Real-time thoughts & analysis of the markets, economy & more...
Co-founder & CEO of AllenWargent property advisory.
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Pete Wargent blogspot
Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.
4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.
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GDP jumped back strongly to rise by +1.1 per cent in the fourth quarter and +2.4 per cent over the calendar year.
Net exports contributed +0.2 percentage points (ppts) to quarterly GDP growth, and household consumption a solid +0.5ppts.
It looks as though dwelling construction won't be contributing much more to growth going forward, so government infrastructure investment may need to step up to the plate.
This was a much better result than implied by the headline numbers, with a scorching terms of trade index rising by 9.1 per cent thanks to a boom in coal and iron ore prices.
As a result not only is real GDP at a record high, so too is real gross national income, real gross disposable income, and real net national disposable income.
The weakest part of the release was very much to be seen at the household level, where wages have stagnated in real terms, while households are reducing their savings ratio in a bid to keep up with rising dwelling prices.
At the state level there was a thumping quarterly result for Victoria, while Western Australia recorded growth in state final demand for the first time since June 2015, coming off the back of a horrible revised result for the preceding quarter (-4.3 per cent).
The Australian Bureau of Statistics (ABS) noted strength in machinery and non-dwelling construction in Western Australia, which may indicate a corner in the process of being turned in the face of higher commodity prices.
Overall, this was a tremendous result which saw Australia stretch its unbroken run without a recession to 102 quarters.
The Dutch hold the record at 103 quarters of continuous economic growth.
Although housing credit continued to chug along in notching growth of 0.5 per cent in the month, total credit growth sagged to just 0.2 per cent due to negative results for the business and personal sectors.
Housing credit for investors continued to rise to 6.6 per cent across the year to January, suggesting that further hikes may be in the post for investor loans.
Total credit growth was 6.4 per cent, while broad money growth was 7 per cent.
Deposit growth has strengthened considerably as banks look to shore up their capital.
Even term deposits, understandably out of favour for some time, are recording growth at a double digit pace, with some accounts set to offer bonus interest on larger balances.
The total value of outstanding credit has doubled over the past decade to $1.64 trillion.
The exact split of loan purpose between owner-occupier and investor credit remains murky, with a net value of $49 billion having been switched away from investment loans since July 2015.
This reflects the interest rate differential between loan types, but note that the credit growth figures by loan type have been adjusted for the net value of switching.
The poor monthly result for business and personal credit sees housing resume its apparently inexorable rise in terms of market share.
All regulatory eyes will be on the growth in investor loans, with more measures likely to be taken to cool this sector as 2017 progresses.
The tweets about Australia being in recession in the fourth quarter are doubtless quietly being deleted.
The current account deficit narrowed by a remarkable 62 per cent from $10.2 billion to just $3.9 billion in the fourth quarter, albeit mainly thanks to booming commodity prices rather than export volumes.
Just a year earlier the deficit has been as wide as $23.1 billion.
The current account balance as a percentage of GDP is now in the best nick in 36 years.
Net foreign debt has declined a little over the past 6 months, although the total outstanding remains over $1 trillion.
We'll have to wait until tomorrow for the national accounts to confirm GDP growth for the fourth quarter.
However, net exports will add a little to growth at +0.2ppts, neatly offsetting an equivalent drag from a draw on inventories.
Meanwhile all that government debt hasn't completely gone to waste, with public demand increasing by +1.4 per cent, as such contributing +0.3ppts to growth in the quarter.
The government has been spending up on transport and other infrastructure projects.
The major banks see GDP growing by between +0.7 per cent and +1 per cent for the fourth quarter of 2016.
It's been an incredible 100 consecutive quarters since Australia experienced a recession, and it looks as though this remarkable record will just about remain intact.
Today's Business Indicators figures from the Australian Bureau of Statistics (ABS) brought a bit of a mixed bag of news.
Mining profits exploded fully 50 per cent higher in the final quarter of the calendar year to be a rip-snorting 89 per cent higher than they were the March 2016 quarter.
This was mainly driven by prices growth (which feed in nominal GDP) rather than export volumes growth (which form a part of real GDP), so the national accounts will be an unusual beast this time around.
Mining income also tore more than 22 per cent higher in the quarter to break fresh records.
Gross operating profits across all industries absolutely smoked expectations to be a massive 20.1 per cent higher in the fourth quarter (the market consensus had expected an 8 per cent improvement).
There hasn't been a quarter remotely like it for profits over the past decade-and-half, this remarkable jump being forged on the back of some massive increases in commodity prices.
Today's business indicators release wasn't all bullish by any means, with wages contracting in the quarter, although analysts expect to see better things from this metric in 2017.
Inventories were up by +0.3 per cent, which was lower than the preceding quarter where there had been an apparently involuntary run-up in inventory levels.
But although this will be a drag on GDP growth in Q4 (-0.2 ppts) the result was not nearly as bad as some analysts had feared.
Overall, the business indicators were perhaps a slight beat on expectations, and some analysts will be marking their GDP forecasts a notch higher for later in the week.
In all likelihood this means that Australia dodged a technical recession after recording negative growth in the third quarter.
Regardless, whatever happens to real GDP growth, national income is clearly set to lift sharply, while nominal GDP will be maniacally strong for the December quarter.
Australia has done a remarkable job to notch up an unbeaten century in respect of quarters of economic growth.
The challenge now for Oz is whether it can turn an excellent century into a genuine 'Daddy hundred'.
Net migration into New Zealand hit a record high 71,300 over the year to January 2017, according to Statistics New Zealand.
