader lift in the global economy. And that hope seems to be picked up in the CBA survey with goods producers at their most upbeat for five months regarding output in the year ahead.

The rebalancing of Australian home prices continues. Home prices are now higher than a year earlier in five of the eight capital cities. And indeed prices are up on a year ago in almost two-thirds of Australian regions. The lift in home prices is positive for those owning or buying their homes. But the higher prices mean challenges for home seekers and renters. Home prices rose 4 per cent in the December quarter – the biggest quarterly gain in a decade.

The lift in home prices has the potential to boost perceived wealth and thus boost spending. Wealth is at record highs and incomes are still running faster than consumer prices. The missing ingredient is confidence with many Aussies preferring to save and live more simply rather than spend and add to the mountain of possessions.

It’s been an amazing time for Sydney and Melbourne property owners. A year ago, most wouldn’t have been able to see an end to the trend of falling prices. Now Sydney and Melbourne regions dominate the list of fastest annual

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Economic Insights: Broadening gains for Aussie home prices

gains in home prices. Sydney home prices are up 66.7 per cent over the decade and prices are 6.4 per cent from record levels. Melbourne prices are up 53.5 per cent on the decade and just 2.3 per cent from record highs. Hobart, Canberra, Brisbane and Adelaide prices are at, or near record highs.

What do the figures show? Home prices

The CoreLogic Home Value Index of national home prices rose by 1.1 per cent in December to stand 2.3 per cent higher over the year.

In capital cities, prices rose by 1.2 per cent to be up 3.0 per cent over the year to December. House prices rose by 1.4 per cent and apartment prices lifted by 0.9 per cent. House prices were up 2.9 per cent on a year ago and prices of apartments increased by 3.4 per cent.

In regional areas, home prices rose by 0.5 per cent with houses up 0.6 per cent and apartment prices were broadly unchanged. Regional home prices were down 0.5 per cent on the year to December.

The average Australian capital city house price (median price) was $657,049 and the average unit price was $569,090 in December.

Dwelling prices rose in six of the eight capital cities in December. Home prices rose by the most in Sydney (up by 1.7 per cent) followed by Melbourne (up by 1.4 per cent), Brisbane (up 0.7 per cent), Adelaide (up by 0.5 per cent), Hobart (up by 0.2 per cent) and Canberra (up by 0.1 per cent). Perth prices were flat and prices fell in Darwin (down by 0.5 per cent).

Home prices were higher than a year ago in five of the eight capital cities in December. Prices rose the most in Melbourne and Sydney (up by 5.3 per cent), followed by Hobart (up by 3.9 per cent), Canberra (up by 3.1 per cent) and Brisbane (up by 0.3 per cent). But prices were down in Darwin (down by 9.7 per cent), Perth (down by 6.8 per cent) and Adelaide (down by 0.2 per cent).

Total returns on national dwellings rose by 6.3 per cent in the year December with houses up by 5.9 per cent on a year earlier and units up by 7.3 per cent. In contrast, the S&P/ASX All Ordinaries Accumulation Index lifted by 24.1 per cent over the year to December.

Manufacturing Purchasing Managers’ index

The CBA/IHS Markit Manufacturing Purchasing Managers' Index fell from 49.9 points to 49.2 points in December. Any reading below 50 indicates contraction in activity.

According to CBA/IHS Markit, “The manufacturing downturn was led by the steepest rate of decline in new orders in the series history during December. Inflows of new sales fell for a third straight month despite rising exports. This in turn contributed to another fall in backlogs of work, where further evidence of spare capacity dampened hiring. Job shedding was reported for the first time in three months, with the rate of decrease the second sharpest seen since the survey began just over three-and-a-half years ago.”

“Despite signs of weakening conditions, goods producers were at their most upbeat for five months regarding output in the year ahead. Expectations of improved economic conditions, higher sales projections and marketing activities were cited as factors driving growth.”

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Economic Insights: Broadening gains for Aussie home prices

Credit card data

The Australian Prudential Regulation Authority (APRA) has released the latest monthly authorised deposit-taking institution statistics. In November, loans to households via credit cards recorded a seasonal 0.4 per cent increase but were down a record 6.9 per cent over the year. The data has been affected by ‘series breaks’ however.

What is the importance of the economic data?

The CoreLogic 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 CoreLogic Hedonic Index includes all properties. Home prices are an important driver of wealth and spending.

The AiGroup and CBA Purchasing Manager indexes (PMIs) for services and manufacturing are released each month. The Australian PMIs are the local equivalents of similar indexes released for other countries. The PMIs are amongst timeliest economic indicators released in Australia. The PMIs are useful not just in showing how the sectors are performing but in providing some sense about where they are heading. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors? The latest CBA manufacturing survey was weak. But that report is akin to looking in the rear-view window. A trade

deal will shortly be signed between the US and China and the optimism seems to have been reflected in the outlook statements of manufacturers that were surveyed rather than the activity report.

The good news is that the US and China are preparing to sign a trade deal. The bad news for exporters is that the optimism has pushed the Aussie dollar above US 70 cents. The currency needs to be watched carefully over the next few months.

Investors are currently getting good returns from both residential property and listed equities. Over 2020, returns from both asset classes should be similar between 7-11 per cent.

Rents rose just 0.1 per cent in December to be up 1.2 per cent on the year. So tenants are in good position to spend unless of course they are looking to save for a home – with home prices up markedly over the past quarter. For retailers, the best targets are owner-occupiers of high value properties with the top end continuing to lead home price gains.

Commonwealth Bank Group economists have pencilled in another rate cut in February 2020.

Craig James, Chief Economist, CommSec Twitter: @CommSec