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Broad-based lift in home prices

Record manufacturing conditions
Home prices; Manufacturing activity

• Home prices: The CoreLogic national home value index rose by 1.8 per cent in April after rising 2.8 per cent in March (biggest rise in 32 years). Home prices are up 7.8 per cent on the year.

• Record home prices: Home prices hit record highs in 63 of the 88 SA4 regions across Australia in April (up 2 regions on March). And prices rose in 84 of the 88 SA4 regions in the month (down 1 region).

• Manufacturing sector: The AiGroup Performance of Manufacturing index rose by 1.8 points in April to 61.7 points – the strongest level since March 2018 – indicating a stronger pace of expansion. And the ‘final’ IHS Markit Manufacturing Purchasing Managers’ index rose from to 56.8 points in March to a record 59.7 points in April. Readings above 50 points indicate an expansion in activity.

Home price data is important for retailers, especially those focussed on consumer durable goods. The manufacturing data provides guidance for companies in the Industrials sector.

What does it all mean?

• Home prices continue to rise, the important point being that gains are broad-based. In April, the only price falls occurred in Queensland – Outback (down 3.4 per cent); Western Australia – Outback, North (down 1.4 per cent); Townsville (Queensland) and Western Australia – Wheat Belt (both down 0.4 per cent).

• Higher prices are enticing more owners to list their properties. And more homes are being built, so supply is responding to the higher demand. Of course the regulators will be watching the situation closely.

• Around two-thirds of people are paying off homes or own the home outright. So higher home prices, boost wealth and borrowing capacity.

• But higher home prices may mean renters and first home buyers downgrade expectations of what they can afford.

• Australia’s economic recovery remains on course. Activity in the manufacturing sector continues to lift solidly. And activity in the housing market remains solid, underpinned by rising job security, low interest rates and home buyer grants.

What do the figures show?

Home prices – April

• The CoreLogic Home Value Index of national home prices rose by 1.8 per cent in April to be 7.8 per cent higher over the year.

• In capital cities, prices also rose by 1.8 per cent to be up 6.4 per cent over the year. House prices climbed 2.0 per cent and apartment prices rose by 1.2 per cent. House prices were up 8.0 per cent on a year ago and prices of apartments increased by 1.8 per cent.

• In regional areas, home prices rose by 1.9 per cent to be up 13 per cent on the year. House prices rose 2.0 per cent to be up 13.5 per cent on the year. Apartment prices rose 1.6 per cent in the month to be up 10.6 per cent on the year.

• The average Australian capital city house price (median price) in April was $761,051 and the average unit price was $597,978.

• Home prices were higher in all eight capital cities in April: Sydney (+2.4 per cent); Melbourne (+1.3 per cent); Brisbane (+1.7 per cent); Adelaide (+2.0 per cent); Perth (+0.8 per cent); Hobart (+1.0 per cent); Darwin (+2.7 per cent); Canberra (+1.9 per cent).

• Home prices were higher than a year ago in all eight capital cities in April: Sydney (+7.5 per cent); Melbourne (+2.2 per cent); Brisbane (+8.3 per cent); Adelaide (+10.3 per cent); Perth (+6.7 per cent); Hobart (+13.8 per cent); Darwin (+15.3 per cent); Canberra (+14.2 per cent).

• Total returns on national dwellings rose by 11.4 per cent in the year to April with houses up 13.0 per cent and units up by 7.1 per cent on a year earlier. In contrast, the S&P/ASX All Ordinaries Accumulation Index rose by 33.9 per cent over the year to April.

Manufacturing Purchasing Managers’ indexes – April

• The AiGroup Performance of Manufacturing index rose by 1.8 points in April to 61.7 points – the strongest level since March 2018 – indicating a stronger pace of expansion. And the ‘final’ IHS Markit Manufacturing Purchasing Managers’ index rose from to 56.8 points in March to a record 59.7 points in April. Readings above 50 points indicate an expansion in activity.

• AiGroup reported: “April was the highest monthly result for the Australian PMI® since March 2018 and the fifth highest result since the Australian PMI® began in 1992. The Australian PMI® capacity utilisation index moved to its highest level on record (since this series commenced in 2007), which suggests employment and/or investment may need to step up in order to facilitate further growth from here. Indeed, many respondents reported that they plan to invest in their facilities, equipment, staff and/or their overall capacity in the coming three to six months.”

IHS Markit noted: “Australia’s manufacturers saw the sector’s growth accelerate to the highest level since the survey began in May 2016 during April. Recovery from the pandemic as COVID-19 restrictions eased helped to boost business confidence and support demand, although supply constraints continued to feature strongly, contributing to a record rise in input cost.”

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 IHS Markit 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 the 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 investors?

• While home prices continue to lift, history shows that a slowdown eventually arises. New buyers may not be able to afford higher-priced properties, especially if incomes stay stagnant. Some may give up the search while others revise their expectations on the desirable property. Supply responds to the higher demand and this will continue to evolve over the next few quarters. While some buyers may experience FOMO (fear of missing out), the good news is that the Reserve Bank is in no rush to lift rates – especially with inflation well contained. So buyers can continue to do their homework to find the right property, especially if new listings lift as expected.

• Not all is going plain sailing in the manufacturing sector. Note the following from AiGroup: “Manufacturers in most sectors (all except food & beverage manufacturing) reported supply chain difficulties including delivery delays and high freight pricing. High prices for various metals, raw materials and imported components continue to hamper many manufacturers. Some manufacturers reported they are increasing their inventory levels and placing larger orders for raw materials to meet future demand and to hedge against possible supply chain issues.”

• The higher costs may eventually be passed through into higher consumer prices. The higher costs may also serve to dent profitability.

Published by Craig James, Chief Economist, CommSec