Residential growth still short of long-term trend: CommSec

One of the remarkable developments over the past year is that investors and analysts can now track home prices on a daily basis just like the sharemarket, interest rates, currencies or commodities. And just like the other markets, prices can rally a long way in a short space of time.

But that generally means that a period of correction or consolidation has to follow.

As we discuss in the last paragraph on page two, the sharemarket has jumped out of the blocks in 2013. But it started 2012 in a similarly positive fashion, only to face periods of correction over the year.

Certainly, Australian home prices also started 2013 positively. In fact, Sydney home prices lifted 2% in the first 28 days, putting the market on track for gains of around 26% over the year. But prices have indeed consolidated through to mid-February.

Currently Sydney home prices have lifted 1.9% over 2013, outpacing a 1.2% lift in Perth home prices, 0.7% rise in Brisbane-Gold Coast and a 0.4% increase in Adelaide.

Melbourne prices have eased 0.2% this year, dragging the five-city index down to a 0.9% gain.

If home prices grow at the same rate over the year, home prices would lift around 16% in Sydney and 10% in Adelaide with the five-city index up 7.5%.

But the current annual growth rates are probably more instructive, showing gains of around 0-3% over the year.

Indeed, we think it is reasonable for home buyers and investors to price in gains of around 2-3%, still way short of the long-term average growth rate of around 7-8%.

The week ahead

On the domestic front, the main interest is the semi-annual testimony from the Reserve Bank governor on Friday. And in terms of economic data, figures on wages dominate, together with a spattering of other indicators such as car sales and imports.

In the US, housing and inflation data will be the highlight. And in a raft of countries including the US and Europe, "flash" readings on manufacturing conditions are issued.

In Australia, the week kicks off with data today on new vehicle sales. Industry data has already been issued by Australian Federal Chamber of Automotive Industries via its VFACTS report. And on Monday the Bureau of Statistics (ABS) will recast the data in seasonally adjusted and trend terms. In original terms sales totalled 85,430 vehicles in January, up 11.3% on a year ago showing that the new car market is exceedingly healthy.

On Tuesday the Reserve Bank releases the minutes from the February board meeting, while the ABS issues January data on merchandise imports (in other words, imports of goods). Apart from car sales, there are few indications of sales or production activity in January so far, so the import data should prove instructive.

On Wednesday the ABS releases the wage price index, the main gauge of wage pressures in the economy. We are tipping growth in wages of 1% in the December quarter and 3.7% for the year. But the risk is that our forecasts prove to be a touch too high.

The Reserve Bank noted in its quarterly statement:

"Business surveys suggest that wage pressures eased further in the December quarter. Liaison with firms also indicates that there has been a pick-up in the share of firms expecting no growth in average wages over the year ahead, and that skills shortages and wage pressures in the resources sector have eased."

On Thursday there is another ABS publication on wages, but the main use of the "Average Weekly Earnings" publication is to provide dollar estimates on wages rather than to gauge wage pressures in the economy.

And on Friday the Reserve Bank governor delivers his semi-annual testimony to the House of Representatives Economics Committee. With any luck the focus will be on economics rather than activities at the note printing subsidiary. Getting some sense on what cash rate could be considered "normal" would be helpful.

In the US, the week begins with the Presidents' Day holiday on Monday with financial markets and government offices closed. And on Tuesday the National Association of Home Builders will issue the activity index for February.

On Wednesday the usual weekly data on mortgage activity and chain store sales is issued alongside figures on housing starts and producer prices. Housing starts soared by 12.1% in December so economists understandably expect some retracement, with the median decline tipped being around 3%. There will be less interest in producer prices (business inflation) with inflationary pressures benign at present.

On Thursday the regular US weekly data on new claims for unemployment insurance (jobless claims) is issued alongside data on consumer prices, existing home sales, the leading index and Philadelphia Federal Reserve index. The main highlight is home sales with a modest 0.2% increase expected in January after the 1% decline in December.

Also on Thursday, survey group Markit will issue "flash" manufacturing readings for the US and a number of European nations. While it is possibly overdoing it to have two readings on manufacturing each month, financial markets are still showing interest in the data.

Sharemarket, interest rates, currencies and commodities

In the coming week the Australian profit-reporting (earnings season) gets into full swing. On Monday amongst the companies that are expected to report are Amcor, Bendigo Bank, BlueScope Steel, Lend Lease and Pacific Brands.

On Tuesday, results include those from Asciano, Coca Cola Amatil, Fantastic, Sonic Healthcare, Mt Gibson Iron and Commonwealth Office Property Fund.

On Wednesday earnings results are expected from BHP Billiton, Fortescue, GWA Group, Ramsay HealthCare, SEEK Limited, Super Retail Group, Suncorp, Tassal, The Reject Shop and Woodside Petroleum.

On Thursday, AMP, APN News & Media, ASX Limited, Brambles, Centro Retail, Fairfax Media, IAG, Origin Energy, Qantas and Toll Holdings are included in a packed schedule of earnings results. And on Friday, Billabong, Crown, Investra, Santos, Telecom NZ, and Transpacific Industries are listed to report earnings.

In the first 30 days of 2013 the Australian sharemarket has lifted almost 7% with the All Ordinaries up 6.9% and the ASX 200 up 6.8%. If the gains were to be replicated over the entire year the indices would post gains of around 60%.

However, it is instructive to turn back the clock 12 months. In the first 30 days of 2012 the key Australian share gauges were up around 5% – not as good as 2013 but still on track to gains of 44%. In the end, the All Ords rose by 13.5% over 2012 with the ASX 200 up 14.6%.

In short, we shouldn't get too carried away. A period of consolidation will inevitably arrive.

Craig James is chief economist at CommSec.