Newsletter Century 21 Housing Slow Down

• Retail spending rose by 0.2 per cent in October after rising by 0.4 per cent in September. Over the past year retail trade lifted by 3.4 per cent.

• Excluding food, sales rose by 0.1 per cent in October and were 2.4 per cent higher than a year ago.

• Building approvals slump. Approvals to build new dwellings fell by 10.7 per cent in October after a 14.2 slide in September.
• The all-important private sector new house segment fell by 7.5 per cent in September to 7,042 approvals – a 33-month low.
• Dwelling approvals fell in five of the six states in October, with Queensland leading the declines (down 19.5 per cent) followed by Victoria (down 18.0 per cent), Tasmania (down 12.9 per cent), and South Australia (down 3.3 per cent) and NSW (down 0.4 per cent). Approvals rose just in Western Australia (up 2.1 per cent).
• The Performance of Manufacturing index (PMI) rose by 0.4 points to 47.8 in November. Any reading below 50 indicates that the manufacturing sector is contracting.

• The latest retail sales result certainly didn’t live up to expectations. Retail sales grew by just 0.2 per cent in October and when essential categories like food are taken out retail sales recorded a paltry 0.1 per cent gain. It is clear that consumers are remaining conservative and no doubt the global economic turmoil and the resulting volatility in share markets is hampering any significant recovery in spending.
• The fundamentals of the Australian economy have been sound but the recent weakness has been a crisis of confidence more than anything else. Over the past year it has been more a choice by consumers to save rather than necessity and the ongoing concerns about global growth have certainly dampened consumer enthusiasm.
• On a positive note retail sales did lift for the fourth consecutive month, with a cumulative gain of 2 per cent. Now that may not sound like much, but given the substantial weakness in activity over past year any pick-up is certainly welcome. In addition the latest data is for October and does not take into consideration the November rate cut.
• Looking forward the recent rate cut should support activity over coming months. In fact following the variable rate cut consumer confidence spiked to a six month high and the anecdotal evidence by retailers is that spending has picked up albeit of a low base.
• The housing sector is not showing any signs of life. Building approvals have fallen by almost 25 per cent in the space of two months. Clearly this adds further weight to our view that the housing sector is still going backwards. Coupled with the fact that house prices have now fallen for ten months and new home sales are holding at 11-year lows and it provides further confirmation as to why interest rates needed to be cut in the short-term.
• It could be argued that the building approvals numbers tend to be more volatile, but the rest of the industry data on housing activity provides a picture of a housing sector that has lost momentum.
• Importantly building approval is a leading indicator for the housing sector. As any pick up in approvals will translate to new building down the line. The latest result effectively ensures that activity levels over the next six months are likely to be weak. The lack of activity in the housing sector will have longer term repercussions for the broader economy. Clearly the result is not great news for tradesman and retailers.

• While homes sales are weak, it is not all bad news as the fundamentals for the housing sector are still strong. Unemployment is still low, wages are rising, the rental market is still tight and population growth is healthy. In addition the first rate cut delivered  will provide a degree of support for the sector. And the potential for further rate cuts cannot be ruled out. If the global economy – particularly Europe – continues along the same vein the policymakers make look at supporting domestic growth by easing policy further in the next couple of months.

• Retail trade rose by 0.2 per cent in October after rising by 0.4 per cent in September. Non-food retailing rose by 0.1 per cent in October after a similar increase in September. Over the past year retail trade lifted by just 3.4 per cent.
• Non-food retailing rose by 0.1 per cent in October and by 2.4 per cent over the year
• Sales by chain stores and other large retailers rose by 0.4 per cent in seasonally terms in October after a 0.1 per cent fall in September. In annual terms sales at chain stores were up 3.6 per cent on a year ago.
• During October sales increased most at electrical and electronic goods retailers (up 2.1 per cent), followed by clothing retailing (up 1.7 per cent), supermarket and grocery stores (up 0.9 per cent).
• Spending fell most at butchers, bakers and other specialised food stores (down 3.9 per cent), furniture, floor coverings and home-ware retailers (down 2.6 per cent) and newsagents and book stores (down 1.2 per cent).
• Across the states sales rose most in Western Australia (up 1.6 per cent), followed by the Northern Territory (up 0.7 per cent), Victoria (up 0.6 per cent), South Australia (up 0.2 per cent). Sales fell the most in Tasmania (down 1.2 per cent), the ACT (down 0.7 per cent), Queensland (down 0.3 per cent) and NSW (down 0.1 per cent).

• New dwelling approvals fell by 10.7 per cent in October after a 14.2 per cent slide in September. Since the start of the year approvals have now slumped by 32.2 per cent – marking the biggest ten month slide since December 2008. Approvals to build houses fell by 7.6 per cent (private sector houses down 7.5 per cent). Dwelling approvals are down 10.7 per cent on a year ago. Approvals to build new apartments fell 16.7 per cent in October (private sector down 16.8 per cent).
• Dwelling approvals rose in just one of the six states in October, with Queensland leading the declines (down 19.5 per cent) followed by Victoria (down 18.0 per cent), Tasmania (down 12.9 per cent), and South Australia (down 3.3 per cent) and NSW (down 0.4 per cent). Approvals rose most just Western Australia (up 2.1 per cent).
• The value of building approvals fell by 2.4 per cent in October. The value of approvals was down 21.5 per cent on a year earlier.

• The Performance of Manufacturing index lifted 0.4 points to 47.8 in November. A reading below 50.0 indicates that the sector is shrinking.

• 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' monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.

• The 32 per cent slump in building approvals since the start of the year certainly doesn’t bode well for the housing sector over the near term.
• It is important to realise that the strength of the housing sector plays a vital role in the supporting activity across an array of sectors. And the lack of building coupled with the dearth in consumer spending has resulted in the domestic economy coming to a standstill. Interestingly all this weakness has taken place in an environment where interest rates have remained on hold for the past year.
• While the recent rate cut will support confidence it is unlikely to provide a significant degree of stimulus. Especially given that the average variable mortgage rate is still marginally above neutral. In fact CommSec believes the Reserve Bank should be cutting rates next week but given its precious reluctance to cut rates we expect that that they will stay on the sidelines until 2012.