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Home prices come off the boil

April 4 2016, The Bull
Latest news from CommSec.

Home prices: The CoreLogic RP Data Home Value Index of capital city home prices rose by 0.2 per cent in March after a 0.5 per cent lift in February. Home prices were up by 6.4 per cent over the year to March – the slowest in 31 months. Dwelling prices rose in just four of the eight capital cities in March.

Manufacturing: The Performance of Manufacturing index rose by 4.6 points to 58.1 in March – a near 12-year high. A reading above 50.0 indicates that the sector is expanding. The index has been above 50 for nine months.

What does it all mean?

With a record number of homes being built, the expectation was that this would lead to softer growth in home prices. And indeed there is more evidence that the slowdown is underway. Actually the only two cities where there had been concern about high home prices were Melbourne and Sydney. Annual growth of Melbourne home prices is now the slowest in 10 months with Sydney home prices growing at the slowest annual pace in 31 months. And further slowing of home price growth lies ahead.

Outside Melbourne and Sydney, home prices haven’t been soaring. Indeed prices in most areas are drifting higher while corrections continue in Perth and Darwin after earlier stellar growth. And in regional Australia, home prices are up just 1.6 per cent over the year with the 5-year average at just 1.8 per cent.

At the same time that home prices are slowing to a more sustainable pace, manufacturing activity is lifting. Both developments are clearly encouraging for Reserve Bank policymakers.

What do the figures show?
Home prices

The CoreLogic RP Data Home Value Index of capital city home prices rose by 0.2 per cent in March after a 0.5 per cent lift in February. Home prices were up by 6.4 per cent over the year to March – the slowest in 31 months.

House and apartment prices both rose by 0.3 per cent in March. House prices were up 6.6 per cent on a year ago and apartments were up by 4.7 per cent.

The average Australian capital city house price (median price based on settled sales over quarter) was $575,000 and the average unit price was $480,000.

Dwelling prices rose in four of the eight capital cities in March: Darwin (up 2.1 per cent), Perth (up 1.2 per cent, Sydney (up 1.0 per cent) and Adelaide (up 0.5 per cent). Prices fell most in Brisbane (down 1.2 per cent), followed by Hobart (down 1.1 per cent), Canberra (down 0.8 per cent) and Melbourne (down 0.6 per cent).

Home prices were higher than a year ago in six of the eight capital cities. Prices rose most in Melbourne (up 9.8 per cent), followed by Sydney (up 7.4 per cent), Hobart (up 4.8 per cent), Brisbane (up 4.5 per cent), Adelaide (up 3.2 per cent) and Canberra (up 1.7 per cent). Prices fell in Perth (down 2.0 per cent), and Darwin (down 1.8 per cent).

Total returns on capital city dwellings in the year to March rose by 10.3 per cent with houses up 10.4 per cent on a year earlier and units up 9.3 per cent.

Performance of Manufacturing

The Performance of Manufacturing index rose by 4.6 points to 58.1 in March – its highest level since April 2004. The PMI has been above 50 points (signifying expansion of the manufacturing sector) for nine months – the longest period of expansion since 2006.

AIG notes “The seven activity sub-indexes all improved in March with production (largely unchanged at 60.0 points) and new orders (up 9.3 points to 61.7).”

“Five of the eight manufacturing sub-sectors expanded (that is, above 50 points in three-month moving averages) led by the largest sub-sector of food, beverages & tobacco (up 9.3 points to a record 71.0). Wood & paper products (up 8.0 points to 65.1) also expanded strongly while the large machinery & equipment sub-sector moved out of contraction for the first time since January 2012 (up 1.6 points to 50.9).”

What is the importance of the economic data?

The CoreLogic RP Data 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 CoreLogicRP Data 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 can safely remain on the interest rate sidelines. There is no convincing reason to either cut or lift rates at present.

While the lift in manufacturing activity is encouraging, the question is whether the gains can be maintained given the recent strengthening of the Aussie dollar.

Home prices should always be analysed over the long term. Prices surge from time to time, and then there are the inevitable corrections or periods of flat growth in prices. Overall there isn’t anything remarkable in current home price trends. Prices are rising most where demand is strongest – that is, where population growth is strongest. And that is in Sydney and Melbourne.
 

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