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Regional Tassie and Victoria lead home price gainsSolid Aussie manufacturing conditions
Home prices; Manufacturing
Home prices: The CoreLogic Home Value Index of national home prices fell by 1.1 per cent in December to be down 4.8 per cent in 2018 – the biggest annual decline since 2008. Over the year to December, Sydney home prices fell by 8.9 per cent, but regional Tasmanian (up 9.9 per cent) and regional Victorian (up 5.9 per cent) home prices lifted.
Manufacturing sector: The ‘final’ CBA Manufacturing Purchasing Managers’ Index (PMI) fell by 0.6 points to 54.0 points in December, but was 0.3 points higher than the ‘flash’ reading of 53.7 points. Any reading over 50 indicates expansion. 
What does it all mean?
Aussie national home prices fell by almost five per cent in 2018 – the worst annual decline in a decade – due to tighter lending conditions amid greater regulatory oversight, rising supply, lifting mortgage rates and falling investor demand. That said, home prices lifted in four (Hobart, Canberra, Adelaide and Brisbane) out of eight major cities during the year.
Dwelling prices in Sydney are down by 11.1 per cent from their July 2017 peak, while prices in Melbourne are down 7.2 per cent from their November 2017 peak. Both cities comprise about 60 per cent of Australia’s housing market by value and 40 per cent by number, weighing on the broader national market. Sydney property values are now back at levels last seen in August 2016.
While falling dwelling prices in Sydney and Melbourne will hog the headlines, regional property prices, particularly in Tasmania and Victoria are continuing to hold up. Over the year to December, regional Tassie property values are up by 9.9 per cent, led by gains in Launceston and the North East, up by 11.4 per cent. And the regional Victorian powerhouse cities/towns of Latrobe-Gippsland (up by 8.7 per cent), Ballarat (up by 8.3 per cent) and Geelong (up by 8.2 per cent) lifted regional Victorian home prices by almost 6 per cent.
Australia’s manufacturing sector is in good shape. The CBA/Markit PMI averaged 54.4 points in the fourth quarter of 2018, above the third quarter average of 53.2 points, signalling a faster rate of expansion. According to the CBA, “new orders lifted, reflecting robust demand conditions and international markets supported sales.”
What do the figures show?Home prices
The CoreLogic Home Value Index of capital city home prices fell by 1.3 per cent in December to stand 6.1 per cent lower over the year. The national home price index fell by 1.1 per cent in the month to be down 4.8 per cent over the year – the biggest annual decline since 2008. Over the quarter, national home prices fell by 2.3 per cent – the largest quarterly decline since the fourth quarter of 2008.
In capital cities, house prices fell by 1.4 per cent in December and apartment prices fell by 1.1 per cent. House prices were down 6.7 per cent on a year ago and apartments were down by 4.3 per cent.
In regional areas, home prices were down by 0.2 per cent in December and were also down 0.2 per cent on the year.
The average Australian capital city house price (median price) was $652,028 and the average unit price was $542,510.
Dwelling prices fell in five of the eight capital cities in December. Home prices fell in Sydney and Darwin (both down 1.8 per cent); Melbourne (down 1.5 per cent); Perth (down 1.0 per cent) and Brisbane (down 0.2 per cent).
Prices rose in Hobart (up 0.4 per cent) and Adelaide (up 0.2 per cent). Prices were flat in Canberra.
Home prices were higher than a year ago in four of the eight capital cities in December. Prices rose most in Hobart (up 8.7 per cent), followed by Canberra (up 3.3 per cent), Adelaide (up 1.3 per cent) and Brisbane (up 0.2 per cent). But prices fell in Sydney (down by 8.9 per cent); Melbourne (down 7.0 per cent); Perth (down 4.7 per cent) and Darwin (down by 1.5 per cent).
Total returns on national dwellings fell by 1.2 per cent in the year to December with houses down by 1.8 per cent on a year earlier, but units were up 0.4 per cent. CBA/Markit Manufacturing Purchasing Managers’ Index
The CBA/Markit ‘final’ manufacturing purchasing managers’ index fell from 54.6 to 54.0 in December, but was 0.3 points higher than the ‘flash’ reading of 53.7 points. The index has moderated from 57.1 points a year ago. Readings above 50 points signals expansion, less than 50 points a contraction.
According to the CBA/Markit, “Australia’s manufacturing sector rounded off 2018 on a solid note, with business conditions improving at a strong pace in December. Growth of both production and sales remained robust, while firms continued to add headcounts to keep on top of additional workloads. Notably, inflationary pressures eased amid reports of lower oil prices. Business confidence remained generally upbeat, despite slipping further.”
What is the importance of the economic data?
The CoreLogic Hedonic Australian Home Value Index is based on Australia’s biggest propertydatabase. 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 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?
Australia’s manufacturing sector capped off a solid 2018. According to the CBA/Markit PMI, the sector has expanded for 32 consecutive months, since the series commenced in May 2016. The equivalent AiGroup manufacturing index has expanded for 26 successive months.
Robust underlying production, sales, new orders, export orders and employment conditions point to non-mining business confidence remaining upbeat. Export orders, in particular, have lifted for 16 straight months, with stronger demand from the US in December, despite ongoing trade tensions with China. That said, the impact of weakening Chinese economic activity and political uncertainty associated with the Australian Federal election likely due in May will need to be closely monitored.
Double-digit home price gains in Sydney and Melbourne weren’t sustainable and the downturn in prices is being driven by a rebalancing of supply and demand rather than weakness in the job market or higher interest rates. Sydney home prices are still around 60 per cent higher than they were in 2012, however, the acceleration of home price falls in December and concerns about credit availability bears close watching.
Regulators have acted to try and shore up the property market with APRA recently announcing that the limit on interest-only mortgage lending was being removed – a key contributor to the property downturn. Annual investor housing credit growth is at record lows of just 1.1 per cent in November.
Regional cities are providing the best returns for investors at present – with returns up 4.7 per cent over the year. Healthy returns are being recorded across regional Tasmanian and Victorian towns and cities due to better affordability, solid jobs growth and transport links.
CommSec doesn’t expect a change in the cash rate until later in 2019 with the main focus being the tightness of the job market and lift in wages. But the impact of falling home prices and shares on household consumption remains a key uncertainty.
Published by Ryan Felsman, Senior Economist, CommSec