Economic Insights

Economics | June 1 2015

Home prices consolidate; Inflation contained

Home Value Index; Inflation gauge; Building approvals; PMI
Home prices fall: The CoreLogic RP Data Home Value Index of capital city home prices fell by 0.9 per cent
in May to stand 9 per cent higher over the year. Dwelling prices fell in six of the eight capital cities in May.
Total returns on capital city dwellings in the year to May rose by 13.3 per cent with houses up 13.7 per
cent on a year earlier and units up 10.2 per cent.
Dwelling approvals ease: Dwelling approvals fell by 4.4 per cent in April to be up 16.3 per cent on a year
ago. House approvals rose by 4.7 per cent in April while lumpy apartment approvals fell by 13.6 per cent.
Tame inflation: The TD Securities-Melbourne Institute monthly inflation gauge was up 0.3 per cent in May
to be up 1.4 per cent over the year. The trimmed mean measure was up 1.3 per cent over the year.
The Performance of Manufacturing index rose by 4.3 points to 52.3 in May. A reading above 50.0 indicates
that the sector is expanding.
China manufacturing: The official Chinese PMI lifted from 50.1 to 50.2 in May. The HSBC measure lifted
from 49.1 to 49.2.
The approvals data has implications for banks, building and building material companies. Inflation data is important for interest rate
settings. Home price data is important for retailers, especially those focussed on consumer durables.

What does it all mean?

A mixed bag of economic data, but for the most part, positive. A mild correction in property prices (particularly in
Sydney and Melbourne) is a good thing, tame inflation, a lift in private sector house approvals (apartment
approvals are generally volatile), and a healthy expansion in manufacturing activity.

The slide in capital city home prices in May marked the first fall in six months and is likely to be driven by the
tightening in lending criteria by the banking sector. In particular there has been a concerted effort to cool investor
demand or speculative home purchases. While it was encouraging that Sydney and Melbourne prices pulled
back, the perfect scenario would have been for a lift in prices
across other capital cities.

Dwelling prices fell in six of the eight capital cities, while

Rest of State prices were flat in May and only up 2.3 per
cent on a year ago. This highlights the issues facing
policymakers in attempting to manage a very diverse housing
market. What we would expect to see is the lift in capital city
house prices eventually filters out across the regional towns
over the next 12-24 months. Strength in home prices across
the nation will be more supportive of a lift in activity levels
over the medium term.

Inflation is well contained. All the key measures from the TD

Securities/Melbourne Institute monthly inflation report show
prices up 1.3-1.5 per cent over the year well below the
Reserve Banks 2-3 per cent target band. The Reserve Bank

Savanth Sebastian Economist (Author)

Twitter: @CommSec
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Economic Insights: Home prices consolidate; Inflation contained

can cut rates without fears of inflation exceeding the target band over the next year.

The latest manufacturing reading was encouraging, but it still has a long way to go. While the headline reading
recorded a slight expansion, the highlight is the lift in the exports component of the PMI survey, which rose by
10.9 points to 58.3 in May. The fall in the Aussie dollar may finally be having the desired impact on exports.

The Reserve Bank Board has a relatively easy decision at its meeting tomorrow. Monetary is ultra-stimulatory,
fiscal policy is providing modest stimulus and it is now more about allowing the economy a few months to adjust
to conditions. Interestingly policymakers are likely to feel more optimistic about the economic landscape following
the slide in the Australian dollar in the past fortnight.

What do the figures show?

Home prices

The CoreLogic RP Data Hedonic Australian Home Value index of capital city home prices fell by 0.9 per
cent in May after lifting by 0.8 per cent in April. Home prices are up by 9.0 per cent on a year ago, after recording
7.9 per cent annual growth to April.

House prices fell by 0.7 per cent in May while apartments fell by 2.3 per cent. House prices were up 9.6 per cent
on a year ago and apartments were up by 5.3 per cent.

The average Australian capital city house price (median price based on settled sales over quarter) was $600,000
and the average unit price was $504,000.

Dwelling prices fell in six of the eight capital cities in May: Hobart (down 2.7 per cent), Melbourne (down 1.7
per cent), Brisbane (down 0.8 per cent), Sydney (down 0.7 per cent), Darwin (up 0.6 per cent), Perth (down 0.5
per cent), and Adelaide (down 0.2 per cent). Prices rose in Canberra (up 1.4 per cent) and Darwin (up 0.6 per
cent).

Home prices were higher than a year ago in six of the eight capital cities. Prices rose most in Sydney (up
15.0 per cent), followed by Melbourne (up 9.0 per cent), Brisbane (up 3.1 per cent), Adelaide (up 3.4 per cent),
Canberra (up 2.4 per cent) and Perth (up 0.7 per cent). Price fell in Darwin (down 2.0 per cent) and Hobart (down
1.0 per cent).

