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.

"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.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

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

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Saturday, 31 August 2013

Sydney auction clearance rate hits a stunning 84%

More chirping over at Property Observer this week, with David Collyer advising youngsters to shun buying property and instead direct money into a savings account.

Fair enough, there's little value in continuing with the argument. 

There's nothing wrong with issuing financial advice based on a robust forecasting model or a proven track record, but advice shouldn't be issued based on what was basically just a guess of prices falling by 20%. A "courageous" call is one way to describe it; "completely wrong" would be another.

Adjusting prices for inflation is also nonsense, for properties are bought aren't bought with inflation-adjusted dollars, and thus property owners are significantly better off than they were a year ago and have made headway in paying down their mortgages over the past few years, while rents will continue to rise.

Suffice to say that I remain convinced that you can get better returns on your capital than in a savings account with the official cash rate at just 2.50% and likely heading to 2.25% before Xmas, whether via property or from a well-diversified portfolio of profit-making and dividend-paying shares.

As for the "inevitable" housing correction, David is, of course, absolutely right - property prices will always move in cycles and a downturn will definitely come. This is always and everywhere the case. The timing of the next correction, however, is far from certain. It could yet be 2-3 years away by which time the market may have moved on significantly.

In my opinion, Sydney's property prices, which are already up by well over 10% since the early part of 2012 with gains now accelerating over the last 8 weeks according to RP Data, will probably continue to add strong gains over the coming months and in all likelihood well beyond.

I'm not in the business of weather forecasting, but it would be no surprise at all to me to see this cycle recording price gains in Sydney of in excess of 20%.

Don't forget that the Reserve Bank is actually looking for property market prices to go up; heck, the Board is barely even pretending otherwise.

In any case, there is certainly no evidence at all of any homebuyers' strike in the harbour city, with auction clearance rates hitting the astonishing level of 84% on Saturday, the highest recorded this year, completing a record month of August for the city.

Last weekend's 79% clearance rate was the only weekend in the last eight where less than a "boomtime level" of 80% of auctioned properties were sold.

The Sydney property boom has some way to run yet.

According to the REIV, Melbourne's auction clearance rates remained strong at 74% as compared to a very high 79% last week.

Melbourne continues to surprise me - I had previously felt fairly sure that prices would recede somewhat after the phenomenal price boom, but instead the market has been remarkably resilient and prices remain close to all-time highs.

It all just goes to show how hard timing the market is - which is precisely why I'm not a strong advocate.

I heard a lot of talk of inevitable mean reversion and unsustainable prices in London back in the 1990s, yet the best part of two decades later there has been no correction worthy of the name and prices are higher than they have ever been, while those of use with mortgage debt from that time are grateful to have extinguished most of it over that time horizon.

In Australia, to a large extent it's a question of location. Some cities and regional areas continue to look weak despite record low interest rates. If you're waiting for prices to become cheap in Sydney's popular suburbs, however, you may as well be waiting for Godot.

Barangaroo...off with a bang

As expected the new release of apartments at Barangaroo generated so much interest that they were all sold within 3.5 hours, including the $10.5 million penthouse.

In recent years, people have erroneously suggested that Sydney's property market can't move higher due to affordability issues. Instead prices are rising very strongly and look set to continue to do so.

25% of the sales occurred interstate or off-shore, suggesting that foreign capital plays a significant role in pushing up prices close to the CBD in the major cities such as Sydney.

The new development selling at such premium prices is likely to continue to push up prices in adjacent suburbs such as Millers Point and Pyrmont.

From SMH:

"All the apartments in the first-release at Barangaroo sold out at Saturday's early morning launch, including the penthouse which sold for $10.5 million to an Australian expat living in Geneva.

