Positive signs indicate a positive future for home prices, manufacturing and retail...

Up, up, up, up: Australian economy lifts
Home Prices; Manufacturing gauge; Retail trade; New home sales

Home prices up: The RP Data – Rismark Home Value index of capital city home prices rose by 1.6 per cent in September to record highs. Home prices are up 5.5 per cent on a year ago. But prices rose in just three capital cities in September.
Manufacturing activity up; now at a 2-year high: The Performance of Manufacturing index rose by 5.3 points to a 2-year high of 51.7 in September. Any reading above 50 suggests manufacturing is expanding.
Home sales up: New home sales rose by 3.4 per cent in August after a 4.7 per cent decline in July.
Retail spending up: Retail trade rose by 0.4 per cent in August, just above market forecasts.
Chinese manufacturing improves: The “official” purchasing manager’s index (from National Bureau of Statistics) rose from 51.0 to 51.1 in September, below forecasts for a result near 51.5.

What does it all mean?
•    After a flat period in the lead-up to the election, the Australian economy is clearly in recovery mode. A clutch of economic statistics was released today and the news was all good. Consumers are spending again and even the manufacturing sector is expanding for the first time in two years. It is clear that the Reserve Bank has no further work to do on the interest rate front – at least not for a few months. And indeed interest rates may now have bottomed.
•    Rather than a “bubble”, couldn’t it just be that home prices are lifting from a low base in response to very favourable influences such as super-low interest rates? That is the sensible view, and also the right view. Over the past decade, Sydney home prices have only barely grown in line with inflation. The lift in prices over the past four months merely reflects investors and home buyers finally embracing attractive conditions.
•    Only three capital cities reported higher home prices in September and only six of the eight capital cities had higher home prices than a year ago. While home prices across Australia may lift around 4-5 per cent in 2013/14, it is more likely that annual growth rates of 2-4 per cent can be expected in coming years.
•    In response to strong demand for established dwellings and rising population growth, the supply of new homes needs to lift. And encouragingly it is. New home sales are now up more than 20 per cent on a year ago – the strongest growth in four years. The only reason to be worried about solid growth in home prices would be if supply was failing to respond to higher demand. The good news is that new homes are being snapped up, sending the signal to investors and developers to advance new projects.

What do the figures show?
House price prices
•    The RP Data-Rismark Hedonic Australian Home Value index of capital city home prices rose by 1.6 per cent in September to record highs. Home prices are up 5.5 per cent on a year ago.
•    House prices rose by 1.6 per cent in September while apartments rose 1.5 per cent. House prices are up 5.7 per cent on a year ago and apartments are up 4.4 per cent.
•    The average Australian capital city house price (median price based on settled sales over quarter) was $525,000 and the average unit price was $450,000.
•    Dwelling prices rose in just three of the eight capital cities in September: Sydney (up 2.5 per cent), Melbourne (up 2.4 per cent) and Adelaide (up 1.1 per cent). Prices fell the most in Darwin (down 2.5 per cent), followed by Hobart (down 2.0 per cent), Canberra (down 0.7 per cent), Brisbane (down 0.3 per cent) and Perth (down 0.1 per cent).
•    Home prices are higher than a year ago across all capital cities except Hobart (down 2.9 per cent) and Adelaide (down 0.8 per cent). Prices rose most in Sydney (up 8.0 per cent), followed by Perth (up 7.6 per cent), Melbourne (up 5.4 per cent), Canberra (up 3.7 per cent), Darwin (up 2.2 per cent) and Brisbane (up 1.1 per cent).
•    Total returns on capital city houses were up 10.2 per cent on a year earlier with units up 9.6 per cent.
Performance of Manufacturing
•    The Performance of Manufacturing index rose by 5.3 points to 51.7 in August – the first time the index has been above 50 since June 2011. A reading above 50.0 indicates that the sector is expanding.
•    Of the components, production rose from 47.1 to 49.9; new orders rose from 44.2 to 53.6; employment rose from 46.3 to 58.5; and exports orders rose from 28.3 to 31.4. The index numbers for new orders, stocks and deliveries each now exceed 50.

Retail trade
•    Retail trade rose by 0.4 per cent in August – the strongest growth in six months – after a 0.1 per cent increase in July. Retail spending is up 2.3 per cent on a year ago.
•    Sales by chain stores and other big retailers rose by 0.6 per cent in August after a 0.1 per cent fall in July. Chain store sales are 3.2 per cent on a year ago.
•    Sales rose most at Department stores (up 6.4 per cent after a 7.9 per cent fall in July), followed by “other recreational goods” such as sporting goods and toys (up 4.6 per cent) and newspapers & books (up 1.4 per cent). Sales fell most at “other retailing” such as antiques, flower sellers and internet sales (down 2.6 per cent) followed by electrical & electronic goods (down 1.3 per cent).
•    In August, spending rose most in Northern Territory (up 1.3 per cent), followed by Western Australia (up 0.7 per cent), Victoria (up 0.6 per cent), NSW (up 0.4 per cent), Tasmania (up 0.3 per cent), Queensland (up 0.2 per cent). Spending fell most in ACT (down 0.8 per cent) and South Australia (down 0.2 per cent).

New home sales
•    New home sales rose by 3.4 per cent in August after falling by 4.7 per cent in July. House sales rose 5.8 per cent in August while apartment sales fell by 11.2 per cent. Over the year home sales are up 20.7 per cent – the strongest growth in four years.
•    In August, house sales increased by 10.2 per cent in Western Australia, 8.2 per cent in South Australia, 7.4 per cent in New South Wales, 3.6 per cent in Queensland, and 2.4 per cent in Victoria.

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.
•    The Bureau of Statistics’ Retail trade publication contains the most current readings on the performance of consumer spending. The ABS surveys 500 ‘larger businesses’ and 2,750 ‘smaller businesses’. Retail trade covers spending at a broad range of retail outlets but excludes both petrol and motor vehicle sales. A weak retail trade result may point to a slowing economy as well weighing on the share prices of listed retail stocks. But retail trade estimates can’t be assessed in isolation – it is important to look at the influences determining future trends in consumer spending, such as income, employment and confidence levels.
•    The Housing Industry Association releases data on the sales of new homes each month. The HIA collects the data each month from a sample of Australia's largest 100 home builders. The survey covers around 12 per cent of the home building industry.

What are the implications for interest rates and investors?
•    The economy has turned the corner. Provided the political wrangling in the US doesn’t drag on, the outlook is encouraging. The election is out of the road, interest rates remain low, housing is taking over from mining as a growth driver and the global economy continues to heal.
•    Interest rate settings are on hold, and perhaps until 2014. Certainly there is no imperative to cut rates again; although the Reserve Bank has plenty of ammunition at its disposal should it need to cut rates again.
•    Retailers can look forward to Christmas trade with more confidence.

Source - Craig James, Chief Economist, CommSec