Home Prices Rise

Home Prices; PMI; Chinese PMI
• Home prices rise: The RP Data – Rismark Home Value Index reported that capital city home prices rose by 0.3 per cent in February and are up 1.3 per cent on a year ago. In February house prices rose by 0.2 per cent, while apartment prices rose 0.6 per cent.
• Total returns on capital city houses were up 5.5 per cent on a year earlier and units were up 7.4 per cent.
• Manufacturing sector: The Performance of Manufacturing index rose by 5.4 points to 45.6 in February. It was the 12th consecutive month that the index has been below a reading of 50 points, suggesting contraction in the sector.
• Chinese manufacturing sector consolidates. The official Purchasing Managers index for China fell from 50.4 to 50.1 in February, against expectations of a rise to 50.5.

What does it all mean?
• The housing sector has certainly started 2013 on a solid footing. House prices have lifted for two consecutive months, while new home sales have surged by 17 per cent in the four months to January – the strongest four month lift in home sales in almost four years. The lift in home prices coupled with a pickup in new home sales certainly supports CommSec’s view that the modest turnaround in housing activity is gaining traction. In addition, home prices are up in five of the eight capital cities compared with a year ago – highlighting the broad-based strength in residential property.
• The improvement in housing activity is coming off a low base. However the fundamentals for housing remain solid and there may be light at the end of the tunnel. The substantial cuts to interest rates, rising share markets, strong population growth and improving confidence levels will support activity over the medium term.
• Importantly, not only has there been a modest pickup in activity across the sector, but rental vacancy rates remain low. In fact total returns on residential property were up a healthy 5.7 per cent in February compared with a year ago. The rise in home prices coupled with the surge in new home sales bode well for the broader economy. Retailers, builders and an array of service industries are likely to benefit. CommSec tips a modesty 5 per cent lift in prices over 2013.
• The manufacturing sector continues to contract, albeit at a more modest pace in February. The sector has been decidedly weak for the past year – highlighting the fact that businesses continue to struggle. Consumers are only tentatively improving spending activity, forcing businesses to reduce prices and margins in order to move stock. At the same time the on-going strength of the Aussie dollar is making it tough for all manner of businesses.
• Disappointingly, the forward looking sub-indices seem to suggest that activity will remain constrained in coming months. New orders contracted at a slower pace however it followed the weakest level in almost four years. But the real concern was that exports contracted at just shy of the fastest pace on record while selling prices barely improved from the weakest levels in a decade.
• The Chinese manufacturing sector continued to consolidate with the pace of the expansion easing somewhat modestly in February. The timing of Chinese New Year does muddy the near term data and it will be a couple of months yet before more clarity emerges about the extent of the recent Chinese economic recovery. In the past couple of month the Chinese economy has recorded a healthy improvement. Retail sales and industrial production activity are holding at the best levels in around 10 months.
• Overall there is nothing in the latest data to worry the Reserve Bank, Chinese activity levels continue to suggest a healthy recovery. In addition policymakers would be encouraged by the modest improvements taking place in housing activity. The recent rate cuts continue to have a further positive effect on the sector. The more disappointing manufacturing data highlights the patchy recovery across the domestic economy and as such keeps the potential of further rate cuts on the cards. However CommSec expects rates to be on hold over the next couple of months given the improving domestic and global economic conditions.

What do the figures show?
House prices
• The RP Data-Rismark Hedonic Australian Home Value index of capital city home prices rose by 0.3 per cent in February after gains of 1.2 per cent in January. Prices have risen by 1 per cent in the in the three months to January. Home prices are up 1.3 per cent on a year ago.
• House prices rose by 0.2 per cent in February while apartments rose by 0.6 per cent. House prices are up 1.2 per cent on a year ago and apartments are up 2.3 per cent.
• The average Australian capital city house price (median price based on settled sales over quarter) was $485,000 and the average unit price was $415,000.
• Dwelling prices rose in three of the eight capital cities in February: Canberra (up 1.9 per cent), Melbourne (up 1.5 per cent) and Sydney (up 0.1 per cent). Prices fell in Darwin (down 2.2 per cent), followed by Brisbane (down 1.1 per cent), Adelaide (down 0.8 per cent), Hobart (down 0.9 per cent), and Perth (down 0.8 per cent).
• Home prices were higher than a year ago in five of the eight capital cities: Darwin (up 5.9 per cent), Perth (up 3.7 per cent), Sydney and Canberra (both up 2.7 per cent), Brisbane (up 1.2 per cent). Prices fell most in Hobart (down 2.3 per cent), followed Adelaide (down 1.1 per cent) and Melbourne (down 0.7 per cent).
• Total returns on capital city houses were up 5.5 per cent on a year earlier and units were up 7.4 per cent.
Performance of Manufacturing
• The Performance of Manufacturing index rose by 5.4 points to 45.6 in February. It was the 12th consecutive month the index has been below a reading of 50 points, suggesting contraction in the sector.
• Of the components, new orders improved from a near four year low of 39.4 to 41.8; employment rose from 40.1 to 47.5; export orders improved modestly from 31.1 to 31.2; and production rose from 40.4 to 46.6. Capacity use rose from 71.3 per cent to 72.8 per cent. Selling prices rose from 40.0 to 44.3 in February.
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 covering more than 312,000 sales during 2011. 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 latest round of data highlights the multispeed nature of the domestic economy. And it is likely that the Reserve Bank will still be maintaining an easing bias, especially given that the terms of trade index continues to decline.
• However, CommSec expects the Reserve Bank to keep interest rates on hold over the next couple of months. Particularly given the improvement in global economic conditions, in addition the recent improvement in new home construction is a huge multiplier for more broad-based economic growth.

Source: Savanth Sebastian, Economist, CommSec

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