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Aussie home prices lift by the most in 21 months

Annual export prices growth hits 2-year highs
Home prices; Export & import prices; Manufacturing

Home prices: The CoreLogic Home Value Index of national home prices rose by 0.04 per cent in July – the biggest increase since October 2017. And capital city home prices rose by 0.1 per cent – the biggest lift since August 2017. Home prices rose most in Darwin (up 0.4 per cent), followed by Hobart (up by 0.3 per cent). Brisbane, Sydney and Melbourne prices all rose by 0.2 per cent. But prices were down in Perth by 0.5 per cent, followed by Adelaide and Canberra (both down by 0.3 per cent). Regional home prices fell by 0.2 per cent.

Export & import prices: Import prices rose by 0.9 per cent (consensus: 1.5 per cent) in the June quarter and were up 2.8 per cent on a year ago. Export prices rose by 3.8 per cent (consensus: 2.8 per cent) in the quarter to be up 17.4 per cent over the year – the strongest annual growth rate in two years.

Terms of trade: Based on today’s data we expect that the ratio of export prices to import prices (terms of trade) rose by around 2.8 per cent in the June quarter.

Manufacturing sector: The Australian Industry Group (AiGroup) Performance of Manufacturing Index rose from 49.4 points to 51.3 points in July. But the ‘final’ CBA/IHS Markit Manufacturing Purchasing Managers’ Index fell from 52.0 to 51.6 in July. Any reading over 50 indicates 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. The terms of trade data is useful in assessing the outlook for the Australian dollar and therefore trade-exposed businesses.

What does it all mean?

• There’s a lot to like about today’s Aussie data releases. Home prices lifted, export incomes are growing and manufacturing sector activity rebounded in July. The economy isn’t firing on all cylinders yet, but the loss of momentum earlier this year appears to have been contained by policy stimulus.

• Importantly, with the Aussie sharemarket straddling record highs and home prices finding a floor, consumers may start to feel a bit more chipper. That said, continued job gains remain crucial to improving sentiment.

• Policymakers have acted to stabilise the property market after two years of falling home prices. While it’s too early to determine whether a ‘soft landing’ has been engineered, Aussie home prices appear to have bottomed. In fact, national home prices increased by the most since October 2017 in July.

• The lift in home prices was modest in July, but increases were broad-based, even extending to the Top End, where Darwin led gains across capital cities. Territorians have had a rough time with home prices down almost 30 per cent peak-to-trough, so this is a very welcome development.

• Housing markets, however, will still have to contend with an increased supply of properties as new house and apartment projects get completed over the next year. But apartment prices rose in both Sydney and Melbourne, despite extensive coverage of building defects.

• The good news for Australia more broadly is that the prices of goods we export are rising at a far faster pace than the price of imports. Aussie incomes continue to rise sharply, boosting our fiscal position.

What do the figures show?

Home prices

• The CoreLogic Home Value Index of national home prices rose by 0.04 per cent in July, the biggest increase since October 2017. But home prices fell by 6.4 per cent over the year to July.

• In capital cities, prices rose by 0.1 per cent – the biggest lift since August 2017 – to be down 7.3 per cent over the year to July. House prices were broadly flat, but apartment prices rose by 0.2 per cent. House prices were down 8.0 per cent on a year ago and apartments were down by 5.3 per cent.

• In regional areas, house prices fell by 0.2 per cent, but apartment prices were broadly flat in July to be down 3.0 per cent and 3.1 per cent respectively on the year.

• The average Australian capital city house price (median price) was $622,897 and the average unit price was $532,110 in July.

• Dwelling prices rose in five of the eight capital cities in July. Home prices rose by the most in Darwin (up 0.4 per cent), followed by Hobart (up by 0.3 per cent). Brisbane, Sydney and Melbourne prices all rose by 0.2 per cent. But prices were down in Perth by 0.5 per cent, followed by Adelaide and Canberra (both down by 0.3 per cent).

• Home prices were lower than a year ago in six of the eight capital cities in July. Prices fell by the most in Sydney (down 9.0 per cent); Perth (down 8.9 per cent); Darwin (down by 8.7 per cent), Melbourne (down 8.2 per cent); Brisbane (down 2.4 per cent) and Adelaide (down 0.8 per cent). But prices are still positive in Hobart (up 2.8 per cent) and Canberra (up 1.1 per cent).

• Total returns on national dwellings fell by 2.7 per cent in the year to July with houses down by 3.4 per cent on a year earlier and units were down by 0.8 per cent. In contrast, the S&P/ASX All Ordinaries Accumulation Index lifted by 12.9 per cent over the year to July.

Manufacturing Purchasing Managers’ Indexes

• The Australian Industry Group (AiGroup) Performance of Manufacturing Index rose from 49.4 points to 51.3 points in July. But the ‘final’ CBA/IHS Markit Manufacturing Purchasing Managers’ Index fell from 52.0 to 51.6 in July. Any reading over 50 indicates expansion.

• According to AiGroup, “The improvement in July was driven by ‘building materials, wood, furniture & other’ manufacturers, the large food & beverages sector and the chemicals sector, while the heavy industrial sectors (metals, machinery & equipment) continue to report weak conditions. Local demand for Australian manufactured products remains weak with both sales and production contracting in July. However, overseas demand remains strong, particularly for consumable manufacturing products such as food, beverages, pharmaceuticals, vitamins and cosmetics.”

• According to CBA/Markit, “Australia’s manufacturing sector started the third quarter on a softer note, with the latest survey data indicating a moderation in growth. Expansions in both output and new orders eased in July, while firms cut back on stockbuilding. However, business sentiment remained positive. Meanwhile, cost inflation intensified on the back of a weaker exchange rate, pushing firms to raise selling prices further.”

Export & import prices

• The Bureau of Statistics (ABS) reported that import prices rose by 0.9 per cent in the June quarter to be up 2.8 per cent over the year. The Aussie dollar depreciated against the greenback during the quarter, supporting trade prices.

• Import prices were driven higher by increases in petroleum, petroleum products and related materials (up 6.1 per cent) and “other” transport equipment (up 7.1 per cent).

• Six of the ten broad import categories recorded price increases in the June quarter.

• Export prices rose by 3.8 per cent in the June quarter. Export prices are up 17.4 per cent over the year. Overall, export prices were driven by higher prices for iron ore, gold, base metals, metal scrap, petroleum, petroleum products and meat.

• Eight of the ten broad export categories recorded price increases in the June quarter.

• The ratio of export prices to import prices (a proxy for the terms of trade) likely rose by around 2.8 per cent in the June quarter.

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.

• The Australian Bureau of Statistics (ABS) provides quarterly estimates of export and import prices. The figures assist in gauging inflationary pressures in the economy.

What are the implications for interest rates and investors?

• The Reserve Bank is expected to sit back for a few months before deciding the next move on rates. Inflation remains below the policymaker’s 2-3 per cent target, providing headroom for additional policy stimulus to bolster economic activity and reduce unemployment, if required.

• Aussie factory activity bounced back in July. Encouragingly, new orders and employment both lifted.

• Australia’s external sector is in fine fettle. CommSec estimates that the terms of trade rose by over 2 per cent in the June quarter, bolstering Aussie income growth.

• Iron ore prices lifted by over 20 per cent in the quarter, boosting the Budget coffers of the Federal Government.

• The impact of the rural drought was most evident in lifting meat prices. Slaughter rates have increased, but so has Chinese demand for Aussie beef – seen as a substitute for pork due to the African swine flu epidemic ravaging China’s hog herd.

Published by Ryan Felsman, Senior Economist, CommSec