Some of the recent burst in migration had been driven by migration from Australia, as well as a large number of student visas.
However, the Aussie trend now appears to have ended, with permanent and long term departures from Australia now having peaked.
In fact, Statistics NZ reported that more than two-thirds of those migrating from Australia to New Zealand were actually NZ citizens returning home after the big Aussie surge driven by the resources boom.
The main drivers of record NZ migration are now increases in Chinese, British, and South African migrants.
Netting off those leaving in NZ in the opposite direction across the Tasman for Australian shores, there was actually an inflow to Australia in January, thus signalling the end of the so-termed "Kiwi exodus".
Chinese tourism boom
New Zealand also experienced a record 381,000 visitors arrivals in January (up 11 per cent from January 2016), more than 54,000 of whom came from China to coincide with Chinese New Year.
Looking at these monster numbers suggests that Australia could be in for some huge equivalent figures when they are reported in a fortnight's time.
Through 2008, outstanding loans to households by Australia's banks totalled less than $700 billion.
The final 2016 numbers are not yet plugged into the chart below, but the monthly banking statistics suggest that the total by the end of the year will exceed $1.5 trillion.
Australia has experienced strong population growth during this period, but nevertheless outstanding housing debt has been compounding at around 9 per cent per annum.
Such a strong pace of increase in household debt is bound to be reflected in housing market conditions one way or another, and in Australia's case the result has been price increases in Sydney and Melbourne.
This dynamic since the financial crisis has been arousing the interest of short sellers, including from overseas.
Although house prices have declined in Perth, Darwin, and parts of regional Queensland in particular, to date the most heavily populated markets have held up well.
Regulators have encouraged several tweaks to lending criteria over the years since the financial crisis first erupted.
"Low-doc" loans, once fairly commonplace, today only comprise a small share of the mortgage market, while 100 per cent mortgages have thankfully gone the same way.
In fact, new mortgages today overwhelmingly have a loan to value ratio (LVR) of 90 per cent or lower, although in reality many borrowers have used equity from existing properties to fund their deposits.
Lending standards in Australia are higher than they were, but on some measures remain concerning.
For example, the share of interest only loans remains high by international standards, despite having declined from somewhat alarming levels in 2015.
ASIC had previously reported that about two in three investor loans in Australia were interest only mortgages, and around a quarter of owner occupier loans - with the repayment typically increasing when the interest only period ends.
Shorting: what and when
Short sellers rarely bet on house prices directly, rather they tend to be interested in the outcomes of a market downturn (and housing markets are necessarily always cyclical).
Some will sell the stock of banks, others will look at developers or home building companies, materials companies, retailers of household goods, financiers, or the institutions that insure mortgages.
Alternatively some may look at buying Australian government bonds, while one of the cleanest and potentially profitable ways to bet against the housing market might be to short the Australian dollar, which at 76.7 US cents arguably still has plenty of downside.
Timing short bets is important
Maintaining short positions can be costly in terms of interest or dividend obligations, while opportunity cost of suboptimal market timing is another factor to be considered.
There has been plenty of discussion of the potential impact of an apartment glut in Australia, but in the case of both Melbourne and Sydney accelerating population growth appears to be absorbed much of the new supply to date, although tens of thousands of apartments remain under construction.
The potential for non-resident buyers defaulting on apartment settlements has been another salient risk closely watched by sceptics, though to date news of any fallout appears to have been relatively contained.
One market risk which cannot so easily be quantified is the potential for defaults in the scenario whereby mortgage rates increase, prices in secondary and lower socio-demographic areas decline, and a swathe of interest only loans reach the end of their interest only period.
Maths can get ugly Anyone who had a standard variable rate mortgage in 2009 at above 8 per cent will recall that principle and interest repayments could be excruciatingly difficult. Consider that a homeowner with a $600,000 interest only mortgage at 4.5 per cent today might be paying only ~$2,250 per month, whereas as and when the mortgage flips to principal and interest, were the mortgage rate to have increased to 6 per cent the repayments could be more than 50 per cent higher, even on a 30 year product. Mortgage repayment calculators don't always give the option to calculate what would happen in a 7 per cent scenario, but the answer on a 30 year product might be a potentially punishing ~$4,000 per month.
With the amount of outstanding interest only debt having increased at an unprecedented pace through this cycle it's not too hard to analyse when this market risk will arise, and in turn which areas might see defaults increase.
The most successful shorters will be those that can combine market timing with bets lined up against those companies with the most vulnerable financials.
The big players
Market participants will be well aware of the attractive mortgage rates that the Commonwealth Bank of Australia (CBA) has been offering lately, and in turn the growth in the CBA investor mortgage book looks likely to bump up against the notional 10 per cent per annum cap set by the regulator APRA.
Unfortunately for analysts the market data reported for investor loans has been muddied by reclassifications from investor to owner-occupier loans.
For example, the Westpac Banking Corporation (WBC) switched more than $21 billion of loans between July and October 2015 taking outstanding investor credit down from $156 billion to $135 billion and in turn causing its year-on-year growth in outstanding investor credit to appear negative for some time.
Despite the reclassification Westpac retains the greatest balance of outstanding investor loans, while Commonwealth has the largest total of outstanding household mortgage debt, although the quality of loans rather than the volume is what should be of interest to analysts.
Investors today typically pay higher mortgage rates than owner-occupiers, with further tweaks a possibility in 2017.
What shorters should really be paying attention to is which financiers, insurers and developers have been active in the highest risk markets, areas which have been discussed here on this blog previously.
Prospective borrowers should take into account the likelihood that mortgage rates may move higher over the years ahead.