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September, 2018 8:10 AM



Home price correction we had to have

Home price correction we had to have

The CoreLogic Home Value Index of capital city home prices fell by 0.3 per cent in June to stand 1.6 per cent lower over the year.

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By Expert Panel 02.07.2018

Home prices: Correction we had to have
Home prices; Manufacturing; Job ads

Home prices: The CoreLogic Home Value Index of capital city home prices fell by 0.3 per cent in June to stand 1.6 per cent lower over the year. The national home price index fell by 0.2 per cent in the month to be down 0.8 per cent over the year. Hobart home prices are up 12.7 per cent over the year.

Job advertisements: ANZ job advertisements fell 1.7 per cent in June from 7-year highs.

Manufacturing activity: The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 57.5 points to 57.4 in June. But the CBA/Markit Manufacturing Purchasing Managers’ Index rose from 53.2 points to 55.0 in June. Both surveys have readings above 50 points, indicating that the manufacturing sector is expanding.

What does it all mean?

National home prices have now fallen for nine straight months. But prices are far from plummeting – down just 0.8 per cent over the past year. More homes have been built and more homes are up for sale. So supply is adjusting to the level of demand. For Sydney and Melbourne in particular, this is the correction we had to have.

Over the coming year, capital city home prices will be a mixture of modest annual growth rates and modest annual declines. The improvement in housing affordability is very welcome. Clearly annual growth rates of 10-15 per cent were unsustainable. Notably high value capital city homes are 2.1 per cent lower over the year while lower-valued properties are up 1.2 per cent.

There are now three Brisbane regions in the capital city SA4 regions that have recorded the strongest home price growth over the past year. Melbourne is represented by five regions. Conversely, Sydney dominates the 10 regions with largest price declines led by Ryde and the Inner West.

The manufacturing surveys highlight some significant issues with drought conditions now having an adverse impact on manufacturers; there is a rising backlog of orders; rising input prices; and there is strong labour demand.

Job ads eased from 7-year highs in June. The question is whether employers are just choosing to lift the work hours of existing staff given the lack of job candidates.

What do the figures show?
Home prices

The CoreLogic Home Value Index of capital city home prices fell by 0.3 per cent in June to stand 1.6 per cent lower over the year. The national home price index fell by 0.2 per cent in the month to be down 0.8 per cent over the year.

In capital cities, house prices fell by 0.3 per cent in June and apartment prices fell by 0.2 per cent. House prices were down 2.2 per cent on a year ago, but apartments were up by 0.4 per cent.

In regional areas, home prices were unchanged in June to be up 2.2 per cent on the year.

The average Australian capital city house price (median price) was $694,764 and the average unit price was $575,685.

Dwelling prices fell in five of the eight capital cities in June: Home prices fell in Darwin (down 1.1 per cent); Perth (down 0.5 per cent). Melbourne (down 0.4 per cent); Sydney and Canberra (both down 0.3 per cent).

Prices rose in Hobart and Adelaide (both up 0.3 per cent); and Brisbane (up 0.2 per cent).

Home prices were higher than a year ago in five of the eight capital cities in June. Prices rose most in Hobart (up 12.7 per cent); Canberra (up 2.3 per cent); Brisbane and Adelaide (both up 1.1 per cent); Melbourne (up 1.0 per cent). Prices fell in Darwin (down 7.7 per cent), Sydney (down by 4.5 per cent); and Perth (down by 2.1 per cent).

Total returns on capital city dwellings rose by 2.7 per cent in the year to June with houses up 2.1 per cent on a year earlier and units up 4.7 per cent.

Manufacturing Purchasing Managers’ Indexes

The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 57.5 points to 57.4 in June. But the CBA/Markit Manufacturing Purchasing Managers’ Index rose from 53.2 points to 55.0 in June. Both surveys have readings above 50 points, indicating that the manufacturing sector is expanding.

CBA noted: “…the Australian manufacturing sector moved through the second quarter at a decent pace. And the leading indicators suggest the positive manufacturing momentum is set to continue. Readings for the new orders, employment, export orders and future output sub-indexes all rose in June… The backlog of work remains uncomfortably high, delivery times are lengthening and some demand is being met by running down stocks. The positive spinoff is a solid labour demand. The ongoing risk is that a strong economy allows rising input costs to flow through to output prices.”

AiGroup highlights: “Drought conditions are now having an adverse impact on manufacturers linked to the agricultural sector, particularly those operating in the food and beverages, metals and machinery and equipment sub-sectors."

Job advertisements

ANZ job advertisements fell by 1.7 per cent in June after rising by 1.4 per cent in May. Job ads are up 6.9 per cent on a year ago. The number of jobs advertised (seasonally adjusted) was 175,660 in June while the trend level of job ads stands at a 7-year high of 177,692.

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 monthly Job Advertisements release is a leading employment indicator. Employers only seek additional staff if business activity is strong, and more importantly, if they expect that conditions will remain favourable in coming months. It takes around 5-6 months for the new staff to be added to the payrolls. But a fall in job advertisements would have a more immediate impact on monthly employment estimates.

The Australian Industry Group compile the Performance of Manufacturing Index and Performance of Services index each month. CBA and Markit also compile purchasing manager surveys for manufacturing and services sectors. The surveys are amongst the timeliest economic indicators released in Australia. The surveys are useful not just in showing how key sectors are performing but also in providing some sense about where they are headed. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

The rebalancing of the housing market has potential to be very positive. But clearly developments in the housing sector will be watched carefully by the Reserve Bank. Just as higher home prices can be infectious, causing irrational exuberance, lower home prices could lead to irrational pessimism.

Total returns on shares have lifted 13.7 per cent over the past year while returns on capital city homes are up 2.7 per cent. A year ago the return on homes was up 14.5 per cent with shares up 13.1 per cent. Performance of these asset classes ebb and flow over time, highlighting the value of diversification.

Job ads fell in June but from 7-year highs. The job market remains in strong shape as evidenced by today’s manufacturing surveys and last week’s Bureau of Statistics job vacancies data.

CommSec expects official interest rates to be stable until early 2019.

Published by Craig James, Chief Economist, CommSec
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