It was Sydney's most highly anticipated apartment launch since Bennelong 20 years ago. And, unless someone knocks something else down, the last CBD waterfront development ever.
Developers Lend Lease and agents CBRE refused to confirm the total value of the apartments sold but with one-bedders at $1 million, two-bedders at $2 million and three-bedders at $3 million, on my calculations total sales exceeded $300 million.
Apart from the $10.5 million paid for the two-level four-bedroom penthouse in a section of the Anadara block known as The Cloud, the sub-penthouse also sold for $7.5 million.
Across Anadara and the other block, Alexander, the prices were up to $40,000 per square metre.
More than 6500 people had registered interest and there were unconfirmed rumours that at least 500 had put down a $10,000 refundable deposit to secure an appointment where they could finalise the purchase.
There were only 159 apartments available.
Lend Lease's Barangaroo South managing director Andrew Wilson said there were no surprises for buyers on Saturday. ''There's been a lot of planning,'' he said. ''There's been three or four weeks of our customers coming in looking at the apartments [in the display suite], looking through plans ... by today most of our customers know exactly what they want and the prices they want to pay.''
The first buyers to arrive in the suite were a well-dressed couple who live at Walsh Bay that own about 40 apartments around the CBD. They bought a couple of two-bedroom apartments.
Another buyer, the Sydney property developer, Andrew Richardson, snapped up two apartments - a one bedder and two-bedder in Anadara's Cloud priced at $2.5 million and $3 million. ''The combination of the best site in Sydney and the extraordinary design of the whole precinct I think makes it a great investment and a good place to live,'' Mr Richardson said.
The penthouse, which had four buyers interested in it including several off-shore, had sold by 9am. CBRE Residential chairman Justin Brown said it was unusual for the penthouse to sell on launch day. ''He realises this is a trophy property ... this gentleman whose family came here today to sign the contract has followed the process for some time,'' Mr Brown said. The buyer intends to return to live in the apartment, which will will be complete by late 2015.
All the apartments had sold within three-and-a-half hours. Seventy five per cent of the sales occurred in Sydney with 25 per cent interstate or off-shore. The apartments were also launched in Hong Kong, Singapore and Shanghai on Saturday. The next Barangaroo apartments go on sale within 18 months. Buyers who missed out this weekend go to the front of the queue.
Apart from Saturday's launch at Barangaroo, there were 550 auctions scheduled in Sydney for what was an unofficial start to the spring selling season. Many auctions originally intended for next weekend were brought forward because of next Saturday's election."

Friday, 30 August 2013

Is China demand still slowing?

Nuh-uh. From Macquarie Bank:

"The August results of our proprietary steel sector survey (in which we interview 40 steel mills, 40 steel traders and 30 iron ore traders) show further improvement on the strength of July with many indicators reaching the highest levels in the two year history of the data. Mills are reporting very strong orders and a strong improvement in profitability."

Steel mills noting a "very strong recovery" in the month of August:


Source: Macquarie Bank

With plans to increase purchases of both iron ore and coking coal, Australia's main bulk commodities exported.


Source: Macquarie Bank


"The July results of Macquarie’s proprietary China steel sector survey point to a marked improvement in sentiment across the 40 steel mills, 30 steel traders and 30 iron ore traders interviewed. Orders have improved somewhat at the mills, profitability is rising (although most are still losing money) and the destocking of raw materials appears to finally have ended. However, traders report flat sales, and are only modestly optimistic about August volumes." 

China's GDP growth has been on a downward trajectory, though sources from within the country state that they remain confident of hitting its 7.5% growth target. Only time will tell on whether that is optimistic.


GDP Growth – China and India graph

Australia's bulk commodity exports over the past decade:

Bulk Commodity Exports graph

Given our ultra-heavy reliance on commodity exports, Australians should hope that the strong demand puts a floor under the iron ore price which typically experiences a seasonal dip through the coming months.

XJO +1.6% in August

A positive trade to finish the month for the ASX200 (XJO), adding 0.84% for the day with gains across the board.

Over the month of August the XJO index added a solid 1.6%.

However, global fears remain and the Fed's taper remains in investors' minds.



Source: ASX

UK house prices +1% in July

Stimulatory policies are having the desired impact in Britain.

Mortgage approvals soared last month by 30% y/y, so we're expecting house prices to follow in due course.

