RP Data Rismark House Prices; Performance of Manufacturing

Home prices rose for the seventh consecutive month: The RP Data – Rismark Home Value Index reported that capital city home prices rose by 1.4 per cent in December to be up 9.8 per cent over the year. Home prices are up 8.4 per cent in the past seven months – marking the biggest gains for a similar period in over four years
Manufacturing contracts: The Performance of Manufacturing index was unchanged at 44.3 in December. Any reading below 50 suggests manufacturing is contracting.
Chinese manufacturing sector expands. The official Purchasing Managers index for China eased from 50.8 to 50.5 in December.

What does it all mean?

• Great news to start a New Year! Home prices are lifting, Chinese manufacturing activity is expanding albeit at a more modest pace and share markets are higher. The only dampener was the ongoing contraction in domestic manufacturing.
• After essentially going nowhere for two years house prices have lifted for the past seven months, (up a cumulative 8.4 per cent -the largest gains for a similar period in over four years). In addition prices are now higher than a year ago across all of the eight capital cities – highlighting the underlying strength in residential property.
• Interestingly the pent up demand for housing, low vacancy rates and strong rental yields, has increased the attractiveness of property as an investment class. In Sydney total returns (capital appreciation plus rental yields) have lifted by 20 per cent over the past year. While across the capital cities total returns are holding just shy of 15 per cent
• While the discussion of a housing bubble will continue to dominate media headlines, it is likely that the lifting in land sales, building approvals and new home sales should result in an increase in housing supply over the first half of the New Year. And overall lead to more circumspect prices gains in 2014. The substantial cuts to interest rates will support activity over the medium term.
• The domestic manufacturing sector has shown glimmers of hope over the past few months; however those gains have been eroded in recent months. Granted the sector is crawling of a low base, however there does seem to be light at the end of the tunnel. Although it will be a while yet before a healthy sustained expansion in activity take place. The key is the ongoing depreciation of the Aussie dollar – providing a further boost to exports. In fact it was the export component that was still decidedly weak, while new orders contracted at a slower pace over the month.
• The Reserve Bank is unlikely to be overly troubled by the lift in house prices. Particularly given that inflation remains well contained and house price growth has added to a lift in household wealth and confidence, all of which will support a lift in retail activity in coming months. The Reserve Bank looks set to remain on the interest rate side lines over the next few months.

What do the figures show?
House price prices

• The RP Data-Rismark Hedonic Australian Home Value index of capital city home prices rose by 1.4 per cent in December. Home prices are up 9.8 per cent on a year ago.
• House prices rose by 1.5 per cent in December while apartments rose by 0.5 per cent. House prices are up 9.9 per cent on a year ago and apartments are up 9.0 per cent.
• The average Australian capital city house price (median price based on settled sales over quarter) was $575,000 and the average unit price was $480,000.
• Dwelling prices rose in seven of the eight capital cities in December: Hobart (up 4.3 per cent), followed by Melbourne (up by 2.2 per cent), Brisbane (up 2.0 per cent), Canberra (up by 1.6 per cent), Perth (up 1.3 per cent), Sydney (up 0.7 per cent), and Adelaide (up 0.3 per cent). Prices fell only in Darwin (down 0.8 per cent).
• Home prices are higher than a year ago across all capital cities. Prices rose most in Sydney (up 14.5 per cent), followed by Perth (up 9.9 per cent), Melbourne (up 8.5 per cent), Brisbane (up 5.1 per cent), Canberra (up 3.5 per cent), Darwin (up 3.3 per cent), Adelaide (up 2.8 per cent), Darwin (up 3.3 per cent) and Hobart (up 2.2 per cent).
• Total returns on capital city houses were up 14.6 per cent on a year earlier and units were up 14.4 per cent.

Performance of Manufacturing

• The Performance of Manufacturing index was unchanged at 44.3 points in December. A reading below 50.0 indicates that the sector is contracting.
• Of the components, production fell from 44.8 to 42.5; new orders rose from 44.1 to 45.7; employment rose from 43.2 to 44.5; and exports orders fell from 37.6 to 33.2.

What is the importance of the economic data?

• The RP Data-Rismark 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 RP Data-Rismark Hedonic Index includes all properties. Home prices are an important driver of wealth and spending.
• The Australian Industry Group and PricewaterhouseCoopers compile the Performance of Manufacturing Index (PMI) each month. The Australian PMI is the Australian equivalent of the US ISM manufacturing gauge. The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

• The Reserve Bank would be justifiably content with the way the domestic economy is panning out. Consumer confidence is lifting, supporting an improvement in retail activity. There is nothing to suggest that official interest rates need to budge from current levels. However tamer growth in house prices would be a welcome point from here on to avoid worries about a potential ‘bubble” developing.

Source – Savanth Sebastian, Economist, CommSec

The information contained in this news letter is of a general nature only and is not intended to be specific advice – it is provided for general guidance only. No warranty is provided in relation to the accuracy or reliability of any of the information contained in this news letter. No party should act, or fail to act, based on the information contained in this news letter