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Record shares; Positive Aussies

High-rise Australia loses favour
Weekly consumer sentiment; Building approvals

Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.9 per cent to 118.5 points. Consumer sentiment remains above the average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.

Record shares: The ASX 200 index hit an intra-day record high today.

Building approvals: Council approvals to build new homes fell by 1.2 per cent in June after rising 0.3 per cent in May. But the value of all building approvals (including commercial) rose 2.0 per cent. Commercial building approvals stand at 11-month highs.

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The approvals data has implications for banks, retailers, developers, building and building material companies.

What does it all mean?

• Tax cuts are filtering through, share prices are at record highs and home prices are stabilising in a number of major capital cities after recent weakness. So there’s a lot to like. The two missing ingredients for most Aussie families are a stronger dollar and lower petrol prices. If these factors were evident, consumers would be over the moon. But neither missing elements are likely to move in the ‘right’ direction anytime soon.

• The high level of consumer confidence boosts the outlook for Aussie retailers and other consumer-dependent businesses.

• Last week it was the All Ordinaries share index breaching new record highs. Today it was the turn of the closely-watched ASX 200 index, taking out the previous intra-day record high from almost 12 years ago (November 1, 2007). There is global optimism that central banks will do what it takes to support economic activity in a low inflation/low wage environment.

• Three years ago the preference of home buyers was for an apartment rather than a free-standing home. And not just an apartment but one in a high-rise building. But the trend to high-rise living has clearly peaked. And while the free-standing house is back in favour, it is clear that other types of homes are engendering more interest. In particular, townhouses. One in eight homes is now a townhouse, the highest on record. Seems like Aussies haven’t totally lost interest in backyards, rather home owners are keen for smaller yards on the smaller lot sizes.

• Fewer new homes will be built over the next year, but there is work for tradespeople in renovations as well as in the commercial sector. In fact the value of building is 16 per cent higher than ‘normal’ (decade average). And NSW, ACT and Tasmanian home building approvals are still above decade averages.

What do the figures show?

Consumer Sentiment

• The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.9 per cent to a 4-week high of 118.5 points. Consumer sentiment remains above the average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.

• Only one out of the five major components of the index fell last week:

The estimate of family finances compared with a year ago was down from +13.1 points to +12.1 points;

The estimate of family finances over the next year was up from +25.6 points to +27.1 points;

Economic conditions over the next 12 months was up from +5.8 points to +11.9 points;

Economic conditions over the next 5 years was steady at +9.1 points;

The measure of whether it was a good time to buy a major household item was up from +27.9 points to +32.4 points.

• The measure of inflation expectations fell from 4.2 per cent to 4.0 per cent.

Building Approvals

• Council approvals to build new homes fell by 1.2 per cent in June after rising 0.3 per cent in May. Approvals are down by 25.6 per cent over the year.

• House approvals rose by 0.5 per cent, but apartment approvals fell by 3.9 per cent.

• In trend terms, overall approvals fell by 1.3 per cent in June, the 19th straight fall.

• Over the past year 187,105 new homes were approved (decade average 194,967).

• Dwelling approvals across states/territories in June: NSW (down 5.4 per cent); Victoria (up 9.7 per cent); Queensland (down 1.0 per cent); South Australia (flat); Western Australia (down 8.6 per cent); Tasmania (down 11.9 per cent). Trend terms: Northern Territory (up 5.8 per cent); ACT (down 4.7 per cent).

• The value of all commercial and residential building approvals rose by 2 per cent in June but were still 4.2 per cent down on the year. Residential approvals fell by 3.1 per cent in June; new building fell by 3.7 per cent; alterations & additions rose by 1.2 per cent. Commercial building rose by 9.6 per cent.

• Over the year to June, building approvals totalled $113.9 billion, up 16.1 per cent on the decade average.
What is the importance of the economic data?

• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

• The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
What are the implications for interest rates and investors?

• The hope is that Aussies will soon start spending, buoyed by rate cuts, tax cuts, stable home prices and the increase in the minimum wage. The outlook for retailers is positive.

• Today Melbourne Institute released “The Household, Income and Labour Dynamics in Australia Survey: Selected Findings from Waves 1 to 17” The findings on economic issues were generally positive, including record real average household disposable incomes, fall in dependence on income support and welfare, and no deterioration in income inequality.

• Here is the link to today’s HILDA report: https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0011/3127664/HILDA-Statistical-Report-2019.pdf . Investors are encouraged to dissect the actual findings given some mixed reporting.

• Builders, planners and tradespeople need to always be alert to the change in consumer preferences. It wasn’t that long ago that free-standing houses were regarded as ‘yesterday’s’ home with high-rise apartments the new black. Well preferences are changing again – a trend that may be hastened by well publicised construction issues on a raft of high-rise projects.

• The Reserve Bank is expected to sit back for a few months before deciding the next move on rates.

Published by Craig James, Chief Economist, CommSec