New home sales crash to 11-year lows

New home sales crash to 11-year lowsRetail Trade; Construction Work; Private Sector Credit; New Home SalesNew home sales fell by 7.3 per cent in January to the lowest reading in 11-years.

New detached house sales fell by 7.4 per cent in the month while sales of ‘multi-units’ fell by 6.3 per cent.Construction work fell by 4.6 per cent in the December quarter after surging 11.7 per cent in the September quarter.
Commercial building work done fell by 7 per cent in the December quarter while engineering work done fell by 5 per cent. Residential building work done fell by 1.8 per cent in the December quarter (private sector down 1.7 per cent).
CommSec estimates the fall in residential building will detract around 0.2-0.3 percentage points from December quarter GDP growth.

Overall growth is expected to be around 0.8 per cent in the December quarter.Cautious consumers: Retail spending rose by 0.3 per cent in January after falling by 0.1 per cent in December. Non-food retailing rose by 0.4 per cent in January to be up 2.9 per cent over the year.
Lending remains weak: Private sector credit (lending) rose by 0.2 per cent in January after a 0.3 per cent rise in December. Annual credit growth held steady at 3.5 per cent – effectively flat in real terms.What does it all mean?
Aussie consumers and home-buyers remain super-cautious and that mood is continuing to constrain activity for retailers and housing-dependent businesses. Anecdotally the recent drop in interest rates is boosting enquiry levels in the housing market, but it is yet to show up in healthy rise in housing activity. In fact the latest data on new home sales clearly highlights that the sector is yet to show signs of emerging from the recent downturn.
New home sales have slumped to the lowest levels in over 11-years and the lack of activity in the home building sector does not bode well for a raft of businesses. While the Reserve Bank doesn’t seem in a rush to cut rates, the ongoing downturn in the residential building market certainly keeps another rate cut on the table.The modest slide in construction work done in the December quarter is hardly concerning – especially given that activity had surged by over 11 per cent in the September quarter to record highs.

In fact construction activity is still up a healthy 9.2 per cent in annual terms.Interestingly the strength in construction activity is primarily being driven by engineering activity – roads, bridges railways etc. – which was up a staggering 27 per cent on a year ago.
In contrast residential building continues to go backwards. It’s clear that as the mining boom rolls on it will lead to a reallocation of capital and labour resources to areas that need it most. The strength in business investment, and in particular engineering activity, is a key reason why the Reserve Bank remains cautiously optimistic about the longer term prospects of the Australian economy.
The public sector continued its retreat, leaving the private sector to drive construction. And while business activity eased in the December quarter it is effectively a period of consolidation. Looking forward it is likely that businesses will continue to ramp up investment plans as the domestic recovery gains traction.The continued sluggishness in retail activity is certainly disappointing. Retail sales rose by just 0.3 per cent in January after sliding by 0.1 per cent in December.
The latest result comes after consumers have had a couple of months to adjust to the rate cuts that took place last year. And while policymakers have underestimated the conservatism of consumers, the anecdotal evidence would suggest that consumers are spending on services rather than goods. In addition the modest lift in non-food spending is also encouraging.
Importantly the household savings ratio is holding at a 24 year high, and given that household balance sheets are in good order it is likely that the increased savings will eventually lead to a pickup in spending as the recovery gains traction.
However CommSec anticipates that the sluggish consumer spending environment will dominate the economic landscape over the first half of 2012.
Overall the Reserve Bank would be comfortable with the current position of the domestic economy. Effectively policymakers have been depressing parts of the economy (like housing and the household sector) to ensure that there is enough spare capacity for the growth in business investment and the mining sector.The key for the Reserve Bank is to ensure that inflation remains in check as the recovery gains traction.
As such CommSec does not expect the Reserve Bank to cut interest rates until at least May.What do the figures show?

