There is an old adage in economics – there are lies, damned lies and statistics. And when it comes to the issue of housing valuations and affordability, there is a lot of data that can be categorised in the two former terms and much less in the latter.
As we go across the country we are amazed at the number of people concerned that our home prices are overvalued. Magazines like The Economist must take some of the blame, together with websites like Demographia and even some industry groups like the Housing Industry Association.
Home prices in Australia are determined by demand and supply. In recent years demand has been strong, driven by the biggest in-bound migration in history. But in some parts of the country, supply – new dwelling construction – has not kept pace. In large part this has been in NSW as well as Queensland. In other parts of the country, governments have increased land supply, reduced barriers for developers and rezoned land for housing. And as a result dwelling starts are running above long-term averages.
The Reserve Bank Governor was asked a question on Australian home prices when he delivered a speech in London on March 10. The comments weren’t well reported, but he highlighted the fact that home prices aren’t rising strongly at present, that arrears rates on mortgages are low, gearing isn’t high and that, overall, home prices “are probably not top of my list of worries.”
However, Glenn Stevens did say something else: “But I think – the other thing I’ll say is that it’s quite often quoted very high ratios of price to income for Australia, but if you get the broadest measures, a country-wide price and a country-wide measure of income, the ratio is about 4 ½ and it hasn’t moved much either way for 10 years. And that is higher than it used to be, but it’s actually not exceptional by a global standard as far as I can see.”
What he was quoting here was the analysis by Rismark International and RP Data on housing affordability. To measure home affordability you need to compare all incomes across Australia with all home prices across Australia – city and regional. Unfortunately a raft of industry bodies don’t do that and it produces spurious outcomes.
The bottom line is that Australian home prices aren’t so extraordinary after all. Once foreign investors start focusing on the facts rather than fiction then perhaps a few more dollars will start flowing Down Under. Because it is a concern abroad, and it’s not being helped by misinformation.
Most of the ‘top-shelf’ economic indicators aren’t released until late in the coming week. But there is still a good spattering of indicators for investors to focus on in the next few days. And in the US, the main game is also late in the week with data on employment (non-farm payrolls) on Friday.
On Tuesday, Reserve Bank Assistant Governor Malcolm Edey will speak at a credit/debit cards conference while population data will be released the same day. Population growth has slowed markedly over the past 18-months, easing from a 40-year high of 2.2% to 1.7%. Australia’s population growth is still one of the fastest rates in the world, but arguably it should be higher given our tight job market and urgent need for skilled migrants. Australia has been poorly served by political debate on migration.
On Wednesday, the Department of Education, Employment and Workplace Relations releases data on skilled job vacancies while the Bureau of Statistics releases broader data on job vacancies. The job market is tight, but the Reserve Bank says it isn’t overly tight. Home sales data for February is also issued.
On Thursday, February data on retail sales, building approvals and lending (private sector credit) are released. Retail spending certainly hasn’t been flash of late, up 0.4% in January and up 1.8% over the year – below the rate of inflation. But the Commonwealth Bank Business Sales Indicator lifted in February, and as a result we tip a 0.6% increase in retail trade in the month.
And building approvals have also been weak, although the Queensland floods and cyclone make analysis tougher. Approvals slumped by 15.9% in January, although we expect a modest 4% lift in February. The floods will depress readings on approvals in the short-term but boost data from mid-year.
In the US, most investors will only have eyes for one indicator – non-farm payrolls (or employment) to be released on Friday. The job market is clearly picking up with new claims for unemployment insurance sliding. In fact, the four-week average of claims is the lowest since July 2008. Economists tip a rise in non-farm payrolls of around 180,000 in March after gains of 192,000 in February. But the jobless rate is expected to remain high near 8.9%.
The other indicator that will be in focus is the ISM manufacturing gauge for March, also released on Friday. The gauge stands at 61.4 – a reading that hasn’t been surpassed in just over 27 years – so it is clear that a solid economic recovery is underway. Economists tip a March ISM reading near 61.6.
Of the other indicators, personal income and spending data are released on Monday together with pending home sales. On Tuesday, the Standard & Poor’s/Case-Shiller home price index is released together with consumer confidence. On Wednesday the ADP employment index is issued together with the Challenger job layoffs series. On Thursday regional purchasing manger surveys are released in New York and Chicago together with data on factory orders. And on Friday car sales figures are released.
Australian investors will also closely watch the Chinese purchasing managers survey on Friday.
CommSec has adjusted its forecasts for the All Ordinaries/ASX 200 for the remainder of the year. The Japanese earthquake, tsunami and nuclear shock have clearly had a depressing influence on investor confidence together with air strikes against Libya. Separately, foreign investors remain cold on the Australian market. Our economy is treading water and both the mining resource rent tax and proposed carbon tax are seen to have depressed the outlook for the economy. The high Australian dollar is also crimping foreign interest in our sharemarket. Sure, China continues to expand, boosting earnings and profits for resource companies. But mining represents just 9% of the economy. It is the other 91% that investors are worried about.
We now expect the All Ordinaries/ASX 200 to be around 4,900 points mid-year and 5,200 points by the end of the year. Our expectation of a softer Australian dollar in the second half of 2011 (US92 cents by end year) should boost interest of foreign investors – a group owning 40-45% of our shares. And high corporate profits do point to a firmer sharemarket as well.
The Japanese nuclear shock has certainly thrown the spotlight on energy prices. Most would have expected that uranium prices would have weakened in response to the problems experienced by a number of Japanese nuclear plants. And certainly that has been the case with the spot U308 price down from around US$73 a pound to US$60 a pound in the past few weeks. But it’s worth pointing out that the current price is well up from recent lows of US$40 a pound in June last year and most nuclear plants still are tied to longer-term price contracts.
The price of competing natural gas has lifted from US$3.75/mmbtu to US$4.25/mmbtu, but this is still in the middle of the US$3.25-5.25/mmbtu range over the past year. And the price of the other fuel that Japan could switch to – thermal coal – has actually fallen by 4% since the earthquake. Still Tohoku Electric Power had to suspend its coal imports because of earthquake damage. The longer-term outlook is more positive, especially given that Germany has decided to suspend seven nuclear reactors and plans by other countries are also under review. And this longer-term outlook is an important consideration for investors in the energy sector.
Craig James is chief economist at CommSec.
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