Borrowers will be drawn in by comments from the Bank of England Governor which suggested that interest rates will remain at record lows for some years to come.

From Property Wire:

"House prices in England and Wales increased by 1% in July, taking the average house price to
£164,098, the latest data from the Office of National Statistics shows.
The region in England and Wales which experienced the greatest increase in its average property value over the last 12 months is London with a movement of 6.3%. The average price of property in the capital is £385,799 in comparison with the average for England and Wales of £164,098.
The most up to date figures available show that during May 2013, the number of completed house sales in England and Wales increased by 19% to 62,651 compared with 52,516 in May 2012.
'Mark Carney, Governor of the Bank of England, has quelled fears that we are sitting on a volatile property bubble, by indicating that the Bank is ready with a plethora of tools to guard against such a scenario. His additional signal that interest rates are likely to remain the same until late 2016 injects further confidence into the rapidly recovering property market, with lenders able to offer highly advantageous deals for those seeking to step onto the property ladder,' he explained.
'Today’s Land Registry House Price Index shows that property prices are continuing to rise across the UK due in part to the increase in sales transactions which are up 19% annually in May 2013. While demand is very high, our market monitor this month indicated that new buyers across the UK are up 28%, and the majority of people have not cottoned on to the fact that the economy, and the property market, are looking incredibly rosy now is the time to sell now before everyone else does,' he added."

RPD: Sydney property growing at a searing pace

Up by more then 5.6% in less than 2 months according to the RP Data Daily Home Value Index.

Melbourne's figures over the same time-scale don't look too shabby either.

Low interest rates have really bitten in the two major capital cities.

Not so much in other areas.


Source: RP Data

Thursday, 29 August 2013

US labor market continues to make progress

Great to see that the US jobs market continues to improve.

Reports Bloomie:

"The number of Americans filing applications for unemployment benefits fell more than forecast last week, a sign that the U.S. labor market continues to make progress.
Jobless claims in the week ended Aug. 24 dropped 6,000 to 331,000 from a revised 337,000 the week before that was higher than initially reported, the Labor Department said today in Washington. The median forecast of 50 economists surveyed by Bloomberg called for a drop to 332,000.
As the effects of higher taxes and federal budget cuts begin to fade, employers are preparing for rising demand and improved growth by maintaining their workforces. While companies are reluctant to fire workers, they’ve made less progress on creating new jobs as they brace for a political showdown over the deficit, new health care laws and the Federal Reserve’s plan to dial down its record $85 billion-a-month stimulus.
“The trend remains very encouraging,” said Ryan Sweet, senior economist at Moody’s Analytics Inc. in West Chester,Pennsylvania. “It suggests the job market is strengthening.”

SQM: How is Sydney's inner west faring?

Regular readers will know that Sydney's inner west has been my number one property region tip for the past half decade (I've put my money where my mouth is too).

SQM produces an excellent vendor sentiment index, so let's take a look at how the inner west is going:



Source: SQM Research

Wow, the chart almost speaks for itself.

Asking prices for 2 bedroom units +22% over the last 3 years alone, a very handsome increase indeed for owners and speculators.

And look at what has happened to asking prices for houses, +17% in the past year alone.

Not much of a housing bust in Sydney's inner west, I'm afraid, as I've confidently predicted on this blog all along, even when the doom and gloom was being peddled.

Sydney has by far away the strongest fundamentals of the capital city markets at present, with stock on the market very tight and auction clearance rates at record levels.

It will be interesting to see how long that sentiment lasts.

It's a capex report of two halves...


Source: ABS

Another fascinating capital expenditure report from the ABS today.  First, the actuals. As above, seasonally adjusted capital expenditure actually increased by 4% in the quarter, easily crunching expectations. So, far from Australia falling off a mining cliff, total capex actually jumped as the grey line below shows. 

As noted previously - and as I remember only too well from when I used to prepare the wretched things for the ABS myself - such capex reports rarely show a smooth result as expenditure often falls into periods that one might not previously have anticipated as projects can be mothballed, shelved, delayed, incur unexpected overruns or are brought 'live' again.

