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Residential property outperforms shares

Top end of the market leads property downturn
Home prices; Manufacturing

Home prices: The CoreLogic Home Value Index of national home prices fell by 0.7 per cent in June – the biggest decline in 16 months. Home prices were 7.8 per cent higher over the year. In capital cities, prices fell by 0.8 per cent – also the biggest fall in 16 months – but prices were still up 8.9 per cent over the year. Regional home prices were down 0.2 per cent (up 3.7 per cent on the year) – the first decline in 10 months.

Residential property outperforms: Total returns on national dwellings rose by 11.7 per cent in the year to June with houses up by 11.4 per cent on a year earlier and units up by 12.3 per cent. In contrast, the S&P/ASX All Ordinaries Accumulation Index fell by 7.2 per cent over the year to June.

Manufacturing sector: The AiGroup’s Performance of Manufacturing Index rose by a record 9.9 points to 51.5 in June. The index had hit 11-year lows of 35.8 in April, before improving to 41.6 in May. The ‘final’ CBA/IHS Markit Manufacturing Purchasing Managers’ Index rose from a record low 44 in May to an 11-month high of 51.2 in June. 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?

• Residential property was a star performer in financial year 2019/20, returning 11.7 per cent – well ahead of shares which fell by 7.2 per cent – the worst fiscal year since 2011/12. But that could change as we enter the new financial year. Commonwealth Bank economists are forecasting a fall in home prices of up to 10 per cent in 2020.

• The economic contraction is weighing on housing demand with the downturn spreading across Aussie suburbs and regions in June. National home prices fell by 0.7 per cent in June – the most in 16 months. Melbourne dwelling prices were down by 1.1 per cent – the biggest decline in 17 months. And Sydney home values lost 0.8 per cent – the biggest decline in 15 months.

• The ‘posh’ suburbs of Sydney and Melbourne appear to have reacted first to the negative economic shock – leading the pandemic-induced slowdown in Aussie home prices. In June, the top quartile of homes by capital value were down by 1.6 per cent and 1 per cent, respectively, in Melbourne and Sydney.

• In the June quarter, Melbourne’s inner eastern suburbs (down 3.8 per cent) posted the largest quarterly price decline in the virus-hit southern capital. And there were declines in values across some high-end markets and beachside suburbs in Sydney, such as North Sydney (down 2.2 per cent), Sutherland (down 1.9 per cent), the Northern Beaches (down 1.7 per cent) and Inner West (down 1.2 per cent).

• But it wasn’t all bad news with home prices up in Hobart (up 1 per cent), Adelaide and Canberra (both up 0.7 per cent) and Darwin (up 0.4 per cent) in the June quarter – perhaps due to the earlier re-openings of these economies because of very low active virus cases.

What do the figures show?

Home prices – June

• The CoreLogic Home Value Index of national home prices fell by 0.7 per cent in June – the biggest decline in 16 months. But home prices were still 7.8 per cent higher over the year.

• In capital cities, prices fell by 0.8 per cent – also the biggest fall in 16 months – but prices were still up 8.9 per cent over the year. House prices fell by 0.9 per cent in June and apartment prices eased by 0.6 per cent. House prices were still up 9.1 per cent on a year ago and prices of apartments increased by 8.4 per cent.

• In regional areas, home prices fell 0.2 per cent in June – the first decline in 10 months – with houses and apartment prices also both down by 0.2 per cent. Regional home prices were up 3.7 per cent on the year to June.

• The average Australian capital city house price (median price) in June was $677,194 and the average unit price was $576,058.

• Home prices were lower in five of the eight capital cities in June. Home prices fell by the most in Melbourne and Perth (both down 1.1 per cent), followed by Sydney (down 0.8 per cent), Brisbane (down 0.4 per cent) and Adelaide (down 0.2 per cent). But prices rose most in Hobart and Darwin (both up 0.3 per cent), followed by Canberra (up 0.1 per cent).

• Home prices were higher than a year ago in six of the eight capital cities in June. Prices rose the most in Sydney (up 13.3 per cent), followed by Melbourne (up 10.2 per cent), Hobart (up 6.4 per cent), Canberra (up 6.3 per cent), Brisbane (up 4.4 per cent) and Adelaide (up 2 per cent). But prices were down in Perth (down 2.5 per cent) and Darwin (down 1.5 per cent).

• Total returns on national dwellings rose by 11.7 per cent in the year to June with houses up by 11.4 per cent on a year earlier and units up by 12.3 per cent. In contrast, the S&P/ASX All Ordinaries Accumulation Index fell by 7.2 per cent over the year to June.

Manufacturing Purchasing Managers’ indexes – June

• The AiGroup’s Performance of Manufacturing Index rose by a record 9.9 points to 51.5 in June. The index had hit 11-year lows of 35.8 in April, before improving to 41.6 in May. Any reading above 50 indicates an expansion in activity.

• The improvement in factory activity was broad-based, including production (up 9.9 points to 52.3), employment (up 8.9 to 49.6 points), new orders (up 20.6 to 55.7 points), exports (up 16.1 to 47.2 points) and sales (up 19 points to 56.1). But supplier delivery times eased (down 2.7 to 47.6 points) as did finished stocks (down 1.4 points to 46.5).

• The AiGroup said, “Australian manufacturing expanded, albeit mildly, for the first time since February. The new orders index jumped into expansion in June indicating improved production in the coming months. Food & beverage manufacturers reported new orders from distributers as restaurants and pubs start to reopen. The instant asset tax write-off increased demand for some machinery & equipment manufacturers.”

• And, “Some manufacturers reported that they have implemented stand downs because they have suffered significantly reduced sales, but do not qualify for JobKeeper (which requires a fall in revenue of 30 per cent or more). Manufacturers in the metal products and ‘building materials, wood, furniture & other products’ sectors remain firmly in contraction. Respondents in these sectors reported low levels of production, sales and new orders because of the pandemic. Some exporters said their overseas markets are essentially shut down by COVID-19, as of June.”

• The ‘final’ CBA/IHS Markit Manufacturing Purchasing Managers’ Index rose from a record low of 44.0 points in May to an 11-month high of 51.2 in June. Any reading above 50 indicates an expansion in activity.

• According to CBA/IHS Markit, “Australian manufacturing conditions showed some modest improvement in June, according to the headline PMI figure, as the country relaxed its lockdown measures. The survey indicated a marked easing in the rates of decline in both production and new orders while confidence rose to a 16-month high on hopes of a further improvement in the coming months. However, firms were reluctant to invest in new capacity, and instead reduced employment and input purchasing in June to contain costs.”

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 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?

• Further declines in Melbourne home prices are likely with 36 suburbs back under COVID-19 stay-at-home orders. Many of the ‘hotspot’ suburbs are located in Melbourne’s West and North West – areas where unemployment is already 9.3-9.6 per cent in May.

• Nationwide, housing activity had picked up in May and into June with listings and sales both rising as the economy re-opened and confidence improved as virus concerns eased.

• Record low interest rates and mortgage relief from the banks have also lent support. But virus uncertainty, less appetite to take on more mortgage debt, rising unemployment, lower household incomes, lower inbound migration and elevated rental vacancies could weigh on property prices over coming months.

• While CoreLogic’s national home value index is heavily skewed towards to the two big cities, the resilience displayed so far by the Hobart, Canberra and Darwin property markets serves to highlight the nationwide variances in performances across capital cities and regional towns.

• The improvement in Aussie manufacturing activity – led by a lift in new orders – is a ‘shot in the arm’ for beleaguered factory floor workers.

Published by Ryan Felsman, Senior Economist, CommSec