House prices hit record highs

Latest economic data; Petrol prices

  • Australian home prices rallied to record highs in October. The RP Data-Rismark Hedonic Australian Home Value Index – the largest property database in Australia – lifted by 1.4 per cent in the month, the tenth consecutive monthly gain, after rising by a revised 0.4 per cent in September. Over the past year, Australian dwelling prices have risen by 8.7 per cent – the fastest growth in 19 months.

  • Profits fell by 2.1 per cent in the September quarter with financial and insurance services recording the sharpest drop. Business inventories rose by 0.8 per cent in the September quarter, and the result will boost the estimate of economic growth to be released in a fortnight.

  • The TD Securities monthly inflation gauge rose by 0.3 per cent in November. Fuel prices rose by 3.7 per cent, while rents rose by 0.3 per cent. The annual inflation rate rose from 1.2 per cent to 2.1 per cent.

  • Private sector credit remained flat in October, after a 0.1 per cent fall in September. The annual growth rate slowed from 1.7 per cent to a 16½ -year low of 1.1 per cent.

  • New home sales fell by six per cent in October, largely due to softening first home buyer activity and rising interest rates

  • The national average petrol price rose by 0.2 cents to 121.5 cents in the latest week. Motorists can expect prices to track sideways over the next fortnight, as the recent fall in the Australian dollar is offset by the cheaper global oil price.

What does it all mean?

  • The latest data on house prices has increased the chance of a rate hike tomorrow. Despite two rate hikes house prices are continuing to defy the global property slowdown, rising by a further 1.4 per cent in October.

  • There are continued signs that the domestic economic recovery is looking more durable and the Reserve Bank will focus squarely on ensuring inflation remains low as the economic recovery fans out. CommSec expects the Reserve Bank to lift interest rates by another 25 basis points (quarter of a percent) tomorrow. The latest figures on home prices indicate that super-low interest rates have out-lived their usefulness and that interest rates need to be gradually restored to more 'normal' levels. In a year's time we would expect that the cash rate was around 5 per cent.

  • Are super-low interest rates creating a housing bubble? Clearly that is likely to be a question that will be discussed by Reserve Bank policymakers at the interest rate meeting tomorrow. Housing affordability has become a hot topic in recent times, especially with population growing at the fastest pace in over four decades.

  • It is important to keep in mind that the expiry of the first home owners boost should lead to slower activity in the housing market and thus slower growth in prices. Unfortunately there is only so much that the Reserve Bank can do in slowing housing demand. While raising rates may curtail some of the demand for homes, the main issues is about increasing the supply of homes. Ironically raising rates certainly does not help in alleviating supply concerns.

  • The global financial crisis has continued to hurt company profits, with the financial and insurance industry recording a significant proportion of the weakness. Overall company profits fell by a substantial 2.1 per cent in the September quarter, marking the fourth straight quarter of declining profits.

  • Interestingly the boost in housing activity has been reflected in the latest data. Profits and sales of the real estate sector have recorded a healthy increase. The current economic recovery is clearly being led by the recovery in housing activity and the latest data has consolidated that view. The multiplier effects from a recovery in housing activity will continue to drive the domestic economy over the next year.

  • Importantly the rise in business inventories will bode well for the economic growth data released in a fortnight's time. Business inventories posted the biggest increase in a year, following the record drawdown in the June quarter. Looking forward as the economic recovery continues to strength, further restocking by businesses should help to drive economic activity.

  • CommSec now expects the economy to grow by at least 0.7 per cent in the September quarter.

  • Lending growth is bottoming. After easing marginally in September, credit growth has remained flat in October. Importantly the data highlights the vast difference in credit growth across different sectors. The pivotal housing market continues to motor along with the annual growth rate holding at one year highs, while business credit has slide to an almost 17 year low.

  • Businesses are still remaining cautious and while investment plans are being revised higher, a significant turnaround in overall lending is unlikely to take place till the second quarter of 2010. Housing lending is likely to come off the boil as interest rates rise and the first home owners stimulus expires, offsetting the expected improvement in business investment as the economic recovery gains traction.

  • The latest monthly inflation result has validated the Reserve Bank's decision to move early on raising interest rates. In annual terms inflation has resumed its upward trajectory, with the annual rate surging from 1.2 to 2.1 per cent. Even taking out volatile items like petrol, and fruit and vegetables the inflation gauge is holding at 2.6 per cent - while within the Reserve Bank's target band of 2-3 per cent, it is still early days in the recovery.

  • Australian pump prices rose marginally in the past week, and the short term trend is far from certain. Volatility in terms of the global oil price and the swing in the Australian dollar is likely to be the driving factors. CommSec believes that pump prices will largely hold between $1.20 and $1.25 a litre over the next month.

What do the figures show?

  • The RP Data-Rismark Hedonic Australian Home Value Index rose by 1.4 per cent in October, the tenth consecutive monthly gain. House prices rose by 1.5 per cent with unit (apartment) prices higher by 1.1 per cent.

  • Over the first ten months of 2009 capital city home prices rose by 10.0 per cent. Over the year to October dwelling (home) prices were up 8.7 per cent, up from the 6.7 per cent annual increase in September.

