Weekly Market & Currency Developments – From Our Bankers

Record home building with bevy of work ahead

Consumer sentiment; Building activity

  • Record home building: In real trend terms, a record $19.8 billion of work was done in building new homes in the September quarter.
  • New starts: The number of dwelling starts fell by 5.7 per cent in the September quarter after falling 4.7 per cent in the June quarter and rising 11.7 per cent in the March quarter. Currently, 227,186 homes are being built.
  • Near-record building: In the September quarter $75.1 billion of residential and commercial building work was yet to be done (completed), down from the record high of $76.4 billion in the June quarter.
  • Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment index fell by 4.7 per cent to a 16-month low of 99.6 in January. A reading above 100 denotes optimism.

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. Building & building material companies are affected by dwelling starts including Boral, James Hardie, Adelaide Brighton, Brickworks, AV Jennings Limited, Devine Limited and Beacon Lighting.

What does it all mean?

  • Think that the building boom is over? A record amount of work was done in building new homes in the September quarter. And the value of outstanding home building and commercial work stands at $74 billion with the value of projects to be completed just off record high. Notably that total includes almost 230,000 homes that are currently in various stages of construction.
  • In short, there is plenty of building work to be done. Add to the value of home and commercial building, around $62 billion of engineering construction work is to be done, up 26.2 per cent on a year ago.
  • The stock of homes being built will understandably ease over the next year as supply starts to match underlying demand. But Australia’s growing population needs more roads, schools and hospitals, so the bevy of infrastructure projects mean strong demand for labour and resources.
  • As supply of homes matches demand, both upward and downward pressures of home prices will ease. Home prices will flatten out across many regions.
  • The latest weekly survey shows above-average consumer sentiment while the monthly survey shows a more pessimistic reading. The monthly data has been superseded by a more optimistic reading in the weekly series. Bottom line is that consumer confidence is good, not great.

What do the figures show?

Dwelling starts & work done

  • The number of dwelling starts (commencements) fell by 5.7 per cent in the September quarter after falling 4.7 per cent in the June quarter and rising 11.7 per cent in the March quarter.
  •  House starts fell by 4.5 per cent in the quarter while apartment starts fell by 7.3 per cent.
  • Work started on 228,179 new dwellings over the 12 months to September, up 3.8 per cent on the year but down from the record high of 234,179 dwellings in the year to December 2016.
  • Across Australia, starts in the September quarter fell in five states/territories: NSW (down by 5.5 per cent); Victoria (down by 16.0 per cent); Queensland (up by 8.3 per cent); South Australia (down by 18.6 per cent); Western Australia (up by 2.9 per cent); Tasmania (down by 6.0 per cent); Northern Territory (down by 2.9 per cent); and the ACT (up by 41.5 per cent).
  • In the full 12-months to September, dwelling starts
    were higher than the decade average in all of the states
    & territories except for the Northern Territory (down 51.1
    per cent), and Western Australia (down 23.3 per cent). Starts in NSW were 49.8 per cent above the decade average. Next highest was the ACT where starts were up by 32.3 above the decade average with Victoria up 27.9 per cent; Queensland up 16.7 per cent; Tasmania up 12.1 per cent; and South Australia up 7.9 per cent.
  • In the September quarter $75.1 billion of residential and commercial building work was yet to be done(completed), up 9.7 per cent on a year ago.
  • The value of residential and commercial building work in the pipeline stood at $96.6 billion at the end of September, up 7.8 per cent on a year ago but down from a record $99 billion at the end of June.
  • Across Australia, 227,186 homes are being built, down from a record 230,573 homes in March.

Consumer confidence

  • The Westpac/Melbourne Institute survey of consumer sentiment index fell by 4.7 per cent to 99.6 in January. The sentiment index is now below its long-term average of 101.3. A reading above 100 denotes optimism. The survey of 1,200 people was conducted from January 7-11.
  • The current conditions index fell by 3.3 per cent and the expectations index fell by 5.6 per cent.
  • All of the five of the components of the index fell in January:
    • The estimate of family finances compared with a year ago fell by 5.9 per cent;
    • The estimate of family finances over the next year fell by 3.1 per cent;
    • Economic conditions over the next 12 months fell by 7.8 per cent;
    • Economic conditions over the next 5 years fell by 5.9 per cent;
    • The measure on whether it was a good time to buy a major household item fell by 1.3 per cent.
  • Housing outlook: A good time to buy a dwelling? The index rose by 4.1 per cent to be up 7.7 per cent on the year. House price expectations fell by 4.1 per cent to be down by 25.7 per cent on a year ago.
  • Unemployment expectations: Unemployment expectations rose by 2.2 per cent in January to be up 0.7 per cent over the year.

