First annual decline in house prices since 2012: CommSec

First annual decline in house prices since 2012: CommSec
First annual decline in house prices since 2012: CommSec

EXPERT OBSERVER

The Bureau of Statistics reports that Australian home prices fell by 0.7 per cent in the June quarter to stand 0.6 per cent lower over the year – the first annual decline since June quarter 2012.

The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.5 per cent to 118.0 – the highest level in five weeks. The index is comfortably above the average of 114.1 held since 2014, and above the longer term average of 113.0 held since 1990.

The minutes from the September 4 Board meeting were issued. The Board’s neutral policy stance remains intact with a period of record low interest rate stability ahead for the foreseeable future. The Reserve Bank Board noted that “since progress on unemployment and inflation was likely to be gradual, they [members] also agreed there was no strong case for a near-term adjustment in monetary policy…. members continued to agree that the next move in the cash rate would more likely be an increase than a decrease.” 

Home price data is important for retailers, especially those focussed on consumer durables. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The Reserve Bank Board minutes provides guidance on interest rate settings.

What does it all mean?

The great re-balancing of the housing market continues. Although the latest data has been superseded by more timely figures, the ABS analysis shows that home prices rose in four capital cities and fell in the other four in the June quarter. The number of homes being built – especially in places like Sydney and Melbourne – are slowly catching up with population growth. And as a result home price growth is becoming more sustainable.

Arguably the number of homes being built still has some way to go to match demand. In the past quarter just fewer than 41,000 homes were added to the housing stock, short of the 5-year average of over 43,000.

Consumer confidence has been choppy in recent months, but optimists continue to defy the pessimists with the ANZ-Morgan survey rebounding to its best level in five weeks. Job security remains a key support for consumer sentiment. A solid August employment report was released last Thursday with all measures of unemployment (including underemployment and underutilisation) falling to their lowest levels in 4-6 years. Unemployment in the boom-state of Victoria is at seven-year lows. Unemployment in Greater Sydney is near decade lows. 

And all the underlying sub-indexes of the consumer confidence survey are higher than their long-term averages except the ‘time to buy a major household item’ index, which is marginally below its long-term average.

There was little new information contained in the Reserve Bank Board’s September 4 monetary policy minutes. Members remained upbeat in their assessment of the Aussie economy.

According to the commentary, economic growth is likely to remain “above potential” through the forecast period. Inflation is “likely to increase over time.” But “significant tensions around global trade policy the outlook” and “low wages growth” presented risks to its outlook. While reiterating the Board’s preference to increase the official cash rate when it next moves interest rates, “progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy.”

What do the figures show?

Residential property prices

The Bureau of Statistics (ABS) has released its Residential Property Price indexes for the June quarter.

“The price index for residential properties for the weighted average of the eight capital cities fell 0.7 per cent in the June quarter 2018. The index fell 0.6 per cent through the year to the June quarter 2018.

The capital city residential property price indexes fell in Sydney (-1.2 per cent), Melbourne (-0.8 per cent), Perth (-0.1 per cent) and Darwin (-0.9 per cent), and rose in Brisbane (+0.7 per cent), Hobart (+3.0 per cent), Adelaide (+0.3 per cent) and Canberra (+0.6 per cent).

Annually, residential property prices fell in Darwin (-6.1 per cent), Sydney (-3.9 per cent) and Perth (-0.9 per cent), and rose in Hobart (+15.5 per cent), Canberra (+3.0 per cent), Melbourne (+2.3 per cent), Adelaide (+2.1 per cent) and Brisbane (+1.7 per cent). 

The total value of residential dwellings in Australia was $6,926,538.0 million at the end of the June quarter 2018, falling $13,321.1 million over the quarter.

The mean price of residential dwellings fell $4,100 to $686,200 and the number of residential dwellings rose by 40,800 to 10,093,700 in the June quarter 2018.”

CommSec estimates that the number of people per home fell from 2.48 in the March quarter to 2.47 in the June quarter.

The number of homes in NSW rose by just 7,800 in the June quarter – the smallest lift in over four years.

Consumer Sentiment

The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.5 per cent to 118.0 – the highest level in five weeks. The index is comfortably above the average of 114.1 held since 2014 and above the longer-term average of 113.0 held since 1990.

Three of the five components of the index increased last week:

Ø  The estimate of family finances compared with a year ago was up from 104.0 to 107.8; 

Ø  The estimate of family finances over the next year was down from 126.2 to 125.7;

Ø  Economic conditions over the next 12 months was down from 109.3 to 108.0; 

Ø  Economic conditions over the next 5 years was up from 111.5 to 115.2;

Ø  The measure of whether it was a good time to buy a major household item was up from 130.1 to 133.1.