Graph: Total asset, total industry

Source: ABS

So, there was still a very high level of construction activity in the June quarter. However, these reports are of significantly more interest for what is expected for the future, and the capex surveys delivered less promising news:

"Estimate 3 for 2013-14 is $159,236m. This is 11.2% lower than Estimate 3 for 2012-13."


To look at this graphically, you can see that the shaded bars show that total capital expenditure is still very strong and remains higher than in previous years. But as the non-shaded bars show, next year is not going to look anything like so strong. Capex is probably going to fall and not insubstantially.

Chart: Financial year actual and expected expenditure- Total Capital Expenditure

As for the 'mining only' element of capex:

"Estimate 3 for Mining for 2013-14 is $102,843 million. This is 13.6% lower than the corresponding estimate for 2012-13."

And to show this graphically:

Chart: Financial year actual and expected expenditure- Mining Capital Expenditure

Source: ABS

So...it's a capex report of two halves, as the old footie cliché goes.

On the face of it, we haven't fallen off a mining cliff and this gives Australia valuable more months in order to rebalance away from the mining construction boom. The good news is that mining production volumes look set to increase strongly over the coming year.

Export Volumes graph
Bulk Commodity Exports graph

The bad news is that there is very little sign of residential construction picking up strongly - in fact, there is close to no discernible sign of it picking up to date, with high land prices clearly representing a sticky prospect for developers.

Recession risk?

Overall then, this is actually a capex report for the bears and the recession cheerleaders in Australia, of which there are a great many.

The RBA had forecast annual growth which suggests GDP for the June quarter of 0.6%, but some now believe that the number may come in at a weaker print next Wednesday given that there has been no change in retail growth and employment growth has been slow. After all, over the year to July unemployment has increased from 5.2% to 5.7%, a trend typically associated with slowing GDP growth.

Why would anyone cheer for a recession? A number of reasons. If you are busy shorting the Aussie stock indices, you'd definitely want things to go badly. If you promote blogs and websites which make money from selling doom and gloom via online advertising and newsletters, then you must continue to pray for rising unemployment and a faltering economy, and we do indeed see this every month in the online fraternity.

By far the most common reason people hope for a recession, of course, is that renters hope that a forthcoming economic malaise will result in a collapse in housing prices. 

This capex report is something of a mixed bag for them.

Interest rates

While we won't see any movement in interest rates in the coming election month, this weak capex outlook and likely slowing in GDP growth now means that it is more likely than not that we will see another rate cut to just 2.25% by November, which, if we haven't already seen the 'tipping point', will continue to fuel dwelling prices a little way higher. This will be particularly so in Sydney, one assumes, goaded along by an approving Reserve Bank and very tight stock levels on the market.

Future markets price in one further full interest rate cut at this juncture.

On the plus side for the housing bears, while I personally still remain hopeful of the economy being stimulated, you'd have to say that this report and some recent economic data - on balance - makes a recession appear more likely than it was. The mainstream media tends to flag significantly higher iron ore prices (roaring all the way up to $154/tonne in A$ terms - a huge leap of more than a third), an apparent stabilisation in China's growth and a falling dollar as valuable plus signs for the economy - and there is some merit in each of these points. 

But you'd have to say that even the better case scenarios see economic growth probably floundering over the next year.

Be careful...

A word of caution for the housing bears, though: housing market corrections don't always work out as planned. 

Over in Britain during the financial crisis, many were wildly excited by the prospect of falling house prices, but, in the event, the lifeblood which first homebuyers had previously assumed was their God-given entitlement - the 100% mortgage - was immediately snatched away by increasingly jittery banks.

Lenders instead began insisting upon vast deposits as unemployment and mortgage defaults jumped, and thus the main beneficiaries in Britain were greedy buy-to-let landlords who scooped up properties at a discount as defaulters were evicted.

First homebuyers lamented that it was "impossible" to save 20-25% deposits and instead began to speak of "Generation Rent" despite mortgage repayments falling to previously unthinkably low levels. By the time 100% mortgages are seen widely again, UK property prices will be significantly higher than previous peaks - and in London and many parts of the south-east, they already have comfortably blasted past record new highs.

