Resilient regional home prices. Solid expansion in manufacturing activity.

Resilient regional home prices

Solid expansion in manufacturing activity
Home prices; Manufacturing

Home prices: The CoreLogic Home Value Index of national home prices fell by 0.6 per cent in July, but was still 7.1 per cent higher over the year. In capital cities, prices fell by 0.8 per cent, but were 7.9 per cent higher over the year. Regional home prices were flat (up 3.9 per cent on the year), but rose in South Australia (up 1 per cent), Northern Territory (up 0.7 per cent) and New South Wales (up 0.5 per cent).

Manufacturing sector: The AiGroup’s Performance of Manufacturing Index rose by 2 points to 53.5 in July. And the ‘final’ CBA/IHS Markit Manufacturing Purchasing Managers’ Index rose from 51.2 in June to 54 in July. Manufacturing activity has expanded for two successive months for the first time since October 2019. Any reading above 50 indicates an expansion in activity.

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

What does it all mean?

• Aussie home prices continued to ease in July with the CoreLogic Daily Home Value index of five capital cities down by 2.3 per cent after peaking on April 22. In July, broader national dwelling prices fell by 0.6 per cent, capital city home prices were down 0.8 per cent, but regional home prices were broadly flat.

• Attention will focus on the property downturn in Australia’s two most populous cities – Sydney and Melbourne – with virus lockdowns and outbreaks weighing on sentiment and activity. While price declines are broadening across capital cities, regional dwelling prices held up in July, led by gains in regional South Australia (up 1 per cent), Northern Territory (up 0.7 per cent) and New South Wales (up 0.5 per cent). Of course, regional home prices may continue to outperform capital cities in the near-to-medium term as Aussies work remotely and seek lifestyle locations in rural and beachside towns during the pandemic.

• And Canberra’s property market appears to be benefiting from the prominent role of the Federal Government and growing public service policy response to the economic downturn. In fact, home prices rose by 0.6 per cent in the nation’s capital in July – the seventh successive month of price increases. REA Group recently reported, “Buyer search activity has more than doubled compared to last year and has seen the biggest increase in search since the first COVID-19 lockdown in March. Rent search activity is up 75 per cent compared to last year, and first home buyer enquiry has tripled compared to the same time last year.”

• The Melbourne virus lockdown – with property sales and auctions now being conducted online – had a notable impact on home prices, which fell by 1.2 per cent in July –the biggest decline since January 2019. Melbourne home prices are down by 3.7 per cent since recent peaks on April 6, weighing on national home prices.

• With the Victorian Government declaring a ‘state of disaster’ – including the imposition of curfews limiting movements for a further six weeks – it is likely that Melbourne auction clearance rates could return to levels seen in April of around 20 per cent or lower. Data from Domain already shows that just 285 Melbourne homes were listed for sale last week, down 46 per cent from the previous week, with a preliminary auction clearance rate of 58 per cent.

What do the figures show?

Home prices – July

• The CoreLogic Home Value Index of national home prices fell by 0.6 per cent in July. But home prices were still 7.1 per cent higher over the year.

• In capital cities, prices fell by 0.8 per cent, but prices were still up 7.9 per cent over the year. House prices also fell by 0.8 per cent in July and apartment prices eased by 0.6 per cent. House prices were still up 8.1 per cent on a year ago and prices of apartments increased by 7.5 per cent.

• In regional areas, home prices were flat in July with house prices unchanged, but apartment prices rose by 0.1 per cent. Regional home prices were up 3.9 per cent on the year to July.

• The average Australian capital city house price (median price) in July was $673,072 and the average unit price was $570,862.

• Home prices were lower in six of the eight capital cities in July. Home prices fell by the most in Melbourne (down 1.2 per cent), followed by Sydney (down 0.9 per cent), Perth (down 0.6 per cent), Brisbane (down 0.4 per cent), Darwin (down 0.3 per cent) and Hobart (down 0.2 per cent). But prices rose in Canberra (up 0.6 per cent) and Adelaide (up 0.1 per cent).

