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Economics | June 1, 2020

High unemployment hits regional home prices Record fall in inflation; Mixed factory activity Home prices; Manufacturing; Inflation gauge Home prices: The CoreLogic Home Value Index of national home prices fell by 0.4 per cent in May - the

biggest decline in 12 months. Home prices were still 8.3 per cent higher over the year. In capital cities, prices fell by 0.5 per cent - the biggest fall in 13 months - but prices were still up 9.7 per cent over the year. Melbourne (-0.9 per cent) and Sydney (-0.4 per cent) home prices fell by the most in 12 months. Regional home prices were flat (up 3.5 per cent on the year) but prices fell by the most for regions with rising unemployment.

Manufacturing sector: The AiGroup’s Performance of Manufacturing Index rose by 5.8 points in May to 41.6 points. The AiGroup noted, "While less of a fall than we saw in April, the further deterioration of manufacturing performance in May is deeply concerning." The ‘final’ CBA/IHS Markit Manufacturing Purchasing Managers' Index fell by 0.1 point to a record low 44 points in May. Any reading below 50 indicates a contraction in activity.

Inflation gauge: The Melbourne Institute’s headline inflation gauge fell by a record 1.2 per cent in May (biggest fall since September 2002) to be up just 0.1 per cent over the year. Similarly, the Reserve Bank’s preferred underlying inflation measure – the trimmed mean gauge – fell by 0.3 per cent to be up 0.5 per cent on the year.

Home price data is important for retailers, especially those focussed on consumer durables. The manufacturing data provides guidance for companies in the Industrials sector. The inflation gauge estimates month-to-month price movements for a wide-ranging basket of goods and services.

What does it all mean? National home prices dipped in May with falls in Darwin and Melbourne most pronounced. Home prices fell by

0.36 per cent - the most in 12 months. Melbourne dwelling prices fell by 0.91 per cent – the biggest decline in 15 months, led lower by the top quartile of homes by capital value (down 1.3 per cent). Sydney home prices were down by 0.42 per cent - also the biggest decline in a year - with capital values at the top end of the market down by 0.6 per cent. But it wasn’t all bad news with home prices up in Hobart (up 0.8 per cent), Canberra (up 0.5 per cent) and Adelaide (up 0.4 per cent).

At this stage prices have eased modestly but have remained remarkably resilient, despite a drop in transaction volumes due to the economic shutdown and social distancing restrictions. Record low mortgage rates, loan relief programs by lenders and government financial support measures (i.e. JobKeeper) have supported home owners.

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Economic Insights: High unemployment hits regional home prices

In fact, Domain recently said, “There is little evidence to suggest an increase in urgent or distressed selling across Australia’s capital cities.” And in a further sign of housing market resilience, CoreLogic reported that, “Prior to Easter, real estate agent activity was tracking 60 per cent lower than at the same time a year ago. By the end of May, agent activity was only 8 per cent below a year ago.”

That said, pockets of weakness in regions that are adversely impacted by higher unemployment are apparent in the May data. In particular, home prices fell by the most in the Queensland Outback (down 4.3 per cent), Western Australia’s Northern Outback (down 3.1 per cent), Darling Downs-Maranoa (down 1.8 per cent), Coffs Harbour-Grafton (down 1.5 per cent), Mackay-Isaac-Whitsunday (down 1.2 per cent) and Shepparton (down 1 per cent). In April, jobless rates rose by 2.5-5 percentage points – the most in the nation – in many of these COVID-19 hit regions.

What do the figures show? Home prices - May

The CoreLogic Home Value Index of national home prices fell by 0.4 per cent in May – the biggest decline in 12 months. But home prices were still 8.3 per cent higher over the year.

In capital cities, prices fell by 0.5 per cent - the biggest fall in 13 months – but prices were still up 9.7 per cent over the year. House prices fell by 0.5 per cent in May and apartment prices eased by 0.3 per cent. House prices were up 9.8 per cent on a year ago and prices of apartments increased by 9.3 per cent.

In regional areas, home prices were flat in May with houses down by just 0.1 per cent, but apartment prices were up by 0.3 per cent. Regional home prices were up 3.5 per cent on the year to May.

The average Australian capital city house price (median price) in May was $680,577 and the average unit price was $580,239.

Home prices were lower in five of the eight capital cities in May. Home prices fell by the most in Darwin (down 1.6 per cent), followed by Melbourne (down by 0.9 per cent), Perth (down 0.6 per cent), Sydney (down 0.4 per cent), and Brisbane (down 0.1 per cent). But prices rose most in Hobart (up 0.8 per cent), Canberra (up 0.5 per cent) and Adelaide (0.4 per cent).