The measure of inflation expectations rose from 4.1 per cent to 4.4 per cent.

Reserve Bank September Board minutes:

“Based on the forecasts and associated risks, members assessed that the current stance of monetary policy would continue to support economic growth and allow for further progress to be made in reducing the unemployment rate and returning inflation towards the midpoint of the target. In these circumstances, members continued to agree that the next move in the cash rate would more likely be an increase than a decrease. However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy.” 

On the economic growth outlook: “…recent data had not changed members' assessment that GDP growth was likely to remain above potential throughout the forecast period and inflation was likely to increase over time. However, members recognised that there continued to be risks associated with uncertainties from abroad and low wages growth.”

On the labour market: “Forward-looking indicators of labour demand, including vacancy rates and survey measures of employment intentions, continued to point to above-average growth in employment in the near term. The unemployment rate was expected to decline gradually towards 5 per cent. Wages growth was expected to increase gradually as spare capacity in the labour market is absorbed.” 

On wages growth: “Information from liaison had continued to point to a modest increase in private sector wages growth in coming quarters. Members noted that the effects of the recent increase in the minimum wage would boost wage outcomes in the September quarter.”

On household consumption: “Growth in household consumption was expected to have recovered in the June quarter; retail sales volumes pointed to a solid increase in consumption of goods. Retail sales data for July had been relatively weak, although online sales had continued to grow rapidly.”

On the housing market: “Housing prices had been falling gradually in Sydney and Melbourne, and in recent months price declines had become more widespread across different suburbs and price segments. Although housing prices in Perth had also declined over recent months, prices in other capital cities had been little changed. Rent inflation had remained low.”

On mortgage rate increases: “Once they take effect, these increases would imply a small rise in the average outstanding variable housing loan rate, unwinding about half of the decline observed in the average housing loan rate over the preceding year. Members noted that there was evidence that banks had continued to compete strongly for new borrowers for housing, including by increasing discounts on published lending rates. For owner-occupiers, housing credit had been growing relatively strongly at around 7½ per cent annualised over the preceding six months, whereas growth in lending to investors had slowed noticeably.”

On business investment: “Non-mining investment intentions for 2018/19 reported in the ABS Capital Expenditure survey had been revised higher, although firms still expected capital expenditure to be lower than in 2017/18. Mining investment was still expected to trough in late 2018 or early 2019, as the remaining large liquefied natural gas projects are completed. Business conditions more generally had remained well above average, according to a range of surveys, despite easing slightly since earlier in 2018.”

On the drought: “Drought conditions in some parts of Australia were expected to result in lower overall rural production and exports in the period following the June quarter, although members noted that a record crop was expected in Western Australia.” 

On the Aussie dollar: “…the modest depreciation of the Australian dollar was helpful for domestic economic growth.”

On trade: “…members observed that there were still significant tensions around global trade policy and that this represented a material risk to the outlook.”

What is the importance of the economic data?

The Australian Bureau of Statistics (ABS) provides quarterly data on residential prices. The figures provide further perspectives on the state of the housing purchase sector.

The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

The housing market continues to rebalance. A soft landing is anticipated, but the impact of falling home prices and rising mortgage rates on household budgets will need to be closely monitored. Housing credit growth for owner-occupiers remains firm and first home buyers are taking advantage of improving home affordability.

Aussie consumers are a resilient bunch. Negative news-flow about politics and global trade can influence confidence surveys in the short-term, but its no coincidence the sentiment has been hovering around four-year highs this year, given the record job gains over the year to January. 

The latest employment report provides further evidence that spare capacity is slowly being reduced in the labour market. But the transmission to higher wages and inflationary pressures will only be gradual, despite emerging skills shortages.

The Reserve Bank is under no pressure to lift interest rates – its preferred next move. Fiscal policy is doing some of the heavy lifting in the form of government spending on infrastructure. Non-mining business conditions are also near record highs - the drag from mining investment has almost troughed. The Aussie dollar has weakened, trade surpluses are being posted and economic growth is above its long-term potential, boosted by household consumption.

The Board wont wait to see the ‘whites of the eyes’ of higher inflation rates before lifting the cash rate. But those pressures are still some way off. Therefore, CommSec expects interest rates to be unchanged until at least November 2019.

Ryan Felsman is a senior economist at CommSec

 

 
 
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