Residential property has outperformed shares: CommSec's Ryan Felsman

EXPERT OBSERVER

The global sharemarket downturn will grab all the headlines again today.

Shares fell sharply in February as investors became increasingly concerned about the spread and increase in novel coronavirus (COVID-19) infection rates globally. Uncertainty about the US presidential election outcome, concerns over lofty sharemarket valuations and worries about the potential virus impact on corporate earnings and global growth also dampened risk sentiment and lifted volatility.

In the final week of the month major developed market indexes - including the Australia’s benchmark S&P/ASX200 index - posted their worst weekly performances since 2008.

So where do investors seek shelter in a low interest rate environment?

Well, record low mortgage rates, rising home prices, strong auction clearance rates, limited housing supply, improving access to home loans and now financial market volatility are encouraging Aussies to return to the property market.

In fact, total returns on national dwellings rose by 10.1 per cent in the year to February - the strongest annual growth rate in 28 months - with houses up by 9.9 per cent and units up by 10.5 per cent on a year earlier. In contrast, the S&P/ASX All Ordinaries Accumulation Index lifted by 8.2 per cent over the year to February – the weakest annual growth rate in 12 months.

What do the figures show?
Home prices

The CoreLogic Home Value Index of national home prices rose by 1.1 per cent in February to stand 6.1 per cent higher over the year.

In capital cities, prices rose by 1.2 per cent to be up 7.3 per cent over the year to February. House prices rose by 1.2 per cent and apartment prices also lifted by 1.2 per cent. House prices were up 7.5 per cent on a year ago and prices of apartments increased by 6.9 per cent.

In regional areas, home prices rose by 0.7 per cent with houses up 0.8 per cent and apartment prices up by 0.3 per cent. Regional home prices were up 1.4 per cent on the year to February.

The average Australian capital city house price (median price) was $669,037 and the average unit price was $577,800 in February.

Home prices were higher in seven of the eight capital cities in February. Home prices rose by the most in Sydney (up by 1.7 per cent), followed by Melbourne (up by 1.2 per cent), Hobart (up by 0.8 per cent), Canberra (up by 0.8 per cent), Brisbane (up 0.6 per cent), Perth (up by 0.3 per cent), and Adelaide (up by 0.1 per cent). But Darwin prices fell by 1.4 per cent.

Home prices were higher than a year ago in six of the eight capital cities in February. Prices rose the most in Sydney (up by 10.9 per cent), followed by Melbourne (up by 10.7 per cent), Hobart (up by 5.0 per cent), Canberra (up by 4.1 per cent), Brisbane (up by 1.9 per cent) and Adelaide (up by 0.4 per cent). But prices were down in Darwin (down by 7.8 per cent) and Perth (down by 4.0 per cent).

Total returns on national dwellings rose by 10.1 per cent in the year to February with houses up by 9.9 per cent on a year earlier and units up by 10.5 per cent. In contrast, the S&P/ASX All Ordinaries Accumulation Index lifted by 8.2 per cent over the year to February.

Manufacturing Purchasing Managers’ indexes - February

The Australian Industry Group’s (AiGroup) Performance of Manufacturing Index fell by 1.1 points to a near 5-year low of 44.3 points in February. Any reading below 50 indicates contraction in activity.

The decline was driven by weaker exports (down 5.3 points to 44.5 points); slower production (down 4.8 points to 40.4 points); slower sales (down 2.3 points); and falling new orders (down 2.0 points to 41.7 points). But supplier deliveries (+2.8 points to 46.5 points); finished stocks (+0.7 points to 48.5 points) and employment (up 0.7 points to 49.1 points) all rose.

The AiGroup said, “All manufacturing sectors experienced weaker conditions in February than in January (trend). Food & beverages is now the only manufacturing sector to be expanding (results over 50 points) but its growth has slowed significantly in recent months. All other sectors contracted in February and at a faster pace than in January (trend).”

“The production, sales, new orders and exports indices fell further into contraction in February and were firmly negative. COVID-19 is already denting exports of Australian manufactured goods, particularly consumable items into China. The ‘heavy’ manufacturing sectors are reporting supply chain disruptions because of freight and factory closures in China. Locally, drought remains a major concern in some parts of the country, despite better recent rain. The ‘metals’ and ‘building materials, wood, furniture & other’ sectors reported weak demand from the construction industry.

The ‘final’ CBA/IHS Markit Manufacturing Purchasing Managers' Index rose by 0.6 points to 50.2 points in February. Any reading above 50 indicates an expansion in activity.

According to CBA/IHS Markit, “February saw a rise in the headline PMI, fuelled principally by longer delivery times as supply chains were affected due to the coronavirus outbreak. Output, new orders and employment all continued to fall, which saw firms cut back purchasing activity and tap into current inventories. Stocks of both inputs and finished goods fell. Business confidence, while positive, stayed below the historical average. On the price front, input price inflation remained solid, while charges grew at a slower pace.”

What are the implications for interest rates and investors?

News over the weekend that China’s February manufacturing and services sector contracted by the most on record – due to the virus-induced shutdown of industry and supply chains – have increased investor concerns about a potential global recession. On Friday, US Federal Reserve Chair Jerome Powell said that the US central bank is ready to cut interest rates to support the US economy.

Now money markets are convinced that Reserve Bank of Australia Governor Philip Lowe will ‘pull the trigger’ and cut rates to a record low 0.5 per cent tomorrow in an attempt to shield the Aussie economy from downturn in the education, tourism and resources sectors. While lower interest and mortgage rates are good news for those with a mortgage – boosting household cashflows due to lower borrowing costs – self-funded retirees relying on term deposits will be displeased.

The latest Aussie manufacturing activity indicators were mixed. The AiGroup factory activity measure is contracting by the most since 2015 with weak consumer demand and now the virus outbreak weighing on business confidence and conditions. Supply chains are being affected by reduced capacity and the shutdown of industry in China.

The one bright spot for the economy is the housing market. Home prices outside of Darwin are booming. Additional rate cuts by the Reserve Bank will provide even further impetus for investors searching for yield with Aussie shares down from record highs and government bond yields hitting record lows. Home values in Adelaide, Brisbane, Canberra, Hobart and Melbourne all hit record highs in February.

RYAN FELSMAN is a Senior Economist for CommSec