by Craig James

Home prices drop: The RP Data – Rismark Home Value Index of capital city home prices fell by 1.9 per cent in May – the biggest fall since December 2008. Home prices are up 10.7 per cent over the year.

Manufacturing improves: The Performance of Manufacturing index rose by 4.4 points to 49.2 in May. Any reading below 50 suggests manufacturing is contracting.

Inflation still contained: The TD Securities-Melbourne Institute monthly inflation gauge rose by 0.3 per cent in May to stand 2.9 per cent higher than a year ago.

Inflation data is important for interest rate settings. Home price data is important for retailers. Manufacturing data is a useful guide to conditions faced by industrial stocks.

What does it all mean?

Home prices couldn’t lift forever – at some point there had to be a correction and it seems the Federal Budget caused people to pause and take stock. But the Reserve Bank will take the latest data on home prices in its stride. Auction clearance rates were still healthy over the weekend, so the drop in home prices may just be the pause that refreshes. In addition interest rates are low and there is evidence that the job market is improving. The Reserve Bank can still afford to stay on the interest rate sidelines – perhaps to late 2014 or early 2015.

The manufacturing gauge isn’t one of the more reliable economic indicators. But, for what it’s worth it has bounced in the latest month after slumping in April. Overall it appears that conditions in the manufacturing sector are far from uniform.

What do the figures show?

Home prices

The RP Data-Rismark Hedonic Australian Home Value index of capital city home prices fell by 1.9 per cent in May to be up 10.7 per cent on a year ago. The 1.9 per cent fall in home prices was the biggest in over five years (since December 2008).

House prices fell by 1.9 per cent in May while apartments fell by 2.1 per cent. House prices are up 11.0 per cent on a year ago and apartments are up 8.6 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 fell in six of eight capital cities in May: Melbourne (down 3.6 per cent), followed by Adelaide (down 1.8 per cent), Brisbane (down 1.7 per cent), Sydney (down 1.1 per cent), Perth (down 0.8 per cent) and Hobart (down 0.6 per cent). Prices rose 1.0 per cent in Darwin and rose by 0.1 per cent in Canberra.

Home prices are higher than a year ago across all capital cities. Prices rose most in Sydney (up 16.6 per cent), followed by Melbourne (up 9.9 per cent), Darwin (up 9.7 per cent); Brisbane (up 5.8 per cent), Perth (up 5.7 per cent), Adelaide (up 3.8 per cent); Canberra (up 2.6 per cent), Hobart (up 1.4 per cent).

Total returns on capital city houses were up 15.5 per cent on a year earlier and units were up 13.8 per cent.

Inflation gauge

The monthly inflation gauge rose by 0.3 per cent in May after a 0.4 per cent rise in April. The annual rate of inflation lifted from 2.8 per cent to 2.9 per cent.

The underlying rate (trimmed mean) rose by 0.2 per cent in May. The annual rate eased from 3.1 per cent to 2.9 per cent.

Excluding volatile items like petrol and fruit & vegetables, the inflation gauge rose by 0.1 per cent in May after a rise of 0.7 per cent in April. The annual rate of inflation eased from 2.4 per cent to 2.3 per cent.

TD Securities noted that “Contributing to the overall change in May were price rises for fruit and vegetables (+ 6.1 per cent), furniture and furnishings (+4.0 per cent) and tobacco (+2.3 per cent). These were offset by falls in holiday travel and accommodation (-3.7 per cent), health (-0.8 per cent), and footwear (-0.9 per cent). The price of automotive fuel fell by 1.1 per cent in May.”

Performance of Manufacturing

The Performance of Manufacturing index rose by 4.4 points to 49.2 points in February. A reading below 50.0 indicates that the sector is contracting.

Of the components, production rose from 42.6 to 51.6; new orders rose from 41.8 to 55.1; sales rose from 41.9 to 53.7; employment fell from 43.6 to 40.8; and exports orders fell from 54.2 to 47.8.

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 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.

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 comfortable about the mix of economic results: home prices off the boil; manufacturing soft, but showing signs of improvement; and inflation still locked in the preferred 2-3 per cent annual target zone. In short, no reason to change policy settings.