Meanwhile, in Australia, thanks to record low interest rates property prices have increased in all capital cities over the past 12 months - although Adelaide continues to resemble something of a damp squib - and look likely to show moderate gains in the months ahead as the mainstream media begins to recognise the headwinds in the offing.

Source: RP Data

In the words of the old Paul Kelly song: "Be careful what you pray for...you just might get it!".

Interesting times ahead.

---

Wednesday, 28 August 2013

Syria knocks share market

The XJO shed 1.05% today as fears of military action in Syria hang heavy.

The miners and the banks both took a hit, but the gold price reached a 12 week high.



Source: ASX

HIA: Low interest rates continue to improve mortgage affordability

From the Housing Industry Association media centre here:

"The cyclical improvement in housing affordability continued in the June 2013 quarter, said the Housing Industry Association, the voice of Australia’s residential building industry.

The HIA-Commonwealth Bank Housing Affordability Index increased by 4.4 per cent in the June 2013 quarter to a level of 72.8.

“A synchronised increase across the capital cities and non-metro areas drove the further improvement in the June 2013 quarter. Housing affordability in Australia is now 16.7 per cent higher than in mid-2012,” said HIA Chief Economist, Dr Harley Dale.

“These are certainly encouraging results for those entering the market at this time in the cycle,” commented Harley Dale. “The considerable reduction in interest rates is more than offsetting recent dwelling price increases,” said Harley Dale. “Current improvements in housing affordability do not represent structural shifts in Australia’s affordability; rather, they represent the dominant impact of cyclical changes in lending rates which will of course be prone to reversal at some point.”

“Genuine, structural improvements to affordability are contingent on a stock of housing supply that grows commensurately with the population and its housing needs,” noted Harley Dale. “Policy reform, led by the Federal Government, needs to be implemented to drive a sustained improvement to residential construction so as to genuinely address the housing affordability challenge in Australia.”

In the June 2013 quarter the HIA-CBA Housing Affordability Index increased in all seven capital cities reported. The strongest quarterly increase occurred for Brisbane with a rise of 10.4 per cent, followed by Hobart (10.0 per cent), Adelaide (7.7 per cent), Canberra and Perth (4.1 per cent), Sydney (3.3 per cent), and Melbourne (2.2 per cent).

Outside of the capital cities, affordability improved in the June 2013 quarter in all six non-metro regions reported. The strongest quarterly increase was for regional Queensland with a rise of 9.6 per cent, followed by the non-metro areas of Tasmania (8.1 per cent), South Australia (7.7 per cent), Victoria (5.3 per cent), Western Australia (4.5 per cent), and New South Wales (2.9 per cent).

Given the importance of adequate new housing supply coming online to avoid unnecessarily strong pressure on existing dwelling prices, the HIA-CBA Affordability Report is now tracking new detached house prices relative to established detached house prices. This provides an indication of the affordability of new houses relative to established houses and consequently the progress different markets are making in addressing overall housing affordability.


“A relative new house affordability advantage has emerged for Sydney and Western Australia in recent quarters. These are the areas of Australia where, not coincidentally, a clear new home building recovery is underway,” added Harley Dale."

This is welcome news in the short-term and all fairly obvious to anyone who has lived through an interest rate cycle before on a standard variable rate mortgage - repayments on existing mortgages have become very cheap as the official cash rate has continued to plumb record lows.

Naturally, we'd expect interest rates to revert higher (although realistically perhaps not until some time in 2015) so if median dwelling prices remain elevated then the affordability index would then decline again. 

---

A very important capital expenditure report tomorrow from the ABS which includes a survey of expected business plans. 

The capex report should give us an improved insight into the unwinding of the mining construction boom and how quickly capital expenditure it is expected to drop off.

One of the key figures will be the 'Estimate 3' for 2013/14. and this should give us an insight into the expected rate of decline.

As a quick recap, Estimate 2 (non-shaded bar below) came in better than many expected at $156.467 billion. 

