By Craig James

Home prices: The CoreLogic RP Data Home Value Index of capital city home prices was unchanged in December, with prices ending the 2015 year 7.8% higher over the year. Dwelling prices rose in just four of the eight capital cities in December.

Sydney property prices fell by 1.2 % in December after sliding 1.4 % in November – the biggest back-to-back declines in seven years.

Manufacturing: The Performance of Manufacturing index fell by 0.6 points to 51.9 in December. A reading above 50.0 indicates that the sector is expanding. 

New orders and employment rose in December while production fell.

Home price data is important for retailers, especially those focussed on consumer durables. The manufacturing data provides guidance for companies in the Industrials sector.

What does it all mean?

The rebalancing of the residential market is underway. Just as Perth prices surged in 2013 and then retreated and Darwin prices surged in 2014 and then retreated, now a correction is underway in the Sydney market. The back-to-back falls in Sydney home prices in November and December were the biggest in seven years. Still, home prices have only fallen three times in 19 months, so the declines have occurred after a solid period of gains.

Returns on Australian homes grew by 11.8% in 2015, well ahead of domestic shares (3.8%), government bonds (2.3%) and cash (2%).

The latest results on the manufacturing sector are encouraging. Consumers are spending and that is lifting demand for local manufactures, especially with an Aussie dollar near US73 cents, rather than the US 82 cents area that it was trading at a year ago. Lower commodity prices are also positive for manufacturers – a point often lost on analysts. The Performance of Manufacturing index has notched up the longest run of readings above 50 (suggesting expansion of the sector) in five years.

 

What do the figures show?

The CoreLogic RP Data Hedonic Australian Home Value index of capital city home prices was largely unchanged in December (up by 0.01%) after falling by 1.5% in November. Home prices were up by 7.8% in 2015 after a gain of 7.9% in 2014.

House prices fell by 0.1% in December while apartment prices rose by 0.9%. House prices were up 7.8 % on a year ago and apartments were up by 7.9%.

The average Australian capital city house price (median price based on settled sales over quarter) was $625,000 and the average unit price was $527,500.

Dwelling prices rose in just four of the eight capital cities in December: Perth (up 2.3%), Melbourne (up 1.0%), Brisbane (up 0.9%) and Hobart (up 0.8%). Prices fell most in Adelaide (down 1.5%), Sydney (down 1.2%) and Canberra (down 1.1 %). Darwin prices were broadly flat.

Home prices were higher than a year ago in four of the eight capital cities. Prices rose most in Sydney (up 11.5%), followed by Melbourne (up 11.2%), Canberra and Brisbane (both up 4.1%). Prices fell in Perth (down 4.2%), Darwin (down 3.6%), Hobart (down 0.7%) and Adelaide (down 0.1%).

Total returns on capital city dwellings in the year to December rose by 11.8% with houses up 11.7 % on a year earlier and units up 12.8%.

CoreLogic RP Data noted: “The slowdown in housing market conditions across Sydney and Melbourne in the last half of 2015 is being driven by a range of factors that can best be described as both organic and externally influenced.” CoreLogic noted affordability pressures, rental yield compression, higher interest rates and regulatory pressures.

Performance of manufacturing

The Performance of Manufacturing index fell by 0.6 points to 51.9 in November. AI Group notes “December was the 6th consecutive month in which the Australian PMI® has been above 50 points (net expansion). This is the longest unbroken run of expansion since 2010. Seven of the past eight months have had an Australian PMI® above 50 points.”

New orders and employment rose in December while production fell.

What is the importance of the economic data?

The CoreLogic RP Data 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 CoreLogic- RP Data 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?

Sydney and Melbourne have driven the gains in home prices in 2015. But the two largest cities are likely to come back to the pack in 2016. Overall, we expect returns on home prices across Australia to lift by around 7 % in 2016, below the expected return on domestic shares of around 11-12 %.

A record amount of homes are being built currently and these will add to housing supply over the next 1-2 years. At the same time, demand for homes will soften in line with slower population growth and reduced exuberance by property investors.