Last week the Bureau of Statistics released new projections on the number of households in Australia. Hopefully planning departments in each of the states and territories were taking notice. Because it’s not population growth that should be feared, rather the main concern is that planning departments fail to determine what all the extra people mean for housing demand and infrastructure like roads, schools and hospitals.
Overall the ABS expects the number of households in Australia to lift from 7.8 million in 2006 to between 11.4-11.8 million in 2031. The expected increase in the number of households will be around 50%, outstripping a 39% expected increase in Australia’s population to around 28.8 million.
Why the difference? Well the assumption is that the number of people occupying dwellings will ease over the 25-year period from 2.6 people per household to around 2.4-2.5 people. That may not sound like much, but it adds up over time. But actually the decline is far less significant than the previous forecasts that had tipped household size to fall to around 2.2-2.3 people per household by 2026. On that assumption, Australia would have needed to build far more (but smaller) homes over coming years.
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Of course the assumption on household size could still prove wrong – as indeed it actually has in the past few years. That is, rather than continuing to fall as it has done over the past century, the amazing thing is that the number of people in the average dwelling has risen in recent years. In part the change reflects an increase in the number of marriages and other partnerships. Also more babies have been born. And children have opted to stay home longer with their parents. And there also has been a tendency for grandparents to share accommodation with their children.
Whatever the reason, Australians have been opting to make greater use of their homes. And given that homes in Australia are the biggest in the industrialised world, it makes sense.
Certainly the year 2031 is a long way off, so what are the near-term projections – that is, over the next five years – especially with reference to housing demand? Well, on the assumption that household size eases slightly, the expectation is that the number of households will rise by around 150,000 over the next five years. But what if household size doesn’t change? Well on this assumption only 127,000 new homes would need to be built to accommodate the extra households.
Given that just over 138,000 new dwellings were started in 2009, the lower target for home-building looks far more achievable – and certainly far more achievable than some of the forecasts of ‘underlying housing demand’.
The week ahead
After a data deluge in Australia over the past fortnight the floodwaters are certainly set to recede over the remainder of June. But it is a different story in the US with a raft of ‘top shelf’ indicators to be released.
On Tuesday lending finance and credit card lending figures are released. And on the same day minutes of the recent Reserve Bank Board meeting are held while Reserve Bank deputy governor Ric Battellino delivers a speech. The March quarter dwelling starts (commencements) figures are issued on Wednesday while detailed labour force figures for May are released on Thursday.
The Reserve Bank events are likely to dominate attention as investors look for clues about how long the rate pause is likely to last. Certainly the statement issued after the last RBA Board meeting was super-short so any details about what prompted the decision to hold rates will be keenly sought. And Ric Battellino has the potential to further advance our knowledge about Reserve Bank thinking on rates, most likely in the question and answer session.
The economic data should provide mixed signals. Lending probably remained weak in April, reflected the softness of business and consumer spending. Little improvement is expected on the 12% fall in housing, personal, commercial and lease loans recorded in the year to March. But on the other hand dwelling starts may have lifted 7% in the March quarter after the strong 15.1% gain in the December quarter. Encouragingly the lift in housing activity will have multiplier effects across the economy.
The data on credit card lending figures is also worth a look. In March there were tentative signs of a thawing in consumer conservatism in the form of a slight lift in the growth of credit card advances. If the thawing in attitudes continued in April then firmer growth in spending may follow.
In the US, a raft of “top shelf” economic indicators is released over the coming week. The week kicks off with the Empire State manufacturing survey on Tuesday and then shifts up a gear with housing starts, producer prices and industrial production on Wednesday. And then on Thursday consumer prices, the leading index, current account, Philadelphia Fed survey and weekly jobless claims are all due for release.
Overall the results should confirm that the recovery of the US economy remains firmly on track. Economists tip another solid 0.7% lift in production and 0.4% increase in the leading index. Inflation should remain firmly above recession territory with the core rates of producer and consumer prices expected to lift by 0.2%. And while housing starts may have eased 2.5% in May, it follows gains totalling 11% over the two previous months.
And as has been the case for the past few months, the weekly data on jobless claims (new claims for unemployment insurance) will provide valuable insights about how the job market is tracking.
Up until mid-April, investors were inclined to believe that things were getting better. And that belief was highlighted in sharemarket valuations. The historic price-earnings ratio – as measured by Factset – had crept up to 20.6, the highest reading in just over five years. Investors concluded that the seemingly lofty level of share prices would be validated once earnings results were printed for the 2009/10 year.
But after jitters started to creep through about problems in Europe, investors felt that it was appropriate to be a bit more conservative about expectations for the Australian market. That is, earnings may indeed validate sharemarket levels, but there were good reasons to reduce the optimism to some extent.
And that more considered view has turned out to be the right call in light of the raft of recent profit downgrades. Companies like Virgin Blue, Toll Holdings and Primary Healthcare have – for differing reasons – chosen to downgrade earnings estimates. In the short space of time since mid April, the historic PE ratio has fallen from an above-average level of 20.60 to a below-average level of 15.50 (decade average 17.25).
What about the forward PE ratio? Well valuations have also come down, but not to the same extent. In mid April the forward PE calculation stood at 16.30 and it has since fallen to 13.25 (decade average 15.8). Provided analysts don’t markedly changed their profit forecasts, current sharemarket prices look a touch low. In fact apart from the recent crisis period of August 2008 – March 2009, the forward PE is close to the lowest levels recorded in 15 years. The clear drivers of the Australian sharemarket over the past two months have been investor fears and falls on overseas sharemarkets, but the weakness has had the result of inducing more value into the market.
Interest rates, currencies & commodities
Economists don’t see it, but traders and investors continue to factor in the risk of a rate cut over the next few months. The overnight indexed swap rate has priced in a 6% chance of a rate cut in the next two months while the Credit Suisse indicator puts the implied chance of a rate cut at 7%. Stranger things have happened, but for the next move in rates to be down rather than up would require a significant deterioration of the European Debt Crisis or double-dip recession in the US. The former issue can’t be totally ruled out but the latter issue is less likely in our opinion.
Craig James is chief economist at CommSec.