  • House prices in October were up 8.4 per cent on a year ago with unit prices up 9.6 per cent.

  • In October, Canberra dwelling prices rose by 3.7 per cent followed by Brisbane & Melbourne (up 2.1 per cent), Adelaide (up 1.4 per cent), Sydney (up 0.8 per cent) and Perth (up 0.5 per cent). Dwelling prices fell by 0.5 per cent in Darwin.

  • Home prices in all capital cities are higher than a year ago. Leading the way is Darwin with dwelling prices up 18.1 per cent while at the tail of the field, Adelaide dwelling prices are up 4.6 per cent.

  • RP Data-Rismark calculates the median capital city house price across Australia at a record high of $524,720 with the median unit value at $426,167.

  • Company gross operating profits fell for the fourth straight quarter, falling by 2.1 per cent in the September quarter. Profits are now down 19.6 per cent on a year ago.

  • Profits fell in eight of the 14 industry sectors, led by financial and insurance services (minus 39.3 per cent) followed by retail trade (down 15.2 per cent) and transport, postal and warehousing (down 14.3 per cent). Profits rose the most in Administrative and support service (up 236.6 per cent).

  • Sales fell in six of the 14 industry groupings in real (inflation-adjusted) terms in the September quarter. Sales fell most in financial and insurance services (down 6.6 per cent), while rental, hiring real estate service recorded a healthy increase of 15.4 per cent in sales.

  • Inventories fell in three of the six sectors. Manufacturing inventories fell by 3.4 per cent while mining inventories rose by 17.1 per cent in the September quarter. Overall inventories rose by 0.8 per cent in the quarter, following the sharp 3.1 per cent drawdown in the June quarter.

  • The monthly inflation gauge rose by 0.3 per cent in November, following the 0.3 per cent fall in October. Contributing to the higher results was price rises for private motoring, fruit and vegetables, and household supplies. Fuel prices rose by 3.7 per cent while rents rose by 0.3 per cent in November. These were offset by falls in the price for travel and accommodation, audio, visual and computing equipment.

  • The annual inflation rate rose from 1.2 per cent to 2.1 per cent. Excluding volatile items like petrol and fruit and vegetables, the inflation gauge rose by 0.3 per cent in November with the annual rate rising from 2.5 per cent to 2.6 per cent.

  • Private sector credit remained flat in October, after a 0.1 per cent fall in September. The annual growth rate slowed from 1.7 per cent to a 16½ -year low of 1.1 per cent.

  • Housing credit grew by 0.7 per cent in October, taking annual growth to a one year high of 8.0 per cent. Owner-occupier housing rose by 0.8 per cent (10.0 per cent annual) with investor housing up 0.5 per cent (3.4 per cent annual). Personal credit rose by 0.6 per cent in October to be down 3.6 per cent on a year ago. And business credit fell by 1.3 per cent - the biggest fall in nine months. Business credit is down 6.8 per cent down on a year ago, the weakest annual growth in 16½ years - since December 1992

  • The national average Australian price of unleaded petrol rose by 0.2 cents to 121.5 cents a litre (c/l) in the week to November 30. The metropolitan price rose by 0.2 c/l to 120.8 c/l, while the regional average price rose by 0.1 c/l to 122.8 c/l.

  • Asian prices for gasoline rose marginally over the past week. The Singapore unleaded petrol price rose by US7 cents (0.1 per cent) to US$80.87 a barrel over the last week. In Australian dollar terms, Singapore gasoline rose marginally from $87.77 a barrel to $89.43 a barrel over the past week

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 including over 200,000 sales during the first nine months of 2009 (and over 129 million data records in total). Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.

  • The monthly RP Data-Rismark Hedonic Index compares month-to-month index results. Quarterly results are measured comparing end months rather than averaging each month in the quarter. For example, the first quarter of 2009 index results compare the end of March index with the end of December index.

  • The quarterly Business Indicators publication by the Bureau of Statistics contains measures such as inventories, company profits and income from sales. Higher inventory (stock) levels can be either intentional or unintentional. If stocks are low and sales are expected to rise in the future, businesses will seek to build up stocks. However an unintentional build-up in stocks is where sales fall short of expectations, leaving more goods on the shelves than desired. If profits are rising then this may point to increased capital spending and employment in the future. Rising profits are also a sign of favourable business conditions.

  • The TD Securities/Melbourne Institute Monthly Inflation Gauge is designed to "provide a timely and accurate monthly measure of inflation in Australia". The Bureau of Statistics only releases the Consumer Price Index on a quarterly basis.

  • Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories - housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

  • Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum. The national average is calculated as the weighted average of each State/Territory's capital city prices weighted by fuel volume consumed in each State/Territory.

What are the implications for interest rates and investors?

  • The September quarter business indicators is backward looking and more timely economic data confirms that the healing process is well underway. Businesses should return to profitability as the economic recovery gains traction.

  • The substantial rise in house prices and higher inflation reading is likely to sway the Reserve Bank towards a third consecutive rate hike tomorrow. The Reserve Bank is clearly forward looking and the emergency low interest rate setting are no longer consistent with the recent run of economic data.


Source Savanth Sebastian Economist, CommSec