• Home prices were higher than a year ago in six of the eight capital cities in July. Prices rose the most in Sydney (up 12.1 per cent), followed by Melbourne (up 8.7 per cent), Canberra (up 7.2 per cent), Hobart (up 5.9 per cent), Brisbane (up 3.8 per cent) and Adelaide (up 2.4 per cent). But prices were down in Perth (down 2.5 per cent) and Darwin (down 2.2 per cent).

• Total returns on national dwellings rose by 10.9 per cent in the year to July with houses up by 10.7 per cent on a year earlier and units up by 11.4 per cent. In contrast, the S&P/ASX All Ordinaries Accumulation Index fell by 8.4 per cent over the year to July.

Manufacturing Purchasing Managers’ indexes – July

• The AiGroup’s Performance of Manufacturing Index rose by 2 points to 53.5 in July. Any reading above 50 indicates an expansion in activity.

• The improvement in factory activity was broad-based, including production (up 4.1 points to 56.4), employment (up 3.8 to 53.4 points), supplier deliveries (up 4.2 to 51.8), and finished stocks (up 5.3 to 51.8). But new orders (down 3 points to 52.7), exports (down 5.8 points to 41.4) and sales (down 3.9 points to 52.2) all eased.

• The AiGroup said, “There was a further stabilisation in manufacturing conditions in July. Food & beverage manufacturers noted stabilising demand after months of volatility, while the instant asset tax write-off increased sales for many machinery & equipment manufacturers. Other respondents in this sector noted an increase in demand from the transport and agricultural machinery & equipment. Respondents across all manufacturing sectors noted increased interest in locally made manufactured goods.”

• And, “The improvement in manufacturing conditions in July was driven by only two sectors: food & beverages and machinery & equipment. Metal products; chemicals; building materials, wood, furniture & other manufacturing remained firmly in contraction in July. Manufacturers in these sectors reported a lack of sales from customers due to COVID-19. Some respondents noted that they have completed previous orders but had few new orders coming in.”

• The ‘final’ CBA/IHS Markit Manufacturing Purchasing Managers’ Index rose from 51.2 in June to 54 in July. Any reading above 50 indicates an expansion in activity.

• According to CBA/IHS Markit, “The recovery in the Australian manufacturing sector gathered pace in July, according to the latest PMI data, with output and new orders both returning to growth. Survey data also showed that firms stepped up their purchasing activity and business confidence remained positive. However, employment continued to be reduced despite a rise in backlogs of work. Prices meanwhile signalled weakened inflationary pressures, with input prices and output charges increasing at slower rates.”

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 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 interest rates and investors?

• While CoreLogic’s national home value index is heavily skewed towards to the two big cities, the resilience displayed so far by regional property markets serves to highlight the nationwide variances in performances across capital cities and regional towns. The ACT, in particular, appears set to benefit from rising government employment as services are increasingly rolled out to assist Aussie households and businesses during the pandemic.

• The pandemic also appears to be resulting in a change of mindset for some big city urban dwellers. In July, home prices in the Blue Mountains and Central Coast were up modestly. The allure of more affordable housing, remote working arrangements and superior lifestyle choices are already showing up in relatively stable home prices and lower rental vacancies in both regions of New South Wales.

• Record low interest rates and mortgage relief from the banks have provided support to the property market. But virus uncertainty, less appetite to take on more mortgage debt, rising unemployment, lower household incomes, lower inbound migration, elevated rental vacancies and the eventual removal of policy support could weigh on property prices over coming months. That said, governments have rolled out a variety of measures, including stamp duty and land tax concessions, along with new residential homebuilding grants to stimulate the market.

• The expansion in Aussie manufacturing activity continued into July in a pleasing development for policymakers. Importantly, the improvement in the AiGroup gauge was driven by higher production and employment, but an easing in new orders and falling exports will need to be closely monitored.

• Commonwealth Bank Group economists also noted that, “Business expectations remained positive as firms look towards the economy returning to normality in the coming months. Policy stimulus and increased infrastructure work were also factors behind the optimism.” But given Melbourne’s importance as a manufacturing hub, the tightening of restrictions are likely to weigh on demand and confidence in August.

Published by Ryan Felsman, Senior Economist, CommSec