The final data on residential property prices for 2011 has been published by RP Data and Rismark International, so it's worth spending some time looking at the results.
Overall, capital city dwelling prices fell by 3.6% in 2011 after rising by 5.1% in 2010 and rising by 12.1% in 2009. So it looks very much like a 'soft landing'. Prices were pumped up in 2009 by super low interest rates and government incentives for first home buyers, so a correction was clearly on the cards as demand and supply moved into balance. And at the end of 2011 it looked like the correction was nearing completion with prices up 0.4% in November and easing just 0.2% in December,
And for the fourth straight year units outperformed houses. Over 2011 unit prices in capital cities fell by just 1.5% while house prices eased by 4.3%. The gap between house and unit prices has now narrowed to just over $86,000 – the lowest level in 5½ years (since May 2006). Generation Y buyers are clearly expressing their preference for smaller dwellings with other evidence suggesting they want to live near their workplace, as well as restaurants, cafes and entertainment venues.
Regional centres outperformed capital cities in 2011 with dwelling prices down 2.9% over the year, versus a 3.6% fall in capital cities. And Sydney was the best performing capital city with prices down just 0.3% in 2011. Still, the out-performance merely represented partial catch-up after years of under-performance. Over the past six years Sydney dwellings grew by 3.6% a year – the lowest gain of any capital city – short of the 5.8% average gain nationally and well short of gains by Darwin (12.4% per annum) and Perth (8.5% per annum).
Despite the fall in dwelling prices, total return on dwellings grew by 0.8% in 2011, out-performing shares with the All Ordinaries accumulation index sliding by 11.4% over the year. But returns varied from +4.5% in Sydney to -2.3% in Melbourne.
The median dwelling price nationally was $450,000 with little difference between Canberra ($488,000), Sydney ($485,000), Melbourne ($462,000) and Perth and Darwin ($450,000).
A combination of rising household income and lower housing prices has meant that housing affordability is now at the best levels in over eight years (since 2003). Another interest rate cut next week will boost housing affordability even further. Where will that leave the doomsters? Basically with nothing to report.
The week ahead
The Reserve Bank takes centre-stage in Australia in the coming week. Not only does the RBA hand down its interest rate decision, but it also releases its comprehensive quarterly economic statement. But while there are signature events in Australia, in the US the financial calendar is sparsely populated. However in Europe key interest rate decisions will be handed down.
In Australia, three key economic data releases are scheduled for Monday. ANZ issues data on job advertisements while the TD Securities/Melbourne Institute monthly inflation gauge for January and retail trade data for December are also on the day's agenda.
Job advertisements have fallen five times in the past six months, easing 0.9% in December. This caution on the part of businesses to hire probably continued in January. The December monthly inflation gauge showed that underlying inflation (excludes volatile items) was well under control, up just 2.1% over the past year. On-going discounting by retailers should have kept inflation low in January. And retail spending may have edged up 0.3% in December. That result would indicate that consumers are getting a little more confident to open their wallets but by no means would it signal a spending spree is imminent.
The Reserve Bank holds its first Board meeting of 2012 on Tuesday. In November and December we asserted that it should be cutting rates but we weren't confident that it would actually follow through. Fortunately the RBA saw conditions as we saw them and cut rates. For the upcoming meeting again we think the Reserve Bank should be cutting rates. But this time we also expect that the Board will actually follow through and cut rates.
Simply, inflation is under control, borrowing is weak, housing prices are still generally falling and the high Aussie dollar is making it tough for businesses. Add in the fact that bank housing rates are still slightly above "normal" (the average since 1997) and there is an obvious case to cut rates again.
On Wednesday Westpac and the Melbourne Institute issue the January consumer sentiment report. Encouragingly Aussie consumers have become a little more confident after the late 2011 rate cuts, but the overall index remains below 100 – suggesting that pessimists still outnumber optimists. The sentiment index may have lifted a little further in January.
And on Friday the Reserve Bank issues its quarterly Statement on Monetary Policy. In November the RBA adopted a more cautious view of the world. We expect that the same tone will prevail in Friday's report in terms of the short-term outlook but expect optimism about medium term prospects to be maintained.
In the US, an atypical week is in prospect – that is, there is little in the way of market-moving economic data. On Tuesday, consumer credit figures are released and then there is a gap until Thursday when wholesale inventories and weekly claims for unemployment insurance are released. And on Friday consumer sentiment, the monthly Treasury Budget statement and international trade data are issued.
None of the US indicators are expected to move financial markets. A trade deficit near US$48 billion is tipped with consumer sentiment flat at 75.0 and wholesale sales up 0.6% and inventories up 0.8%.
In Europe, data on German manufacturing orders is released on Monday with German industrial production on Tuesday, German trade on Wednesday, UK production, trade and house prices on Thursday with French and Italian production on Friday together with UK producer prices.
Also of note in the coming week, the European Central Bank holds its interest rate setting meeting on Thursday while the Bank of England also meets the same day to set rates. Other central banks to meet include Iceland (Wednesday) and Sweden (Friday).
Sharemarket, interest rates, currencies & commodities
The Australian profit-reporting season gets into full swing over the coming week. Of companies expected to report on Tuesday are Bradken, Cochlear, Reckon and Transurban. On Wednesday Ansell, Australand, BHP Billiton, Boral and Talent2 International are listed to issue earnings results. On Thursday, companies to report include News Corp, Telstra, Tabcorp, Stockland and Rio Tinto. Newcrest Mining releases earnings on Friday.
A fortnight ago we discussed the dramatic fall in the Baltic Dry freight index – a gauge of freight costs for dry commodities like iron ore, coal and wheat. At that time the Baltic Dry index stood at 926, close to the lowest levels in three years. Well the index has continued to fall, hitting a level of 662, and reaching the lowest levels in almost 25 years.
The decline in the Baltic Dry index is a product of reduced commodity demand and an increase in the availability of vessels. Initially, that appeared a natural outworking of supply and demand influences. But there is concern that the index is in free fall, having fallen for 31 straight days.
Was November 25, 2011 the low point for the global sharemarket in the current cycle? Across the globe, share prices appear to have reached their nadir on that day, just as world markets hit lows after the Global Financial Crisis on March 5 and 6, 2009. Since November 25 2011, the World Morgan Stanley Capital International (MSCI) has risen by 13% with Asian, European and North American markets lifting by similar amounts.
Craig James is chief executive of CommSec.