Home prices were higher than a year ago in six of the eight capital cities in May. Prices rose the most in Sydney (up by 14.3 per cent), followed by Melbourne (up by 11.7 per cent), Hobart (up by 6.2 per cent), Canberra (up by 5.1 per cent), Brisbane (up by 4.3 per cent) and Adelaide (up by 1.8 per cent). But prices were down in Darwin (down by 2.6 per cent) and Perth (down by 2.1 per cent).

Total returns on national dwellings rose by 12.3 per cent in the year to May with houses up by 12 per cent on a year earlier and units up by 13.1 per cent. In contrast, the S&P/ASX All Ordinaries Accumulation Index fell by 6.2 per cent over the year to May.

Manufacturing Purchasing Managers’ indexes - May

The AiGroup’s Performance of Manufacturing Index rose by 5.8 points in May to 41.6 points. The index had hit 11-year lows of 35.8 points in April. Any reading below 50 indicates a contraction in activity.

The modest improvement in factory activity was broad-based, including production (up 7.1 to 42.4 points), employment (up 6.4 to 40.7 points), new orders (up 2.4 to 35.1 points) and supplier deliveries (up 11.5 to 50.3 points). But new exports were down 11.5 to 31.1 points.

The AiGroup said, “Small numbers of manufacturers are experiencing surging demand for highly sought-after goods during the pandemic, such as medical equipment, PPE, groceries and DIY home improvement items. Manufacturers that supply government-related sectors, such as defence, energy and water projects, reported a steady stream of work. Rural equipment manufacturers noted an improvement in demand because of recent rain in some drought affected regions.”

And, “The manufacturing industry remained in a deep contraction in May. The decline slowed across all activity indices, except for the exports index which recorded its

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Economic Insights: High unemployment hits regional home prices

lowest ever monthly result. Many manufacturers noted that projects have been delayed or cancelled altogether because of the pandemic. Manufacturers supplying the construction industry said they have been mainly filling existing orders in recent months, but expect a large decline in new orders ahead.”

The ‘final’ CBA/IHS Markit Manufacturing Purchasing Managers' Index fell by 0.1 point in May to a record low of 44 points. Any reading below 50 indicates a contraction in activity.

According to CBA/IHS Markit, “The Australian manufacturing economy experienced a substantial deterioration in operating conditions during May as ongoing efforts to curb the spread of the COVID-19 pandemic continued to weigh on the sector. Output and purchasing activity both fell at record rates while demand weakened further. This led to firms discounting prices for the first time since October 2016 despite increased costs. That said, business confidence about the future rose to a five-month high.”

Inflation - May

The Melbourne Institute’s headline inflation gauge fell by a record 1.2 per cent in May to be up just 0.1 per cent over the year. Similarly, the Reserve Bank’s preferred underlying inflation measure – the trimmed mean gauge – fell by 0.3 per cent to be up 0.5 per cent on the year.

What is the importance of the economic data?

The CoreLogic Hedonic Australian Home Value Index is based on Australia’s biggest property database. Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the CoreLogic Hedonic Index includes all properties. Home prices are an important driver of wealth and spending.

The AiGroup and CBA Purchasing Manager indexes (PMIs) for services and manufacturing are released each month. The Australian PMIs are the local equivalents of similar indexes released for other countries. The PMIs are amongst timeliest economic indicators released in Australia. The PMIs are useful not just in showing how the sectors are performing but in providing some sense about where they are heading. The key ‘forward looking’ components are orders and employment.

Melbourne Institute developed a monthly inflation indicator to give markets and policy makers a more regular update on inflation trends. Based on the ABS methodology for calculating the quarterly consumer price index, the Melbourne Institute Monthly Inflation Gauge estimates month-to-month price movements for a wide-ranging basket of goods and services across the main capital cities of Australia.

What are the implications for interest rates and investors? Home prices have lost momentum in Sydney and Melbourne and the near-term outlook remains challenging.

Expectations are for continuing price declines as demand recedes due to the economic downturn, rising unemployment and reduced inbound migration.

But a gradual easing in restrictions on home inspections and public auctions, the broader re-opening of the economy, rising return-to-work rates, ultra-low interest rates and more supportive government policy measures should eventually encourage property buyers back.

In fact, reports today suggest that the government is about to announce a stimulus package for the residential building industry. Buyers of newly constructed homes could get grants of $20,000-$50,000 and additional cash support for home renovations is also reportedly under consideration.

The impact of the COVID-19 economic shutdown on demand and prices was evident in May with the monthly inflation gauge falling by the most on record. Deflation is an area of concern for investors, economists and policymakers worldwide as it reduces business profitability and slows wage growth – hampering consumer spending and economic growth.

Ryan Felsman, Senior Economist, CommSec Twitter: @CommSec