- the team with a difference

Wednesday, September 30, 2009

National Home Value Index Release

National property values jumped by almost 2 per cent in August in the largest monthly movement since the RP Data-Rismark Home Value Indices began in January 2005.

Using the (ASX: RPX) property database, which is Australia’s largest and includes over 170,000 sales during the first eight months of 2009, Australia’s housing recovery solidified during the month of August with strong capital gains registered across the country despite evidence of fading first home buyer numbers.

According to the “market-leading” RP Data-Rismark National Home Value Index (see Background on p4), home values in Australia rose by an exceptional 1.9 per cent during the month of August. This brings cumulative capital growth in the first eight months of 2009 to a better than expected 7.9 per cent. This is also the single highest monthly index result since the RP Data-Rismark National Home Value Index began in January 2005.

According to research director, Tim Lawless, the August results surprised on the upside and are indicative of very high levels of buyer confidence combined with low levels of listings.

“These buoyant conditions sit in striking contrast to the same time last year when values were falling, less than half of the auctions held cleared and sales volumes were at rock bottom. We are now seeing home values rising at a solid rate, almost 80 per cent of auctions are clearing, and sales volumes have bounced back significantly”, Mr Lawless said.

Rismark International managing director, Christopher Joye, added, “Australia’s housing market is being underpinned by the strongest population growth since 1971, record housing shortages, historically low mortgage rates, better than expected employment outcomes, and one of the world’s most profitable banking systems.”

Australian home values have now risen 3.8 per cent past their February 2008 peak. This rebound followed peak-to-trough falls in national home values of just 3.8 per cent in 2008, which compares exceptionally well with the 15 per cent and 30 per cent house price declines seen in the UK and US, respectively.

Dispelling concerns that the recovery is limited to first home buyers Mr Joye commented, “In contrast to claims that this is a first time buyer bubble, the cheapest 20 per cent of suburbs in Australia have actually underperformed both the mid-priced market and Australia’s 20 per cent most expensive suburbs since the housing market bottomed in December 2008.”

“As recently noted by the RBA, all major lenders now require a minimum 10 per cent deposit and are applying the strictest credit standards we’ve seen in over a decade. Australian housing credit growth has also been running at levels that are extremely low by historical standards and noticeably less than the growth experienced in the 1991 recession,” Mr Joye said.’s Tim Lawless concurred with Mr Joye and said that over the last three months the premium residential market increased in value by 4.5 per cent compared with a 3.4 per cent gain in the middle market and a 2.8 per cent improvement at the cheapest end. (Note: numbers in chart to right show changes since December 2008 in the cheap, middle market, and expensive suburbs.)

“Despite the strong gains, the bounce in the premium sector has not been enough to offset the peak to trough fall of 9.9 per cent between February 2008 and January 2009. Prices in Australia’s most expensive markets are still 1.1 per cent lower than at their peak.”

Mr Joye added, “While the resounding recovery in Australia’s housing market confirms our forecasts, we expect medium term growth rates to be more measured as mortgage rates normalise back to between 7-8 per cent. This would bring the cost of housing finance back in line with its 2000-01 levels, which is notably well below the searing 9.6% highs endured by borrowers in August 2008 care of the RBA.”

In closing Tim Lawless said that the upward momentum in Australian house prices is a critical economic signal from the market to builders and developers to encourage them to reinvest in producing new housing supply. This was a message reinforced by the RBA’s Dr Anthony Richards in a speech to CEDA yesterday: policymakers need to facilitate significant new investment in housing supply to alleviate Australia’s growing housing shortage, which ANZ and Westpac estimate has risen to around 200,000 homes.

“This price growth will also go a long way to comforting risk-averse lenders to start providing credit again to developers, which has been one of the main bottlenecks on the supply-side. And it will stimulate the reallocation of resources away from other sectors of the economy into much-needed housing investment.” Mr Lawless said.

Other key findings from the August RP Data-Rismark Index results:

Unit values (+2.1 per cent) have marginally outperformed house values (+1.8 per cent) in the month of August. Over the course of 2009, units (+8.5 per cent) have also generated slightly higher capital growth than houses (+7.7 per cent).

Most capital cities recorded robust gains in the month of August with every single city experiencing rises in home values during the first eight months of 2009.

After several years of subdued growth following the end of Australia’s last housing boom in 2003, which saw Australia’s “house price-to-income ratio” fall by nearly 20 per cent through to December 2008, home values in the two major capital cities, Melbourne and Sydney, have led the recovery in 2009 with total capital gains of 11.6 per cent and 8.6 per cent, respectively.

Following Melbourne, Darwin has been the next best performing capital city with growth of 9.7 per cent in 2009. Interestingly, Darwin also continues to deliver the highest rental yields, implying that the market may have room for further growth.

Home values in Canberra (+6.7 per cent), Brisbane (+5.2 per cent), Perth (+4.1 per cent) and Adelaide (+3.1 per cent) have also realised sustained gains in 2009.