What is the importance of the economic data?

  • Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
  • The Australian Bureau of Statistics releases data ondwelling commencements (starts) each quarter. The figures provide guidance on future construction activity. If construction begins on new houses or apartments, it signifies work for building trades.

What are the implications for interest rates and investors?

  • Council approvals to build new homes, offices and shops
    have eased from record levels, but it is clear that there is plenty of work to be done over the next year or two. And added to the near record amount of building there are the growing number of infrastructure projects. There is a growing risk of price and wage pressures to emerge in the construction sector.
  • Prospects currently remain bright for building material companies. But forward-looking investors would envisage slowing demand for materials in a year’s time – in home building rather than commercial or engineering sectors.
  • Experts don’t expect a change in interest rates until later in 2019 at the earliest.

 

First-home buyer numbers surge

Housing finance

  • Number of home loans: The number of loans (commitments) by home owners (owner-occupiers) fell by 0.9 per cent in November after rising by 2.1 per cent in October (the largest gain in 12 months).
  • First home buyers active: The proportion of first-time buyers in the home loan market rose from 18.1 per cent in October to a 6-year high of 18.3 per cent in November (decade-average 17.7 per cent).

The home lending figures have implications for builders, housing-reliant businesses, finance providers, retailers, and companies dependent on consumer and business spending.

What does it all mean?

  • In November, almost 10,500 first-home buyers took out a home loan, just off the highest number in almost nine years. And as a proportion of all buyers, the share of first-home buyers is at 6-year highs. Clearly these buyers are celebrating the greater choice of properties on the market, more attractive prices and super-low interest rates.
  • Over the year to November, almost $238 billion in loans were taken up by owner-occupiers to buy property, just below the all-time high of $240 billion in the year to August. While investors have retreated from the market on the belief that price gains will be harder to achieve, budding home owners are still out in force.
  • The number of owner-occupier home loan borrowers in Tasmania stands at 61⁄2-year highs in trend terms with ACT borrowers at record highs, South Australian borrowers are at 18-month highs and Western Australian borrowers at 10-month highs. Too much focus is placed on NSW and Victoria when housing markets in many other parts of the country are doing well.
  • It is important that investors don’t get duped by ‘lazy analyses. That is, analysis that assumes trends in aggregate national figures apply across all market sectors and regional economies. As data released yesterday shows, the number of homes being built at present is just off all-time highs. And there are still healthy numbers of budding home owners in the market, especially amongst first-home seekers.

What do the figures show?

Housing finance – November, number

  • The number of loans (commitments) by home owners (owner-occupiers) fell by 0.9 per cent in November after rising by 2.1 per cent in October (the largest gain in 12 months). But loans are down by 7.9 per cent on the year.
  • Excluding refinancing, new loans fell by 0.5 per cent after rising 2.3 per cent in October.
  • Loans by owner-occupiers for the construction of homes fell by 2 per cent after lifting 3.3 per cent in October.
  • Loans to buy newly-erected dwellings rose by 3.4 per cent – first gain in six months.
  • Loans for the purchase of established dwellings (excluding refinancing) fell by 0.6 per cent after rising 2.3 per cent in October.
  • The number of refinancing transactions fell by 1.1 per cent.
  • Changes in home loans across the country: NSW (down 1.5 per cent); Victoria (up 0.7 per cent); Queensland (down 0.7 per cent); South Australia (down 0.8 per cent); Western Australia (up 2.4 per cent); Tasmania (down 9.2 per cent); Northern Territory (up 22.4 per cent); ACT (down 0.6 per cent)

Housing finance – November, value

  • The value of new housing commitments (owner occupier and investment) fell by 2.5 per cent.
  • Owner-occupier loans fell by 1.5 per cent while Investment loans fell by 4.5 per cent. Over the year to November investor loans are down by 23.4 per cent and owner-occupier loans have fallen 7.3 per cent.
  • The value of loans by owner-occupiers and investors to build new homes fell 7.2 per cent in November to $2.6 billion after rising 5.8 per cent in October.

Housing finance – November, other statistics

  • The value of cancelled loans totalled $1.41 billion up from $1.33 billion a year earlier.
  • Commitments actually advanced (loans made) totalled $20.66 billion, down from $21.55 billion a year earlier.
  • The proportion of first-time buyers in the home loan market rose from 18.1 per cent in October to 6-year highsof 18.3 per cent (decade-average 17.7 per cent).
  • The proportion of fixed rate loans rose from 16.3 per cent to a 14-month high of 16.9 per cent.
  • And the average home loan across Australia was $384,700, down 1.1 per cent on the year.

