Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyers agents, 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.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"Blog is great - loads of good data and charts. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

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Thursday, 27 October 2016

Terms of trade up 7pc since March

Income boost

The ABS reported its International Trade Price Indexes figures for the September 2016 quarter. 

There was a welcome +4.5 per cent boost to the terms of trade in Q3, signalling that the 'income recession' has ended, at least for the time being. 

In fact, this was the biggest lift in the terms of trade in half a decade.

Export prices rose by +3.52 per cent in the quarter, while import prices pulled back by-0.97 per cent. 

The result comes off the back of a similarly strong improvement in Q2, meaning that Australia's terms of trade have improved by ~7 per cent since March.

There is more to come in Q4 as well, with metallurgical coal prices having exploded another +27 per cent higher in October to date to above US$270/tonne.

Australia's coking coal prices have more than tripled since their November low, as China now looks to address its supply cutbacks.

Rental growth steadies (though not in Sydney!)

Rents inflation steadies

There are still a great many property investors around in the market right now, so there shouldn't be too much upwards pressure on rents at the national level.

And, so it is!

The weighted average annual rents inflation across Australia's eight capital cities steadied at +0.7 per cent in the third quarter of calendar year 2016, according to the ABS Consumer Price Index figures. 

As you can clearly see in the chart below, nominal rental prices at the national level only tend to spike dramatically when property investors are spooked out of the market for some reason, thereby stymying the available supply of rental stock.

This has only happened twice over the past 35 years or so, with the most recent trigger point being the global financial crisis. 

However, with mortgage rates close to their record lows, there are presently oodles of investors in the domestic market - and many more from overseas too! - even in the face of recent curbs. 

City by city

Of course, the outlook is as always quite different for each capital city, region, and sub-region.

I have presented a second chart below as an index to show what has happened to nominal rents over the last four-and-a-half decades.

One of the reasons I have done so is that although commentators seemingly love to spin out 'inflation-adjusted' results, the reality for many of us living today is that we often have 'rent versus buy' equations to weigh up, and for these decisions we understandably - and logically - tend to think in nominal terms.

"Are rents rising? Are dwelling prices rising? What about holding costs? Will mortgage rates increase or decrease? What is the smartest financial decision here?"

In Sydney, annual rents inflation accelerated slightly to +2.5 per cent, which is still close to double the +1.3 per cent headline rate of inflation.

Blogsites and media do love a good falling rents meme, but this hasn't really been backed up by the facts, at least in Sydney's case.

Indeed, Sydney rents have increased at double the rate of inflation for nearly a decade now.

Since the beginning of 2007 Sydney's rental index has increased by +54 per cent, exactly double the rate of inflation for the harbour city over the same time horizon. 

Rental growth may be softer than it was, and in fact it is already easing in some pockets of Sydney, but rents have hardly 'fallen' since the financial crisis as commentary sometimes tries to imply.

It's a very different Jackanory in the resources capitals, mind you.

After a great surge in both rents and dwelling prices through the heady days of the resources boom, the rental index numbers are in full on decline mode in Perth, falling back by -6.4 per cent over the year to September.

This puts the rental index for Perth back close to where it was at the peak of the mining boom four years ago in Q3 2012.

And in Darwin, the equivalent year-on-year decline has been -7.7 per cent, although certain other metrics have implied that the real estate market in the Top End may be stabilising somewhat. 

Rental growth is flat on this index in Canberra, while interestingly the rental growth index for Adelaide has by and large tracked that of Melbourne closely for almost the entire data series since 1972. You learn something new every day!

Supply response cavalry now arriving

The chart above hints at why Rory Robertson was always unlikely to lose his high profile 2008 bet cf. Sydney house prices correcting sharply.

While the annual rate of population growth in New South Wales rose incessantly from 2004 to 2008 up to an annualised peak of nearly 118,000, very little accommodation was actually being built, and this has resulted in nearly a chronic supply shortage and nearly a decade of strong rents growth. 

What you don't need any charts to tell you - just listen to the jackhammers! - is that this dynamic has at last changed, with dwelling construction at now really hitting its straps over the last couple of years, and a veritable flood of apartment completions in the post.


In other news, Domain reported that Sydney's median house price rose by +2.7 per cent in the September quarter to a fresh all-time high of $1,068,000.

In Melbourne, the median house price rose by an even more sprightly +3.1 per cent over the quarter and +9.1 per cent over the year to also hit a record high of $774,000.

Somewhat surprisingly, median unit prices in Melbourne performed even more strongly again in the quarter in rising by +4.5 per cent, to be +5.5 per cent higher over the year.

Melbourne has been constructing dwellings like fury in recent years, but population growth has accelerated to extraordinarily high levels as you can see in the chart above. 

