by Craig James

Home building has certainly stepped up to the plate to be the key driver of growth. The ongoing lift in house prices and strong population growth has resulted in a substantial lift in home construction. New dwelling starts have accelerated over the past 12 months, culminating in 180,408 starts in the year to June – the highest annual result in over 19 years.

Importantly the slide in starts over the June quarter can be seen as more of a consolidation after the outsized gain in the March quarter. In fact the March quarter result of 48,877 new starts was the largest on record. In addition the total number of starts exceeded the “normal” rate – measured as either the five-year or 10-year average. In fact annual dwelling starts are almost 15 per cent above decade averages.

Interestingly, the lift in new construction is not just taking place in one or two locations but is more broad-based. Home building is above decade averages in NSW, Victoria, Western Australia, Northern Territory and the ACT.

Lower interest rates, strong population growth, improving affordability, and pent up housing demand will see the housing sector gather pace over the medium term. In addition the recent cuts to fixed interest rates by the major banks will spur a further round of home building.

The lift in approvals will appease policymakers to some degree. Fundamentally, the growth in house prices has been driven by a lack of stock, and a substantial lift in new housing stock should ensure more sedate price growth over the longer term.

The monthly consumer confidence data is now merely useful as a check against the timelier weekly survey. The ANZ-Roy Morgan survey has the same number of survey respondents as the monthly series, has been running over the same number of years and covers the same questions but is conducted each week.

Effectively you can ignore the monthly consumer confidence result as it reflects the vagaries of survey timing. The more regular ANZ/Roy Morgan survey shows that consumer confidence is trending higher. Data out yesterday showed that consumer confidence rose 1.1 per cent last week to be down just 2.1 per cent on the seven-month high recorded for the week to July 27.

Chinese inflation remains benign and is certainly no threat to the broader Chinese economy. Consumer inflation is mild and business inflation is still contracting. More importantly the data in recent weeks suggests the Chinese economy has found a solid base and has lifted after a lacklustre start to the year. If growth doesn’t rebound Chinese authorities are certainly well placed to provide further stimulus. Focus will shift to the retail sales, industrial production, fixed asset investment and more importantly the September quarter GDP figures released next Tuesday.

What do the figures show?

Dwelling starts

Dwelling starts (commencements) in the June quarter fell by 6.9 per cent to 45,527 in seasonally adjusted terms. Houses fell by 1.1 per cent and apartments fell by 15.1 per cent. There were 180,408 new dwellings over the 12-months to June, the highest annual result in over 19 years and up 11.3 per cent on the previous year.

Across the capital cities, starts in the June quarter lifted in just Tasmania (up 28.7 per cent), the Northern Territory (up 18.3 per cent) and Western Australia (up 2.0 per cent). Starts fell in NSW (down 12.3 per cent), Victoria (down 3.3 per cent); South Australia (down 1.7 per cent), Queensland (down 1.3 per cent), the ACT (down 48.0 per cent).

Home building is higher than the decade average in all the capital cities except for Queensland, South Australia and Tasmania.

Consumer sentiment

The Westpac/Melbourne Institute index of consumer confidence rose by 0.9 per cent in October to 94.8 points after falling by 4.6 per cent to 94.0 points in September. The index is down 12.5 per cent over the year.

The current conditions index rose by 1.5 per cent in October, while the expectations index rose by 0.4 per cent.

Three of the five components of the index rose in October:

The estimate of family finances compared with a year ago was up by 4.4 per cent;

The estimate of family finances over the next year was up by 1.2 per cent;

Economic conditions over the next 12 months was down by 5.2 per cent;

Economic conditions over the next 5 years was up by 5.5 per cent;

The measure on whether it was a good time to buy a major household item was down by 0.4 per cent.

Gender & demographics: Men (index reading of 97.5, down by 1.1 per cent) are still more optimistic than Women (92.3, up by 2.9 per cent). Young people (18-24 years) are more optimistic (index down 0.5 per cent to 119.4). Across the other demographics: 25-44 years (index 90.8, down 1.9 per cent); 45 years plus (index 93.2, up 2.6 per cent).

State sentiment levels: NSW (up 8.1 per cent), Victoria (down 10.7 per cent), Queensland (up 6.0 per cent), Western Australia (down 4.6 per cent) and South Australia (up 1.3 per cent).

New car sales

According to the Australian Bureau of Statistics (ABS) new car sales rose by 2.9 per cent in September, the first rise in three months. Passenger car sales rose by 0.5 per cent, while sales of sports utility vehicles rose by 6.8 per cent and “other” vehicles (includes utilities, panel vans, cab chassis, goods carrying vans, rigid trucks, prime movers, non-freight carrying trucks, and buses) rose by 2.3 per cent.

Car sales in September were up 0.8 per cent on a year ago – the first annual increase in over a year. Passenger vehicle sales were down by 6.7 per cent, while SUVs sales were up by 13.0 per cent and “other vehicles” were up by 1.8 per cent.

In rolling annual terms, 1,119,236 new vehicles were sold over the year to September, down from the record 1,141,483 sales over the year to July 2013. Annual sales of SUVs (345,504) hit fresh record highs in September, while annual sales of other vehicles were up from 229,213 to 229,656 in September. Sales of passenger vehicles stood at 544,076 in the year to September, down substantially from the record high of 637,473 in the year to February 2008.

Chinese inflation data

The annual rate of consumer price inflation fell from 2.0 per cent in August to 1.6 per cent in September. The result was below forecasts for annual growth of 1.7 per cent. Over the month consumer prices rose by 0.5 per cent, mildly stronger than forecasts.

Food prices rose by 0.8 per cent in September with non-food prices up 0.3 per cent in September. Pork prices lifted by 2.3 per cent in September. Over the year to September, food prices rose by 2.3 per cent while non-food prices were up by 1.3 per cent.

Producer prices (business inflation) fell by 0.4 per cent in September. Producer prices in September were 1.8 per cent lower than a year ago. Economists had tipped a 1.6 per cent annual decline.

What is the importance of the economic data?

The Australian Bureau of Statistics releases data on dwelling commencements (starts) each quarter. The figures provide guidance on future construction activity. If construction begins on new houses or apartments, it signifies work for building trades.

Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month.

According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

The Australian Bureau of Statistics (ABS) provides monthly estimates of car sales in seasonally adjusted and trend terms after receiving the actual sales data from the car industry. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.

What are the implications for interest rates and investors?

Policymakers will be encouraged by the strength in home building. A further lift in homebuilding is expected to take place over the rest of 2014. With interest rates likely to remain at exceptionally low levels over the coming year, coupled with solid population growth and low vacancy rates, the housing sector will be at the forefront of activity over the coming year. In short, the supply of homes is set to rise even further to meet strong housing demand, and as a consequence the growth of home prices will soften.

At present the Reserve Bank is in a delicate balancing act of keeping interest rates low to support the broader economic recovery while hoping house price growth eases over the medium term. And the lift in home building should provide policymakers with some added comfort.

The Reserve Bank will continue to watch and wait – no change in rates is likely before 2015.