As RP Data-Rismark correctly anticipated, residential real estate in Perth has experienced a recovery in 2009 after a period of falling prices since September 2007. While Perth dwellings have recorded 4.1 per cent growth in the first eight months of the year they still remain 3.6 per cent below their September 2007 peak.

National rental yields have softened slightly given the strong capital growth with the gross annualised rental yield for units being 5.1 per cent while house rental yields are slightly lower at 4.3 per cent.

30 September 2009 Rp Data Source

Sunday, September 27, 2009

End of September signals the phasing out of the Boost

The first stage of the phasing out of the First Home Owners Grant Boost (FHOG Boost) will happen in alittle over a week, on September 30.

From October until December 2009 the FHOG Boost will be reduced from $14,000 to $10,500 for established homes and from $21,000 to $14,000 for newly constructed homes.
From 1 January 2010, the FHOG will return to the $7,000 previously provided to first home buyers of newand established housing, before the implementation of the Boost.
“It’s important for first home buyers to act now if they want to receive the maximum grant before it is phasedout,” said Real Estate Institute of Australia (REIA) President, Mr David Airey.

“To assist consumers with eligibility requirements and information about obtaining the Boost, the Government has a website1 to direct potential first home buyers to their relevant state or territory revenueoffice,” he said.

The decision made by the Government to extend the Boost as part of the Federal Budget reflects the position the REIA presented to Government, which was to extend the Boost for both new and existing homes and introduce a plan to phase the Boost out gradually.

“It is great to see the number of first home buyers in Australia that have been able to secure a home since the FHOG Boost was implemented,” concluded Mr Airey.

“Australian Bureau of Statistics (ABS) figures have shown that the proportion of first home buyers has increased from 19.5 per cent in October 2008 to a record 28.5 per cent in May 2009. Government figures show that at the end of July, 137,000 homes had been purchased with the aid of the FHOG Boost,” he said
REI Media Release 24th September 2009

Sunday, September 20, 2009

Reserve Bank patiently sits on the sidelines report

• Reserve Bank Board members agreed on “a wait and see” policy at the last interest rate meeting, noting the significant improvement in economic conditions in domestic and global economies and allowing market interest rates to price in rate hikes.
• There are two key factors holding the Reserve Bank from raising interest rates. The bank is still unsure about the sustainability of the recovery and is also concerned about the health of business balance sheets.
• Board members noted the “strong macro stimulus” and the strength in the Asian region has provided a considerable support to the Australian economy adding to concerns over the already relatively high levels of underlying inflation.
• Australia’s chief commodity forecaster, ABARE, expects Australian winter crop production to have increased by 3.4 per cent to 36 million tonnes. Forecasts for Australia’s 2009/10 wheat crop is expected to rise by 3.4 per cent to 22.7Mt.

What does it all mean?
• It is pretty clear from the minutes of the latest Reserve Bank Board meeting that the Board believes that the best approach is to hold off on any rate hikes until more concrete economic data is available in coming months. The Reserve Bank Board has confirmed that the Australian economy is on a recovery path with the “strong macro stimulus” and the strength in the Asian region supporting the Australian economy.

The Reserve Bank Board is in “wait and see mode” on interest rates. Board members are still not convinced that the economy can stand on its own two feet. The Board also believes that further repair work is necessary on bank and private company balance sheets. However a quiet confidence is perceived in the Board minutes with members noting that domestic economic conditions continued to evolve in line with bank forecasts. And as the risks to the global and domestic economy diminish, the board will no doubt become more relaxed about raising interest rates.

In particular members focused on the strength in the Asian economies in particular China. The pickup in car sales in China and increasing export volumes throughout the Asian region bodes well for the longer term fundamentals for the Australian economy. Importantly Board members believed that the Chinese economy would continue to record solid growth outcomes in the longer term.

•The Board clearly believed that with interest rates at 49 years lows and significant fiscal stimulus currently been undertaken, it was having an expansionary effect on the Australian economy. However with fiscal stimulus waning, the Board is likely to keep the monetary stimulus in place until the recovery gets a strong foothold. As a result the Reserve Bank decided the more prudent course was to keep rates on hold at the last meeting.
• Certainly the relatively high underlying measures of inflation, coupled with the stronger level of domestic economic activity will be a key concern going forward, and the likely barometer for the timing of rate hikes. The Board noted that the rise in market interest rates had effectively done part of its job already, adding to the borrowing costs for business and mortgage holders and restraining the momentum of the economy.
• At this stage the Reserve Bank looks likely to keep rates on hold in upcoming months. However CommSec is not ruling out the possibility of the first rate hike of 25 basis points taking place in December.
• The rural sector certainly did its part in ensuring that the Australian economy avoided a recession and will play a significant part in supporting the economy until the recovery gains a strong foothold. ABARE has revised up forecasts for Australia’s winter crop production by 3.4 per cent to 36 million tonnes.
• The one major risk to forecasts is the possibility of not enough healthy rain, especially in Queensland and Northern NSW. Already the lack of winter rains has had a critical effect on crop production. However improvement in weather patterns in Western Australia has helped to support the upgraded crop estimates. The combination of higher production, favourable prices will be offset by a stronger Australian dollar.

