House building falls by the most in a decade
Consumer confidence hits 4-year low
Record international tourism
Building activity; Consumer confidence; Tourism
New starts: The number of dwelling starts rose by 1.1 per cent in the June quarter – the first increase since December 2017. Currently, 207,269 homes are being built – the lowest level in 3½ years. House starts fell by 10.5 per cent in the June quarter – the biggest decline in 10½-years. And $69.8 billion of residential and commercial building work was yet to be done (completed), down from the record high of $77.0 billion in June 2018.
Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment index fell by 5.5 per cent to 92.8 points in October – the lowest level since July 2015. Consumer sentiment is below the longer term average of 101.5 points. A reading below 100 points denotes pessimism.
Tourism: International visitors to Australia rose by 3 per cent to a record high 8.6 million over the year to June. Spending by international tourists increased by 5 per cent to $44.6 billion – a record high.
The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. Building & building material companies are affected by dwelling starts including Boral, James Hardie, Adelaide Brighton, Lend Lease, CIMIC, Dulux and Brickworks. Tourism data is important for airlines, hotels and booking agents.
What does it all mean?
• The slowdown in residential home building continues. And the amount of work entering the pipeline is declining, having peaked a year ago. The number of homes currently being built across Australia is the lowest level since December 2015. And new (private sector) house building fell by 10.5 per cent in the June quarter – the biggest decline since September 2008.
• With building approvals falling back to pre-residential construction boom levels of around 195,000 units, the demand and supply imbalance will recede, eventually supporting home prices, given still-solid population growth.
• And the pipeline of residential building construction in Sydney and Melbourne remains elevated with overall activity supported by non-residential building activity, including aged care facilities, retail warehouses, offices and recreational buildings.
• The Reserve Bank has its job cut-out convincing Aussies to spend more at the moment. Retail spending lifted by the most in six months in September (up by 0.4 per cent), but consumers appear in no mood to part with their hard-earned coin in October, despite lower mortgage rates and tax relief. In fact, sentiment for mortgagers has fallen to 3½-year lows.
• Tourism continues to be a bright spot for the Aussie economy. A record 8.6 million international visitors made their way ‘Down Under’ over the year to June, up by 3 per cent. According to Austrade’s International Visitor Survey, spending on accommodation, flights, theme parks, airlines and rental cars, combined, lifted to a record-high 44.6 billion, up by 5 per cent. The weaker Aussie dollar is a tourist magnet.
What do the figures show?
Dwelling starts & work done
• The number of dwelling starts (commencements) rose by 1.1 per cent in the June quarter to 46,315 dwellings – the first lift since December 2017.
• House starts fell by 10.5 per cent in the June quarter – the biggest decline in 10½-years, but apartment starts rose by 21.0 per cent.
• Work started on 197,227 new dwellings over the 12 months to June, down by 14.3 per cent on the year. Starts fell from the record high of 234,186 dwellings in the year to December 2016.
• Across Australia, starts in the June quarter fell in five states/territories: NSW (up by 11.7 per cent); Victoria (down by 4.2 per cent); Queensland (down by 9.6 per cent); South Australia (down by 0.9 per cent); Western Australia (up by 19.8 per cent); Tasmania (down by 20.2 per cent); Northern Territory (down by 15.6 per cent); and the ACT (up by 31.3 per cent).
• In the year to June, dwelling starts were higher than the decade average in all of the states and territories except for the Northern Territory (down 57.9 per cent), Western Australia (down 32.2 per cent), South Australia (down 7.3 per cent) and Queensland (down 3.0 per cent). Starts in the ACT were 26.8 per cent above the decade average. Next highest was NSW where starts were up by 23.8 above the decade average with Tasmania up 15.3 per cent and Victoria up 4.3 per cent.
• In the June quarter $69.8 billion of residential and commercial building work was yet to be done (completed), down 9.3 per cent on a year ago.
• The value of residential and commercial building work in the pipeline stood at $89.1 billion at the end of June, down by 10.2 per cent on a year ago and below the record-high of $99.2 billion at the end of June 2018.
• Across Australia, 207,269 homes are being built, down from a record 231,416 homes in March 2018.
• The Westpac/Melbourne Institute survey of consumer sentiment index fell by 5.5 per cent to 92.8 points in October – lowest level since July 2015. Consumer sentiment is below the longer term average of 101.5 points.
• Looking at the Westpac survey: the current conditions index fell by 4.5 per cent – the biggest monthly decline in over two years to 97.4 points. And the expectations index fell by 6.3 per cent to 89.7 points.
• All five components of the index fell in October:
The estimate of family finances compared with a year ago fell by 4.9 per cent to 80.2 points;
The estimate of family finances over the next year fell by 3.7 per cent to 93.3 points;
Economic conditions over the next 12 months fell by 6.0 per cent to 87.1 points;
Economic conditions over the next 5 years fell by 9.1 per cent to 88.9 points;
The measure on whether it was a good time to buy a major household item fell by 4.2 per cent to 114.5 points.
• Housing outlook: A good time to buy a dwelling? The index fell by 5.4 per cent to 116.6 points, but was still up by 13.7 per cent on the year. House price expectations lifted by 5.9 per cent to 138.0 points to be up by 36.1 per cent on a year ago.
• Unemployment expectations fell by 1.3 per cent to 131.8 points in October (assuming a slightly stronger job market).
What is the importance of the economic data?
• The Australian Bureau of Statistics releases data on dwelling commencements (starts) each quarter. The figures provide guidance on future construction activity. If construction begins on new houses or apartments, it signifies work for building trades.
• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
What are the implications for interest rates and investors?
• Aussie business owners and consumers are on guard. The tick-up in unemployment, elevated mortgage debt and slow wages growth are weighing on consumers, despite interest rate and income tax cuts. And the uncertain economic backdrop, lower value of the Aussie dollar, higher petrol prices and reversal in global sharemarkets in October are also combining to unnerve households.
• The Reserve Bank’s move to cut interest rates to fresh record lows appears to have spooked consumers about the economic outlook. Sentiment has fallen immediately after rates were cut in June, July and now October.
• Disappointing readings on consumer (4-year lows) and business (6-year lows) confidence justifies stimulus by policymakers to shore-up Australia’s slowing economy. The easing of monetary policy and tax relief – it is hoped – will eventually encourage jobs growth, consumer spending and business investment.
• But dwelling investment will continue to be drag on growth in the near-term, despite the unexpected lift in building starts in the June quarter, home price revival on the East Coast and improving housing finance commitments.
• Commonwealth Bank Group economists expect another rate cut in February 2020. But we view fiscal policy easing in the way of further personal income tax cuts and more infrastructure spending to be potentially more beneficial than taking the cash rate lower.
Published by Ryan Felsman, Senior Economist, CommSec