THE BIG PICTURE: Real estate picking up but let’s not get ahead of ourselves

One of the remarkable developments over the past year is that investors and analysts can now track home prices on a daily basis just like the sharemarket, interest rates, currencies or commodities. And just like the other markets, prices can rally a long way in a short space of time.

But that generally means that a period of correction or consolidation has to follow.

As we discuss in the last paragraph on page two, the sharemarket has jumped out of the blocks in 2013. But it started 2012 in a similarly positive fashion, only to face periods of correction over the year.

Certainly, Australian home prices also started 2013 positively. In fact, Sydney home prices lifted 2% in the first 28 days, putting the market on track for gains of around 26% over the year. But prices have indeed consolidated through to mid-February.

Currently Sydney home prices have lifted 1.9% over 2013, outpacing a 1.2% lift in Perth home prices, 0.7% rise in Brisbane-Gold Coast and a 0.4% increase in Adelaide.

Melbourne prices have eased 0.2% this year, dragging the five-city index down to a 0.9% gain.

If home prices grow at the same rate over the year, home prices would lift around 16% in Sydney and 10% in Adelaide with the five-city index up 7.5%.

But the current annual growth rates are probably more instructive, showing gains of around 0-3% over the year.

Indeed, we think it is reasonable for home buyers and investors to price in gains of around 2-3%, still way short of the long-term average growth rate of around 7-8%.

The week ahead

On the domestic front, the main interest is the semi-annual testimony from the Reserve Bank governor on Friday. And in terms of economic data, figures on wages dominate, together with a spattering of other indicators such as car sales and imports.

In the US, housing and inflation data will be the highlight. And in a raft of countries including the US and Europe, “flash” readings on manufacturing conditions are issued.

In Australia, the week kicks off with data today on new vehicle sales. Industry data has already been issued by Australian Federal Chamber of Automotive Industries via its VFACTS report. And on Monday the Bureau of Statistics (ABS) will recast the data in seasonally adjusted and trend terms. In original terms sales totalled 85,430 vehicles in January, up 11.3% on a year ago showing that the new car market is exceedingly healthy.

On Tuesday the Reserve Bank releases the minutes from the February board meeting, while the ABS issues January data on merchandise imports (in other words, imports of goods). Apart from car sales, there are few indications of sales or production activity in January so far, so the import data should prove instructive.

On Wednesday the ABS releases the wage price index, the main gauge of wage pressures in the economy. We are tipping growth in wages of 1% in the December quarter and 3.7% for the year. But the risk is that our forecasts prove to be a touch too high.

The Reserve Bank noted in its quarterly statement:

“Business surveys suggest that wage pressures eased further in the December quarter. Liaison with firms also indicates that there has been a pick-up in the share of firms expecting no growth in average wages over the year ahead, and that skills shortages and wage pressures in the resources sector have eased.”

On Thursday there is another ABS publication on wages, but the main use of the “Average Weekly Earnings” publication is to provide dollar estimates on wages rather than to gauge wage pressures in the economy.

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