What do the figures show?
• The Australian Bureau of Agricultural and Resource Economics (ABARE) expects Australian winter crop production to have increased by 3.4 per cent to 36 million tonnes on a year ago.
• Forecasts for Australia’s 2009/10 wheat crop are expected to rise by 3.4 per cent to 22.7Mt. ABARE did note that the winter rainfall was below average in Queensland and Northern NSW, however widespread rainfall over the first week of Spring has provided a degree of improvement for crop production However further good rain is needed. Western Australian crop production is expected to fare better above average spring rainfall expected.
• Barley production is tipped to rise from 7.7Mt over 2009-10 to 7.9Mt. Canola crop production is estimated to hold steady at 1.7 million tonnes in 2009-10. Sorghum production will fall 4.6pct in the year to 1.85 million tonnes, while cotton seed production will fall 12 per cent to 531,000 tons in 2010.
Minutes from the May Reserve Bank Board meeting
Key Comments:
• “Members were briefed on the recent data for the Chinese economy, which had been somewhat mixed. Car sales had risen very sharply and export volumes had also been growing, including recently to the United States and Europe.”… “Overall, members observed that some slowing in the Chinese economy relative to the rapid pace in the June quarter had been inevitable but that the longer-term prospects were strong”
• “Of most significance to Australia, the Asian region had recorded strong growth in the June quarter. While this had been largely driven by domestic demand in these economies, reflecting strong economic stimulus, there were also recent signs of a pick-up in their exports...”
• “Outside Asia, most economies had experienced another fall in GDP in the June quarter, though more recent information suggested that the majority of these economies were now approaching a turning point.”
• “The US economy was expected to grow in the September quarter, after contracting by 4 per cent over the previous year”
• “In relation to housing markets, members observed that in countries that had experienced better economic outcomes and/or fewer financial sector problems (e.g. China, Canada, Norway and Australia), house prices now appeared to be rising quite solidly and were above or around earlier peaks. Even in the US and UK, which had earlier experienced significant falls in house prices, there had been some up-ticks recently”
• Retail sales: “Measures of sentiment had continued to strengthen. Consumer sentiment had risen sharply over the three months to August. Liaison with retailers suggested that household spending had softened somewhat in July but had been better in August.”
• Business investment: “The data for business investment in the June quarter indicated a strong rise in spending on plant and equipment, with a sharp increase in spending on a wide range of capital goods, including cars. However, this mostly reflected the bringing forward of spending to qualify for tax allowances. Car sales had subsequently fallen in July.”
• Exports: “The data for June quarter export volumes showed most categories were growing or holding up reasonably well. Manufacturing exports were the exception, and had fallen broadly in line with the falls seen in many other countries. On average, commodity prices had been broadly steady since the last meeting.”
• Financial markets: “There were some favourable signs in the Australian residential mortgage-backed securities market. The gap between secondary market yields and primary market yields was continuing to close, such that the prospect of issuance without the support of the Australian Office of Financial Management was increasing.”
• “Turning to banks’ funding, members noted that there had been a continuation of the strong competition for deposits. Together with an increase in term interest rates, which were rising because of expectations of monetary tightening, this was contributing to an increase in bank funding costs.”
• Outlook: “An important question for members was whether the global economic improvement would be sustained, or whether it was mainly a reflection of the strong macroeconomic stimulus that had been applied over the past year and might in due course fade. Members were also conscious that, even though financial market conditions had improved significantly and debt markets were beginning to function again, banks, corporates and households in many countries still faced significant balance sheet adjustments.”
• Policy decision: “As at the previous meeting, members noted that the policy decision in the near term involved balancing the risk of over staying an accommodative stance, and that of prematurely tightening and adversely affecting confidence and demand. The meeting concluded that the balance was best struck by leaving the cash rate unchanged for the time being, pending further evaluation of incoming information at future meetings.”

What is the importance of the economic data?
• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
• The Australian Bureau of Agricultural and Resource Economics (ABARE) release its Crop Report each quarter. The latest estimates on winter and summer crops assists investors in assessing conditions for the rural and resources sector and companies leveraged to these industries
What are the implications for interest rates and investors?
• CommSec is pencilling in the first rate hike within the first quarter of 2010. With longer term interest rates and funding costs for banks rising the Reserve Bank is more likely to hold of on any rate hikes and allow the market to price in higher cash rates.
• However if the domestic economy continues along the current recovery path a rate hike in December cannot be ruled out.

Information supplied by Jason Smith- Paid on Exchange