Construction WorkConstruction work done fell by 4.6 per cent in real (inflation-adjusted) terms in the December quarter to be up by 9.2 per cent on a year ago. Public sector construction work fell by 1.0 per cent while private sector activity fell by 5.6 per cent.Six states had higher activity in the December quarter. Construction work rose most in the Northern Territory (up 42.5 per cent), followed by Queensland (up 10.3 per cent), ACT (up 5.7 per cent), Tasmania (up 5.0 per cent), South Australia (up 0.7 per cent) and Victoria (up 0.4 per cent). Construction fell the most in Western Australia (down 24.4 per cent), and NSW (down 1.8 per cent).Engineering work fell by 5.0 per cent in the December quarter with private sector activity down 6.8 per cent and public sector work down 0.1 per cent. Engineering construction is up 27.1 per cent on a year ago.
Commercial (non-residential) building fell by 7 per cent in the December quarter with private sector work down 9.3 per cent. Residential building fell by 1.8 per cent in the quarter with private sector work down by 1.7 per cent.
Alterations & additions fell 3.2 per cent while new residential work fell by 1.5 per cent.The value of building work yet to be done fell by 8.6 per cent to $37.1 billion in the December quarter – marking the weakest reading since December 2007. The value of building work yet to be done is now down 17.8 per cent from the record highs reached in March 2010.Building that has been approved but not commenced fell by 16.1 per cent in the December quarter.
Construction costs rose by 0.7 per cent in the December quarter to stand 1.7 per cent higher than a year ago (decade average 4.1 per cent). Building costs rose by 0.2 per cent in the quarter and 1.3 per cent over the year.
Engineering costs rose by 1 per cent in the quarter and 2.2 per cent over the yearRetail tradeRetail trade rose by 0.3 per cent in January. Sales had previously fallen by 0.1 per cent in December and were flat in November.
Annual spending growth rose from 2.6 per cent to 2.7 per cent.
Non-food retailing rose by 0.4 per cent in January. Sales are up by 2.9 per cent over the year.Sales by chain stores and other large retailers rose by 0.5 per cent in seasonally terms in January after a 0.2 per cent fall in December.
In annual terms sales at chain stores were up 2.0 per cent on a year ago.Across the states sales rose the most in: Northern Territory (3.5 per cent), followed by the ACT (up 2.1 per cent), Queensland (up 1.7 per cent), Western Australia (up 1 per cent), and Tasmania (up 0.1 per cent). Sales fell the most in the NSW (down 0.5 per cent), and Victoria (down 0.4 per cent).New home salesThe Housing Industry Association / JELD-WEN new home sales report shows that number of new homes sold in January fell by 7.3 per cent following a decline of 4.9 per cent in December.
New detached house sales fell by 7.4 per cent in the month while sales of ‘multi-units’ fell by 6.3 per cent.Private sector creditPrivate sector credit (lending) rose by 0.2 per cent in January after a 0.3 per cent rise in December. Annual credit growth held steady at 3.5 per cent.Housing credit grew by 0.5 per cent in January after a 0.4 per cent rise in December.
Housing credit is up 5.3 per cent on a year ago – the weakest annual growth in records going back 34 years.Owner occupier housing credit rose by 0.5 per cent in January to stand 5.7 per cent higher than a year ago.
And investor housing finance lifted 0.4 per cent in January to be up 4.7 per cent over the year.Personal credit fell by 0.2 per cent in January. Personal credit was down 1.3 per cent over the year, holding near the biggest decline in over two years.
Business credit fell by 0.2 per cent after a 0.3 per cent rise in December. Business credit is 1.4 per cent higher than a year ago.What is the importance of the economic data?
The Bureau of Statistics’ Retail trade publication contains the most current readings on the performance of consumer spending. The ABS surveys 500 ‘larger businesses’ and 2,750 ‘smaller businesses’.
Retail trade covers spending at a broad range of retail outlets but excludes both petrol and motor vehicle sales.
A weak retail trade result may point to a slowing economy as well weighing on the share prices of listed retail stocks.
But retail trade estimates can’t be assessed in isolation – it is important to look at the influences determining future trends in consumer spending, such as income, employment and confidence levels.
The Bureau of Statistics releases quarterly estimates of Construction work done. The estimates are based on a survey and cover around 80 per cent of the construction work done in the period. Revised estimates will be released in coming months.
The data is useful largely for historical purposes but the work yet to be done estimates provide an early warning signal of future activity. The residential work figures give a good early guide to the strength of residential investment in the national accounts.
The Housing Industry Association & JELD-WEN release data on the sales of new homes each month. The HIA collects the data each month from a sample of Australia’s largest 100 home builders.
Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy.
If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.What are the implications for interest rates and investors?
The residential building sector is clearly not shooting the lights out as yet but it is primed for growth. It is likely that private sector construction spending will lift over the coming year as resource-dependent projects drive investment.
There is still around $37 billion of building work remaining to be completed, although order books have continued to get smaller, not larger over the past year.Conditions in the construction sector are mixed.
Engineering really is the standout, whereas residential activity is patchy. Overall there is a reasonable supply of existing construction projects, but construction costs are well contained.
In short, no problems for the Reserve Bank.The January retail trade data is certainly disappointing, however the rate cuts in November and December and improving outlook for the global economy should lead to firmer spending ahead.
It should also be noted that spending varies markedly across the nation with the large states of NSW and Victoria the most cautious about spending.Financial markets continue to factor in rate cuts in coming months.
Currently the overnight indexed swap sees a 20 per cent chance of a rate cut next week and is pricing one 25 basis point rate cut over the next six months. 

 

 

 

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