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Sydney home prices lift by the most in 2 years

Manufacturing activity hits 2½-year low
Home prices; Manufacturing

Home prices: The CoreLogic Home Value Index of national home prices fell by 0.2 per cent in June, the smallest decline since March 2018. Home prices rose by the most in Melbourne and Hobart (both up 0.2 per cent), followed by Sydney (up 0.1 per cent). But prices were down elsewhere, led lower by Canberra and Perth (both down by 0.9 per cent). Regional home prices fell by 0.4 per cent.

Manufacturing sector: The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 52.7 points to 49.4 points in June – the lowest level since August 2016. But the CBA Manufacturing Purchasing Managers’ Index rose from 51.0 to 52.0 in June. Any reading over 50 indicates expansion.

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?

• Sydney and Melbourne home prices appear to be stabilising, reflecting improved sentiment towards the property market since the election. In June, Sydney dwelling prices lifted by a modest 0.07 per cent, but it was the biggest monthly increase since June 2017 when prices rose by 0.15 per cent.

• And it was a similar story in Melbourne, where home prices rose by 0.24 per cent in June – the largest monthly increase since the 0.60 per cent increase in October 2017. But home prices in Perth and Darwin continue to fall amid a protracted downturn since the end of the mining construction boom.

• Housing markets will still have to contend with an increased supply of properties as new house and apartment projects get completed over the next 12 months.

• That said, demand for property has lifted a little, as evidenced by a tentative pick up in auction clearance rates in the Sydney and Melbourne markets. And housing investors appear set to eventually end their recent ‘strike’ – especially given the ‘hunt for yield’ across financial market asset classes with interest rates being cut by central banks.

• And first home buyers are ‘back in the game’, attracted by cheaper home prices and government support, likely rate cuts, personal tax cuts and an easing of loan serviceability hurdles.

• In a worrying, but not totally unexpected development, manufacturing activity contracted in Australia for the first time in almost three years in June.

• The decline in the AiGroup gauge – while at odds with the Commonwealth Bank’s June purchasing managers’ index – is consistent with the downturn in global factory gauges, which have all ‘double dipped’ due to the re-intensification of the US-China trade war in May and slowing global growth.

• But a tariff détente was declared between US President Trump and Chinese counterpart Xi Jinping on the weekend at the G20 Summit in Osaka, providing some hope that tensions will thaw and factory activity will rebound.

What do the figures show?

Home prices

• The CoreLogic Home Value Index of national home prices fell by 0.2 per cent in June, the smallest decline since March 2018. Home prices rose by the most in Melbourne and Hobart (both up 0.2 per cent) followed by Sydney (up 0.1 per cent). But prices were down elsewhere, led lower by Canberra and Perth (both down by 0.9 per cent). Home prices fell by 6.9 per cent over the year to June.

• In capital cities, prices fell by 0.1 per cent – also the smallest fall since March 2018 – to be down 8.0 per cent over the year to June. House prices fell by 0.2 per cent, but apartment prices rose by 0.2 per cent. House prices were down 8.7 per cent on a year ago and apartments were down by 5.9 per cent.

• In regional areas, house prices fell by 0.4 per cent and apartment prices fell by 0.3 per cent in June to be down 3.2 per cent and 3.0 per cent respectively on the year.

• The average Australian capital city house price (median price) was $622,452 and the average unit price was $528,935 in June.

• Dwelling prices rose in three of the eight capital cities in June. Home prices rose in Hobart and Melbourne (both up 0.2 per cent) and Sydney (up 0.1 per cent). But home prices fell in Canberra and Darwin (both down 0.9 per cent), Perth (down 0.7 per cent), Brisbane (down 0.6 per cent) and Adelaide (down by 0.5 per cent).

• Home prices were lower than a year ago in six of the eight capital cities in June. Prices fell by the most in Sydney (down 9.9 per cent); Darwin (down by 9.3 per cent), Melbourne (down 9.2 per cent); Perth (down 9.1 per cent); Brisbane (down 2.6 per cent) and Adelaide (down 0.3 per cent). But prices are still positive in Hobart (up 2.9 per cent) and Canberra (up 1.4 per cent).

• Total returns on national dwellings fell by 3.3 per cent in the year to June with houses down by 4.0 per cent on a year earlier and units were down by 1.4 per cent. In contrast, the S&P/ASX All Ordinaries Accumulation Index lifted by 11.3 per cent over the year to June.

Manufacturing Purchasing Managers’ Indexes

• The Australian Industry Group (AiGroup) Australian Performance of Manufacturing Index fell from 52.7 points to 49.4 points in June – the lowest level since August 2016. But the CBA Manufacturing Purchasing Managers’ Index (PMI) rose from 51.0 to 52.0 in June. Any reading over 50 indicates expansion.

• According to AiGroup, “Manufacturers reported the weakest conditions in almost three years in June. Heavy industrial manufacturers continue to report weaker economic conditions than others, with the house construction downturn and ongoing drought negatively impacting sales of ‘machinery & equipment’ and ‘metal products’ to construction and the agricultural sector. Drought is also increasing input prices for ‘food & beverage’ manufacturers. More positively, export demand for Australian food, beverages, pharmaceuticals, vitamins and other consumer products continues to support the food, beverages and chemicals sectors.”

• According to CBA/Markit, “Australia’s manufacturing sector finished off the second quarter on a stronger note, according to latest survey data. Faster expansions in both production and new orders lifted the headline index which, in turn, encouraged firms to boost hiring and raise purchasing activity. Supply chains remained under pressure and backlogs accumulated while business confidence headed higher. However, inflationary pressures moderated further.”

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?

• The mixed bag of Aussie economic data releases continues. The end of the residential property construction boom and the resulting consumer caution are weighing on domestic demand.

• But in a positive development, home prices in Sydney and Melbourne are showing early signs of stabilisation. An easing of lending and credit conditions, lower mortgage rates and greater policy certainty after the election have boosted sentiment in the big cities.

• That said, the property downturns in Perth, Darwin and regional parts of Western Australia are showing no signs of abating, remaining a huge concern for policymakers.

• And spare a thought for Aussie manufacturers who are contending with very challenging economic conditions. The slowdown in the Aussie economy is weighing on demand, especially for those businesses most exposed to the housing construction downturn.

• New orders of manufactured goods are falling – a similar situation faced by global factories due to slowing global growth and trade flows. And the drought is increasing the cost of production and reducing machinery and equipment demand in the agricultural sector.

• CommSec expects a rate cut to be delivered tomorrow. The aim is to run the economy faster to get the jobless rate down to a new ‘floor’ level of 4.5 per cent to reduce spare capacity and stoke inflation.

Published by Ryan Felsman, Senior Economist, CommSec