Biggest increase in Aussie home prices in 16 years: Ryan Felsman

EXPERT OBSERVATION

The CoreLogic Home Value Index of national home prices rose by 1.7% in November, the biggest increase since October 2003.

And capital city home prices rose by 2.0% – also the biggest lift in 16 years.

Regional home prices rose by 0.5% in the month. Sydney home prices lifted by 2.7% in November – the biggest monthly increase since October 1988.

Of the 88 SA4 regions across Australia, home prices were up on a year ago in 39 regions. Home prices in West and North-West Tasmania rose by 5.9% over the year.

The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 51.6 points to a 3-year low of 48.1 points in November.

And the ‘final’ CBA/IHS Markit Manufacturing Purchasing Managers' Index fell from 50.0 points to a 31⁄2-year low of 49.9 points. Any reading below 50 indicates contraction in activity.

What does it all mean? 

Aussie home prices are booming. National property prices lifted by the most in 16 years in November. And in Australia’s most populous city – Sydney – home prices surged by 2.7%, posting the biggest monthly gain in 31 years.

Record-low mortgage rates and an easing in lending standards have seen a surge in demand.

In fact, preliminary ‘unadjusted’ auction clearance rates last weekend came in at 84.7% in Sydney and 78.3% in Melbourne, according to CoreLogic results.

And on the supply side, the limited pool of housing stock for sale is also supporting a surge in home price growth.

For combined capital cities, the number of new homes listed for sale is down by 15.3% over the year to November with Sydney listings down 23.1%, according to CoreLogic. Newly advertised listed stock is at the lowest level since 2007.

The rapid recovery in the property market since the Federal Election has seen national home prices post their first annual gain (up 0.1%) since April 2018. Still, in many regions, home prices are lower than a year ago.

In fact there were annual gains in home prices in only 39 of the 88 regions in November. But home prices in Tasmania’s West, North West and South East are up 5.3-5.9% over the year to November. And in Melbourne’s posh Inner East, annual gains are a nation-leading +8.0%. 

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What do the figures show? 

Home prices

The CoreLogic Home Value Index of national home prices rose by 2.0% in November, the biggest increase since October 2003. Home prices are 0.1% higher over the year. 

In capital cities, prices rose by 2.0% – the biggest lift in 16 years – to be up 0.4% over the year to November. House prices rose by 2.1% and apartment prices lifted by 1.6%. House prices were up 0.1% on a year ago and prices of apartments increased by 1.4%. 

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In regional areas, home prices rose by 0.5% with houses and apartment prices also both up by 0.5%. Regional home prices are down 1.2% on the year to November. 

The average Australian capital city house price (median price) was $652,446 and the average unit price was $563,439 in November.

Dwelling prices rose in seven of the eight capital cities in November. Home prices rose by the most in Sydney (up by 2.7%), followed by Hobart (up by 2.3%), Melbourne (up by 2.2%), Canberra (up by 1.6%), Brisbane (up 0.8%), Adelaide (up by 0.5%) and Perth (up by 0.4%). But prices fell in Darwin (down by 1.2%). 

Home prices were higher than a year ago in four of the eight capital cities in November. Prices rose the most in Hobart (up by 4.2%), followed by Canberra (up by 3.0%), Melbourne (up by 2.2%) and Sydney (up by 1.6%).

But prices were down in Darwin (down by 10.9%), Perth (down by 7.7%), Brisbane (down by 0.5%) and Adelaide (down by 0.5%).

Total returns on national dwellings rose by 4.1% in the year to November - the most in 19 months - with houses up by 3.6% on a year earlier and units up by 5.4%.

In contrast, the S&P/ASX All Ordinaries Accumulation Index lifted by 25.9% over the year to November. 

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Manufacturing Purchasing Managers’ Indexes - November

The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 51.6 to a three-year low of 48.1 points in November. And the CBA/IHS Markit Manufacturing Purchasing Managers' Index fell from 50.0 points to 3½-year lows of 49.9 points in November. Any reading below 50 indicates contraction. 

According to AiGroup: “Drought remains a top concern for many manufacturers, particularly those located in rural areas or those selling metal products and machinery & equipment to the agricultural sector. The small but diverse Textiles, Clothing and Footwear (TCF), paper and printing’ sector recorded its lowest reading since early 2013, with respondents noting weak market demand and rising raw material costs."

According to CBA/IHS Markit: “Australian manufacturing conditions were broadly stagnant in November, as a survey-record fall in new orders and a decline in output weighed on the headline PMI. A weakening sales trend contributed to a further fall in backlogs which, in turn, dampened hiring. Jobs growth was marginal. Meanwhile, firms once again failed to add to inventories of both inputs and final goods while business confidence fell to the lowest since June 2016.”

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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. 

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What are the implications for interest rates and investors?

The Aussie property market is booming due to strong demand, reduced supply and record low interest rates.

And with listings remaining at very low levels, residential home building falling and population growth remaining solid, could a potential housing shortage boost home price growth even further in 2020? Yes, according Commonwealth Bank Group economists whom are forecasting a 6.1% lift in capital city home prices over the year, led higher by Sydney (up 7.0%) and Melbourne (up 8.0%).

Gains of 2.5-4.0% are expected elsewhere except Darwin, with prices tipped to be flat. If this materialises, consumers may feel a tad more optimistic about their wealth and be encouraged to increase their discretionary spending. But tepid wage growth and elevated mortgage debt will likely restrain consumers.  

Global manufacturing conditions have improved. In fact, the November purchasing manager index readings for leading exporters’ Germany, Japan and China have bottomed after a period of contraction.

Trade tensions between the US and China have eased in recent months with the official Chinese factory gauge expanding in November for the first time since April on improving external demand.

But the outlook for global growth is highly dependent on a ‘phase one’ trade deal negotiations with the next tranche of US tariffs – 15% duty on US$156 billion worth of Chinese products – due on December 15. 

But things aren’t as promising for Aussie manufacturers. Both the AiGroup and CBA/IHS Markit manufacturing gauges hit three-year lows with activity contracting in November.

Like the Reserve Bank and most market economists, the AiGroup has implored the Federal Government to deploy additional fiscal stimulus measures to ‘jump-start’ the economy.

The AiGroup said: The further fall in new orders is far from encouraging...stimulus from interest rate and income tax cuts has not so far flowed through to consumer and business spending. The Government will need to look very closely at additional stimulus options over coming months."

Commonwealth Bank Group economists expect another rate cut in February 2020. But with limited conventional monetary policy ammunition at its disposal, we would prefer to see additional fiscal initiatives – such as infrastructure spending and tax cuts - be announced by the Federal Government to prop up economic activity.

That said, credit ratings agency Standard & Poor’s last week warned that Australia’s AAA sovereign credit rating could be at risk should the government announce large spending measures.  

Ryan Felsman is a senior economist at CommSec.