Total returns on capital city dwellings in the year to May rose by 13.3 per cent with houses up 13.7 per cent on
a year earlier and units up 10.2 per cent.

RP Data report: Over the past three years, dwelling values have risen more than three times as fast as rents.
Dwelling values are 24.2 per cent higher across the combined capitals over the past three years while weekly
rents have risen by only 7.2 per cent. The net result is that gross rental yields have been compressed from 4.3
per cent back in 2012 to the current average gross yield of 3.7 per cent across the combined capital city index.

Rental yields are currently the lowest in Melbourne. A typical house is returning a gross yield of 3.2 per cent
while units are providing a higher gross yield, averaging 4.3 per cent. Sydney follows closely behind, recording a
gross yield of 3.4 per cent for houses and 4.5 per cent for units.
Building Approvals:

Dwelling approvals fell by 4.4 per cent in April to be up 16.3 per cent on a year ago. In trend terms, approvals
are down 0.4 per cent, after lifting for the prior 10 months.

House approvals rose by 4.7 per cent in April (private sector up 4.7 per cent). Meanwhile lumpy apartment
approvals fell by 13.6 per cent in April (private sector down 15.0 per cent).

In trend terms dwelling approvals are up 16.5 per cent on a year ago with house approvals up 4.0 per cent while
apartments are up by 34.4 per cent.

Across states in April: NSW approvals fell by 14.6 per cent; Victoria fell by 2.2 per cent; Queensland down by

June 1 2015

Economic Insights: Home prices consolidate; Inflation contained

14.2 per cent; South Australia fell by 10.3 per cent; Western Australia fell by 3.0 per cent; Tasmania rose by 29.8
per cent. In trend terms, approvals fell 6.2 per cent in the Northern Territory and rose 8.4 per cent in the ACT.

The value of all commercial and residential building approvals fell by 4.1 per cent in April after rising by 4.8
per cent in March. Residential approvals fell by 3.5 per cent with new building down by 5.1 per cent while
alterations & additions rose by 10.8 per cent. Commercial building fell by 5.4 per cent in April, but was still up 14.5
per cent on a year ago.
Inflation gauge

The monthly inflation gauge was up 0.3 per cent in May after a similar increase in April. The annual rate of
inflation held steady at 1.4 per cent.

Tradable good prices rose by 0.4 cent over the year to May, up from 0.2 per cent. And the annual growth rate of
non-tradable inflation rose from a decade low of 1.8 per cent to 2.0 per cent in April.

The underlying rate (trimmed mean) rose by 0.4 per cent in May after a 0.2 per cent lift in April. The annual rate
eased from 1.4 per cent to 1.3 per cent.

Excluding volatile items like petrol and fruit & vegetables, the inflation gauge rose by 0.2 per cent in May after
rising 0.3 per cent in April. The annual rate of inflation rose from 1.4 per cent to 1.5 per cent.

TD Securities noted that: Contributing to the overall change in May were price rises for automotive fuel (+4.3
per cent), tobacco (+1.1 per cent) and rent (+0.6 per cent). These were offset by falls in holiday travel and
accommodation (-0.5 per cent), newspapers, books and stationery (-1.3 per cent), and non-alcoholic beverages (2.2 per cent).
Performance of Manufacturing

The Performance of Manufacturing index rose by 4.3 points to 52.3 in May. A reading above 50.0 indicates that
the sector is expanding. The highlight of the report was the lift in the exports component of the PMI survey, which
rose by 10.9 points to 58.3 in May.

What is the importance of the economic data?

The CoreLogic RP Data Hedonic Australian Home Value Index is based on Australias biggest property
database. Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the CoreLogicRP 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.

The Bureau of Statistics' monthly Building Approvals release contains figures on local council approvals to build
residential structures such as homes and units as well as commercial premises such as offices and shops.
Approval is one of the first stages of the construction pipeline and is thus a key leading indicator of future activity.
An increase in approvals would point to stronger future activity for construction-related companies.

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.

What are the implications for interest rates and investors?

In the next 12-18 months a record amount of new dwellings

will come onto the market, serving to restrain growth of
established home prices. Sydney and Melbourne home
prices are hot now, but it may be a different question in
2016.

Certainly there are few risks with cutting rates again, but it
gets down to a tactical decision. When is the best time to cut
rates? Are rate cuts losing their effectiveness? Do we risk
using up all our ammunition by cutting rates now? There are
no right or wrong answers, just a strategic decision by the
Board. Understandably financial markets and economists
are expecting no change to interest rates over the next few
months.

Savanth Sebastian, Economist, CommSec

Twitter: @CommSec
June 1 2015