Housing wealth soars. Economic recovery ‘delayed’.

NAB Business survey; Reserve Bank Governor Speech; Property prices

What happened? The Australian Bureau of Statistics (ABS) reports that the average value of Australia’s 10.7 million homes rose by a record $52,600 in the June quarter. CommSec estimates that the average number of people per home fell from 2.42 people to 2.41 people in the June quarter.

Reserve Bank Governor: Reserve Bank (RBA) Governor Philip Lowe delivered a speech “Delta, the Economy and Monetary Policy”. The Governor continued to stress that economic recovery is delayed, not derailed. Governor Lowe also said, “I find it difficult to understand why [interest] rate rises are being priced in next year or early 2023.”

Business survey: The NAB business confidence index rose from -7.3 points to -5.3 points in August. And the conditions index rose from +10.1 points to +14.2 points. Long-term averages are around +5.5 points.

Investor implications: The focus is on the future. The RBA Governor expects a solid lift in activity when vaccination targets are met and Australia’s east coast awakens. Businesses are similarly focussed. Investors are now interested in the likely winners and losers when economies awaken. The increased value of Aussie homes is especially encouraging for travel-dependent companies.

The business survey has broad implications for investors and the economy.

What does it mean?

• Australia has almost 10.7 million homes. And quite sensationally the average value of those homes has lifted more than $50,000 in the space of just a three-month period. For those paying off their homes or who own them outright, that represents an amazing lift in wealth levels, thus underpinning increased spending on discretionary purchases.

• The latest business survey is quite encouraging. The business conditions index continues to track above the long-term average together with key measures on activity. Confidence is still slightly down on the long-term average but understandably the national result is being dragged down by NSW and Victoria. Business confidence and conditions are strongest in Tasmania, reflecting its ‘Covid-free’ status.

• The business survey was taken in the second half of August – so before the NSW government released the ‘roadmap’ out of lockdown.

• The Reserve Bank Governor remains positive on the economic outlook. While the economy may contract in the September Quarter by at least 2 per cent, recovery is expected in the December quarter and in 2022.

• The RBA Governor acknowledges that low interest rates are serving to lift home prices at present. But Governor Lowe says that it is not higher interest rates or lending restrictions that will address worsening affordability but rather that supply factors need to be addressed such as planning and zoning restrictions and taxation and social security systems.

What do you need to know?

Reserve Bank Governor speech

Key quotes:

• “The exact magnitude of the economic contraction in the September quarter remains to be determined but it is likely to be at least 2 per cent, and possibly significantly larger than this.”

• “Delta is delaying progress, but it is not expected to derail our resilient economy.”

• “More broadly, society-wide concerns about the level of housing prices are not best addressed through increasing interest rates and curbs on lending. While monetary policy is contributing to higher housing prices at the moment, the way to address these concerns is through the structural factors that influence the value of the land upon which our dwellings are built.”

• “Many of the businesses we talk to are expecting an easing of restrictions later this year. They also remember that the labour market was tightening just a few months ago and are alive to the possibility that this could be again the case next year. This possibility is creating a strong incentive to keep in close contact with employees; it doesn’t make much sense to let workers go, only to have trouble hiring when restrictions are eased.”

Residential Property Price indexes

• The Australian Bureau of Statistics (ABS) has released its Residential Property Price indexes for the June quarter. The ABS reports that Australian home prices rose by a record 6.7 per cent in the quarter to stand 16.8 per cent higher over the year.

• The total value of Australia’s 10.68 million dwellings was a record $8,924.6 billion with the average dwelling price at $835,700. The average price of residential dwellings rose $52,600 in the quarter and number of residential dwellings rose by 44,400.

• CommSec estimates that the average number of people per home fell from 2.421 to 2.410 in the June quarter. The number of homes rose by 79,900 over the past six months while Australia’s population rose by an estimated 42,200.

National Australia Bank Business survey – August

• The NAB business confidence index rose from -7.3 points to -5.3 points in August (long-run average: +5.2 points). And the conditions index rose from +10.1 points to +14.2 points (long-run average: +5.7 points).

• Trading conditions rose by 7.4 points to +19.1 points; profitability rose 9.4 points to +14.8 points; employment fell 2.4 points to +8.8 points.

• The survey was conducted in the period August 17-30, 2021, covering over 500 firms, with NAB economists reporting, “The current lockdowns in Sydney and Melbourne have now persisted for around two months and the ACT for a month.”

• The proportion of firms reporting that they did not require credit rose from near 45 per cent to around 50 per cent.

• In terms of prices and wages NAB economists noted: “Price indicators continued to track at a relatively high rate with final products prices and input prices growth similar to the previous month. Labour costs growth edged up slightly.”

Pulished by Craig James, Chief Economist, CommSec