What is the importance of the economic data?

  • Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.

What are the implications for interest rates and investors?

  • Builders and real estate agents will face differing prospects depending on their location. At present five of the eight states and territories are showing monthly gains in home loans in trend terms. NSW, Victoria and Queensland are in the downturn phase of the cycle.
  • Almost 17 per cent of borrowers opted for fixed-term loans in November, a 14-month high. Borrowers that took out 3-year fixed loans in 2015 and 2016 are seeing a major improvement in their budgetary situation when rolling over loans.
  • Experts expect no change in official interest rates until late in 2019 at the earliest.

Investor Signposts: Week Beginning January 20 2019

Australia: Jobs data in focus

  • In the coming week the monthly job figures (released Thursday) dominate the statistical schedule.
  • The week kicks off on Monday when Commonwealth Bank releases its measure on economy-wide sales for December.
  • In addition on Monday the Australian Bureau of Statistics (ABS) issues the final edition of Lending Finance. The report covers not just home loans, but also personal, business and lease loan commitments. The new report to be released in February will combine the detailed Housing Finance publication with Lending Finance.
  • On Tuesday, ANZ and Roy Morgan release the weekly consumer confidence data. Consumers remain remarkably upbeat, no doubt reflecting the strength of job markets as well as lower petrol prices.
  • On Wednesday, the Department of Jobs and Small Business will release the Skilled Vacancies data for December – a key leading index on the job market. Vacancies have flattened out at a healthy level.
  • On Thursday, the ABS releases the December jobs report. The job market is in great shape. In November, 37,100 jobs were created with the jobless rate at 5.1 per cent. In addition a record proportion of Australians are in the workforce with the trend participation rate at record highs.
  • In December, we expect that jobs lifted by 20,000 with the jobless rate at 5.0 per cent.
  • Also on Thursday, CBA releases the “flash” survey results purchasing managers in manufacturing and services.

Overseas: Chinese economic growth data in focusA

  • Chinese economic growth and activity data are amongst the highlights in the coming week.
  • In the US, the economic release schedule is subject to change – a victim of the government shutdown. A bevy of indicators were to be released in the coming week but are now delayed.
  • The week begins on Monday in China with economic growth data for the December quarter. In addition, the final estimates for 2018 are issued for retail sales, industrial production and investment. The Chinese economy likely grew by 6.5 per cent over 2018 (6.4 per cent in the December quarter), hitting official targets. But growth of 6.0-6.5 per cent is more likely in 2019.
  • In addition, Chinese retail sales is tipped to have grown at a 8.2 per cent annual pace in December with production up 5.3 per cent and investment up 6 per cent.
  • The International Monetary Fund (IMF) releases new economic forecasts on Monday. The data is likely to show a modest downgrade to growth expectations in 2019, currently estimated at 3.7 per cent. However it’s likely that IMF economists will factor in more Chinese economic stimulus and some resolution to the US-China trade dispute.
  • On Tuesday in the US, data on existing home sales is released. Economists tip a 0.6 per cent fall in December sales after a 1.9 per cent lift the previous month. Sales stand at 3-month highs. Also the usual weekly data on chain store sales is released on Tuesday.
  • On Wednesday the influential Richmond Federal Reserve manufacturing index is expected to be released with the House Price index and weekly data on mortgage applications. Over the last seven months US house prices have been rising 0.2-0.4 per cent per month.
  • In the US on Thursday the weekly data on new claims for unemployment insurance is released together with the leading index and the Kansas Federal Reserve manufacturing index. The leading index rose by a modest 0.2 per cent in November after a 0.3 per cent decline in October and 0.6 per cent increase in September…
  • Also on Thursday in the US the Markit ‘flash’ services and manufacturing indexes are issued. And similar ‘flash’ surveys are issued in France, Germany, Eurozone and Japan.
  • On Friday in the US, so far no indicators are set down for release. Previously, data on durable goods orders and new home sales were scheduled to be issued.

US earnings season

  • The US profit-reporting (earnings) season gets into full swing in the coming week. S&P 500 companies are expected to report a 14.3 percent rise in fourth-quarter earnings, lower than the 20.1 percent growth forecast in October, according to IBES data from Refinitiv. So far, the earnings season is progressing well with sharemarkets supported by better-than-expected results from global investment banks.
  • Amongst companies reporting on Tuesday: IBM; Johnson & Johnson, Haliburton.
  • Wednesday: Procter & Gamble; Ford Motor.
  • Thursday: American Airlines; E*Trade; Intel; ResMed.
  • Friday: Colgate-Palmolive.

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