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July, 201710:30 AM



Biggest home prices fall in 18 months

Biggest home prices fall in 18 months

The CoreLogic Home Value Index of capital city home prices fell by 1.1 per cent in May but was up 8.3 per cent over the year. It was the biggest monthly fall in prices in 18 months.

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01.06.2017 04:06 PM

Home prices: Biggest fall in 18 months

Home prices; Manufacturing

Home prices: The CoreLogic Home Value Index of capital city home prices fell by 1.1 per cent in May but was up 8.3 per cent over the year. It was the biggest monthly fall in prices in 18 months.

In regional Australia, house prices fell by 0.2 per cent in April (latest available) and were 4.5 per cent higher than a year ago.

Dwelling prices rose in just two of the eight capital cities in May: Adelaide (up 0.8 per cent), Brisbane (up 0.3 per cent). Prices fell the most in Hobart (down 4.8 per cent), Darwin (down 3.5 per cent), Melbourne (down 1.7 per cent), Sydney (down 1.3 per cent), Perth (down 0.4 per cent) and Canberra (down 0.1 per cent).

Manufacturing: The Performance of Manufacturing index fell from near 15-year highs, down by 4.4 points to 54.8 in May. A reading above 50.0 indicates that the sector is expanding. This was the eighth consecutive month of expansion. 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?

Property prices across the nation have recorded the biggest fall in 1½ years. However policymakers are unlikely to be overly concerned but the fall in home prices. In fact it might be a welcome relief – particularly in Sydney and Melbourne where property prices have surged over the last year. It is important to keep in mind that it is only one month of weakness, and there is also a level of seasonality, but there have been a number of signs that the tighter lending standards adopted by the banking sector are starting to result in more circumspect buyers.

What was more telling in the latest result was the slide in apartment prices across the nation, in particular the outsized 3.8 per cent fall in Melbourne apartment prices. Over the last year there has been a lot of discussion on the anticipated lift in housing supply, with particular concern on inner city Melbourne and Brisbane. And it may just be that this is the first sign of the lift in apartments coming on-stream and curtailing price growth.

While the housing market is more mixed across the nation, it was disappointing to see a lack of growth in regional Australia. The unfortunate fact is that the more stringent lending measures act as a blunt instrument, curtailing what has been flat or negative price growth in the mining states and even some regional centres. Perth property prices have fallen for three out of the past four months. And Darwin dwelling prices have fallen by over six per cent over past six months.

Overall, policymakers will keep a close eye on the housing sector over the remainder of 2017, and will prefer to see more balanced house price growth across the nation. In particular, a lift in regional house prices would be a positive outcome. Annual growth in home prices across regional centres was just 1.4 per cent over the past 12 months. 

What do the figures show?

Home prices

The CoreLogic Home Value Index of capital city home prices fell by 1.1 per cent in May but was up 8.3 per cent over the year. It was the biggest monthly fall in prices in 18 months.

In regional Australia, house prices fell by 0.2 per cent in April and were 4.5 per cent higher than a year ago. (Regional prices cover just houses and data is up to the end of April).

In capital cities, house prices fell by 0.9 per cent in May while apartment prices fell by 2.6 per cent. House prices were up 9 per cent on a year ago and apartments were up by 3.4 per cent.

The average Australian capital city house price (median price based on settled sales over quarter) was $670,000 and the average unit price was $550,000.

Dwelling prices rose in just two of the eight capital cities in May: Adelaide (up 0.8 per cent), Brisbane (up 0.3 per cent). Prices fell the most in Hobart (down 4.8 per cent), Darwin (down 3.5 per cent), Melbourne (down 1.7 per cent), Sydney (down 1.3 per cent), Perth (down 0.4 per cent) and Canberra (down 0.1 per cent).

Home prices were higher than a year ago in six of the eight capital cities. Prices rose most in Melbourne (up 11.5 per cent); followed by Sydney (up 11.1 per cent); Hobart (up 5.8 per cent); Canberra (up 5.7 per cent); Adelaide (up 2.9 per cent); and Brisbane (up 2.3 per cent). Prices fell in Darwin (down 6.4 per cent) and Perth (down by 3.8 per cent).

Total returns on capital city dwellings rose by 11.8 per cent in the year to May with houses up 12.4 per cent on a year earlier and units up 7.6 per cent.

Performance of Manufacturing

The Performance of Manufacturing index fell by 4.4 points to 54.8 in May. A reading above 50.0 indicates that the sector is expanding. This was the eighth consecutive month of expansion for the Australian PMI. The last six months have averaged 56.2 points and the April result was a near 15-year high.

AIG notes “All seven activity sub-indexes in the Australian PMI® expanded in May albeit at a slower pace than in April. New orders remained elevated (58.1 points), suggesting the current expansion has some way to run. Employment (54.2 points), deliveries (55.8 points) and sales (54.4 points) remained relatively strong. Exports (52.0 points) slowed but remained expansionary, as did production (52.2 points) and stocks (50.9 points).”

“Manufacturers reported slower conditions than previous months, although demand is still relatively elevated. Exports are a key source of growth with many manufacturers strongly focussed on export markets. Less positively, others are feeling the impacts of the exiting auto industry more acutely. Strong overseas competition remains evident and the Federal Budget has caused some unease. Slower retail conditions are also having some negative impacts for manufacturers, while slow capital expenditure by business is limiting demand for others. Elevated input costs are an ongoing challenge, particularly for raw materials and energy costs. Specialised labour shortages are posing challenges for some manufacturers.”

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 Australian Industry Group compiles 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 latest economic news is generally positive. Manufacturing is expanding solidly with exports leading the way.

The flattening out of home prices and declines in apartment prices represent a wake-up call to investors. At present the total return on shares is broadly the same as the return on homes.

The Reserve Bank has no need to lift or cut rates as yet. Rate hikes are still more likely to come later in 2018. 

Originally published by Savanth Sebastian, Senior Economist, CommSec
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