Wednesday, 26 October 2016

Inflationary pressures remain...weak

Apples & bananas

The headline result for inflation was slightly higher than expected by the market (though not me!) at +0.7 per cent in the third quarter.

As I noted here during the week, fruit & veg costs did indeed prove to be one of the key drivers with a massive +19.5 per cent spike in fruit prices following localised flooding, while housing utilities costs also spiked as had been correctly identified by market analysts.

Reported the ABS:

"The rise in fruit and vegetable prices is due to adverse weather conditions, including floods, in major growing areas, impacting supply."

As expected, an offset came from lower communication costs and, for the time being at least, fuel prices.

Soaring fruit prices helped to take annual headline inflation up a bit from a 17-year low of +1 per cent to +1.3 per cent.

The pace has quickened a little, then, but of course remains well below the 2 to 3 per cent target range. 

Traders backed this uptick to mean that interest rates will be on hold until next year, with the Aussie dollar jumping.

Core blimey

I tend to agree with market sentiment given the recent rhetoric from the Reserve Bank.

But when you drill in to the underlying inflation figures, the November 1 meeting could still arguably be a marginal call. 

The quarterly core inflation figures were very soft in Q3, with both the trimmed mean (+0.35 per cent) and weighted median (+0.28 per cent) quite a lot weaker than target.

The figures may look a bit more solid when rounded up to +0.4 per cent and +0.3 per cent respectively.

But still, very soft, and even with an upwards revision to the Q2 trimmed mean figure the 6-month annualised core figures also remain below the target range, averaging out as they do at +1.55 per cent. 

In terms of the outlook, annual non-tradables inflation has apparently stabilised at +1.7 per cent, below target for the third quarter in a row, but slightly higher than the +1.6 per cent recorded last quarter. 

This is important because non-tradables inflation is taken to be a reasonable proxy for domestic inflationary pressures, and as the red line shows, there essentially is no such pressure at the moment. 

The wrap

Overall, this was another weak set of inflation numbers which leaves plenty of room for another interest rate cut as and when it is deemed necessary. 

The main reason I don't think that will happen this year is housing. In short, the Reserve Bank probably doesn't want to stoke up the fire in Sydney's property market belly too much. 

And it appears that the new Governor is relatively comfortable with inflation running below target for a while. Thus, sitting pat until 2017, I think.

Jeepers, it could still be a close call, though, with such benign numbers. 


Hot auction markets with the combined capital city clearance rate spiking above 80 per cent this week on lower volumes than a year ago. 

Source: CoreLogic

Sydney's Eastern Suburbs recorded an auction clearance rate last week of 93.5 per cent, with most of the inner ring markets in the city recording elevated results. 

Tuesday, 25 October 2016

Fire it up! (Shorts burned again)

Pretty good effort

Lots of talk and misinformation on my Twitter feed and elsewhere about immigration directly causing 'falling' wealth in Australia, when in fact real GDP per capita is at record highs. 

Talk about spin, S. K. Warne would be proud of that one!  

All things considered, Australia's real GDP growth performed remarkably well through the global financial crisis, so I'm not really sure why people are trying to claim otherwise (what am I saying? Of course I am). 

It's true that national income did take a bit of a hit after an extraordinarily strong 17-year run. 

Income boost

And yet, some of Australia's key commodity prices have lately been staging a monumental fightback, and real national income looks like a nailed on certainty to surge to new record highs at some point over the next few quarters.

Dalian iron futures hit "limit up" today, up +6 per cent (follow the links to Business Insider for more details). The spot price rose +4.9 per cent to US$61.60/dry ton.

Fortescue Metals Group (FMG) saw its share price rocket another +6.5 per cent higher, touching a fresh 52-week high of $5.46.

FMG's share price is now up by a lazy +280 per cent since its horrible January nadir (imagine if you'd been shorting that!). 

Not to be outdone, Dalian coking coal futures were also limit up +7 per cent to another new high.

Coal prices really have exploded dramatically in recent months.

Whitehaven Coal (WHC) closed up by +5 per cent in the end the trade at $3.14. Indeed, WHC is getting tantalisingly close to being a tenbagger from its desperate lows of just 35 cents in February!


Across the first three months of 2016-17 Australia's budget deficit was already tracking favourably versus budget forecast to the tune of $1.9 billion. 

Meanwhile, these commodity price numbers suggest that a very tidy windfall may be heading the way of Treasurer Morrison in due course - and potentially a huge windfall if prevailing coal prices persist for any meaningful length of time. 

Amazing news for ScoMo. Better to be lucky than smart, as they say!


Otherwise, a quiet day for news. Stay tuned for tomorrow, though, as the all-important inflation figures are due for release!