Craig James, Chief Economist Twitter: @CommSec IMPORTANT INFORMATION AND DISCLAIMER FOR RETAIL CLIENTS The Economic Insights Series provides general market-related commentary on Australian macroeconomic themes that have been selected for coverage by the Commonwealth Securities Limited (CommSec) Chief Economist. Economic Insights are not intended to be investment research reports. This report has been prepared without taking into account your objectives, financial situation or needs. It is not to be construed as a solicitation or an offer to buy or sell any securities or financial instruments, or as a recommendation and/or investment advice. Before acting on the information in this report, you should consider the appropriateness and suitability of the information, having regard to your own objectives, financial situation and needs and, if necessary, seek appropriate professional of financial advice. CommSec believes that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made based on information available at the time of its compilation, but no representation or warranty is made as to the accuracy, reliability or completeness of any statements made in this report. Any opinions, conclusions or recommendations set forth in this report are subject to change without notice and may differ or be contrary to the opinions, conclusions or recommendations expressed by any other member of the Commonwealth Bank of Australia group of companies. CommSec is under no obligation to, and does not, update or keep current the information contained in this report. Neither Commonwealth Bank of Australia nor any of its affiliates or subsidiaries accepts liability for loss or damage arising out of the use of all or any part of this report. All material presented in this report, unless specifically indicated otherwise, is under copyright of CommSec. This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399, a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. This report is not directed to, nor intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or that would subject any entity within the Commonwealth Bank group of companies to any registration or licensing requirement within such jurisdiction.

Economics | October 1, 2020

Record home prices in 18 Aussie regions Mixed messages in manufacturing Home prices; Manufacturing activity Home prices: The CoreLogic Home Value Index of national home prices fell by just 0.1 per cent in

September. Prices were up 4.8 per cent over the year. Prices rose in six of the eight capital cities in September.

Record home prices: Home prices hit record highs in 18 of the 88, SA4 regions across Australia.

Manufacturing sector: The AiGroup Performance of Manufacturing Index fell from 49.3 to 46.7 in September. And the ‘final’ IHS Markit Manufacturing Purchasing Managers' Index rose from 53.6 to 55.4 in September. Readings above 50 indicate expansion in activity.

Home price data is important for retailers, especially those focussed on consumer durables. The manufacturing data provides guidance for companies in the Industrials sector.

What does it all mean? This is a most remarkable recession. Home prices are up almost 5 per cent over the year and are higher over the

12-month period in all capital cities bar Perth. But even in Perth, home prices lifted in the month. With lockdown restrictions easing in Victoria, there is also the prospect of firmer housing demand returning to that state in coming months.

Certainly home prices are being supported by super-low interest rates. And the job market continues to defy the gloomsters. But challenges lie ahead. An extended closure of foreign borders will continue to crimp demand for homes.

One feature of the COVID-19 economic times is an increased array of timely economic data. But sometimes the extra data can be confusing, such as the purchasing manager surveys. The AiGroup index fell in the latest month while the IHS Markit index rose. Overall, most indicators of the economy remain encouraging, showing that economic recovery is well underway.

What do the reports and figures show?

Home prices - September

The CoreLogic Home Value Index of national home prices fell by 0.1 per cent in September. But home prices were still 4.8 per cent higher over the year.

In capital cities, prices fell by 0.2 per cent, but prices were still up 4.9 per cent over the year. House prices also fell by 0.2 per cent in September and apartment prices eased by 0.4 per cent. House prices were still up

October 1, 2020 2

Economic Insights. Record home prices in 18 Aussie regions

5.2 per cent on a year ago and prices of apartments increased by 4.0 per cent.

In regional areas, home prices rose 0.4 per cent in September with house prices up by 0.5 per cent, and apartment prices rose by 0.3 per cent. Regional home prices were up 4 per cent on the year to August.

The average Australian capital city house price (median price) in September was $672,873 and the average unit price was $564,648.

Home prices were higher in six of the eight capital cities in September: Sydney (down 0.3 per cent); Melbourne (down 0.9 per cent); Brisbane (up 0.5 per cent); Adelaide (up 0.8 per cent); Perth (up 0.2 per cent); Hobart (up 0.4 per cent); Darwin (up 1.6 per cent); Canberra (up 0.4 per cent).

Home prices were higher than a year ago in seven of the eight capital cities in September: Sydney (up 7.7 per cent); Melbourne (up 3.1 per cent); Brisbane (up 3.8 per cent); Adelaide (up 3.6 per cent); Perth (down 1.0 per cent); Hobart (up 6.4 per cent); Darwin (up 1.9 per cent); Canberra (up 6.3 per cent).

Total returns on national dwellings rose by 8.5 per cent in the year to September with houses up 8.5 per cent and units up by 8.2 per cent on a year earlier. In contrast, the S&P/ASX All Ordinaries Accumulation Index fell by 8.8 per cent over the year to September.

Manufacturing Purchasing Managers’ indexes - September

The AiGroup’s Performance of Manufacturing Index fell from 49.3 to 46.7 in September. And the IHS Markit Manufacturing Purchasing Managers' Index rose from 53.6 to 55.4 in September. Readings above 50 indicate expansion in activity.

IHS Markit reported: “The recovery in the Australian manufacturing sector gathered pace at the end of the third quarter, with the sector recording solid increases in both production and sales. The survey also showed export orders returning to growth in September. Firms added more workers for the first time in ten months amid a rise in capacity pressure. A sustained improvement in manufacturing conditions also boosted confidence, which rose to the highest since February 2019. Supply chains consequently came under greater pressure and inflationary pressures intensified.”

AiGroup reported: “Manufacturers related to food & beverages (including printing & packaging for groceries), medical & pharmaceutical products, and some parts of freight transport, reported a robust recovery in conditions while other sectors reported lower demand due to the COVID-19 recession.

There was significant divergence between the larger manufacturing states in August. Victoria’s PMI® fell by 9.3 points and back into contraction at 44.0 points. In contrast, the PMI® in NSW and South Australia continued to indicate recovery in August, while the PMI® in Queensland improved but continued to indicate a period of contraction.”

What is the importance of the economic data?

The CoreLogic Hedonic Australian Home Value Index is based on Australia’s biggest property database. Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the

October 1, 2020 3

Economic Insights. Record home prices in 18 Aussie regions

CoreLogic Hedonic Index includes all properties. Home prices are an important driver of wealth and spending.

The AiGroup and IHS Markit Purchasing Manager indexes (PMIs) for services and manufacturing are released each month. The Australian PMIs are the local equivalents of similar indexes released for other countries. The PMIs are amongst the timeliest economic indicators released in Australia. The PMIs are useful not just in showing how the sectors are performing but in providing some sense about where they are heading. The key ‘forward looking’ components are orders and employment.

What are the implications for investors? Like most things, home prices are a function of supply and demand. While stock levels are around 25 per cent

below the five-year average, demand has also eased in line with softer job markets. Both supply and demand are tipped to rise over coming months with modest single digit annual growth rates of national prices seen as likely.

Interest rates are expected to remain at super-low levels for the next three years. So the job market, changes in listing numbers and external and internal migration will be the key influences on home sales, home building and home prices.

Craig James, Chief Economist, CommSec Twitter: @CommSec