Financial year actual and expected expenditure - Total Capital Expenditure

Source: ABS

Possible Syria strike looming

PM David Cameron is calling in Parliament in Britain and discussions are taking place in the US as to whether there is a case for making a strike on Syria due to the use of chemical weapons.

At this stage there are so many unclear points as to what such a strike would be expected to achieve, how it might be undertaken and whether may result in an unintended escalation of violence. This could result in a different path being taken, such as weapons inspectors being sent in.

Following on from the tribulations in Iraq, it doesn't look as though military action will be much of a vote-winner, according to YouGov's rushed mini-poll, which showed a favourable rating of only 9%.

The legal justification for a strike also remains unclear, although there are several possibilities discussed by the FT here.

The Aussie dollar has slipped below 90 cents, which is welcome enough news. 

As ever, stock markets dislike uncertainty, so expect to see bourses sliding further until there is clarity around the course of action ahead. The Dow has already shed another 170 points overnight, sliding back to 14,776, and the S&P 500 recorded a not insubstantial 1.6% loss during the trade.

The corresponding beneficiaries will be US bonds and, more than likely, a timely boost for the gold price. Gold is already in a decent uptrend, so uncertainty around Syria may see that continue. 


Tuesday, 27 August 2013

The demise of Billabong could be a wipe-out

Sadly, the famous Billabong (ASX: BBG) brand appears to be running out of time after it recorded a full-year loss of $859 million.

The loss reflected a range of brand impairments (approximately $600m), intangibles which can no longer be supported by the company's financials, as well as a further c.$200m in write-downs on fixed assets and inventory.

The share price has continued to plummet over the past two years as revenues have continued to decline, with global sales falling by another 13% last year. 

Reportedly, the Aussie stores are the main ray of hope as the brand has lost traction in the US and Europe.

The company is riddled with half a billion dollars in debt and seeks a private equity deal to strengthen its position. 

To date, no deals have been secured, leaving the company in a precarious position.



Source: ASX

New home loans soaring

As expected, low interest rates took a little time to bite, but now they are really impacting the market.

With returns on bank accounts so poor, investors are piling into the Aussie property market.

For most of the past year, people have been telling me why this time's going to be different. 

I've always agreed that we won't get a price boom of the same magnitude as seen previously - that always remains unlikely when the market is already relatively highly leveraged in global terms - but nevertheless, the property markets will see price gains while levels of unemployment remain reasonably low.

From SMH:

"New home loans approved by banks and other lenders jumped by 28 per cent to $79 billion in the June quarter, amid growing signs of a recovery in the residential property market.

Official figures released today put Australian lenders' total exposure to residential property at $1.13 trillion, an amount that has increased by 7.3 per cent in the year to June.

New lending, however, is expanding much more quickly than the banking sector's total exposure to property, because many borrowers are using low interest rates to pay off their debts more quickly, taking older loans off banks' books.

The Australian Prudential Regulation Authority said lenders had approved $79 billion in new loans during the June quarter, which was 28 per cent more than they approved in the previous March quarter and 20 per cent more than a year earlier.

The fastest growing category of property lending was to investors, with the value of investment loan approvals surging by 35 per cent to $27.8 billion in the quarter.

Loan approvals for owner-occupiers also grew strongly, jumping 25 per cent to $51.2 billion in the quarter, during which the Reserve Bank lowered the cash rate by 0.25 percentage points.

The jump comes as auction clearance rates in Sydney hover near record highs, re-igniting the debate about the risk of a bubble in Australian property led by speculative investors.

An economist at JP Morgan, Tom Kennedy, said lending was likely to continue flowing into property investment as the housing market recovered further.

"We've got rising house prices and falling interest rates – both of those things are quite attractive for investors. They can get better returns and they can service the debt more cheaply," he said.

The low returns from bank deposits – which can be lower than inflation once tax is taken into account – are also tipped to drive more investors into the housing market.

Despite the strong growth in new lending, the numbers suggest banks remain conservative in their credit standards.

The share of new housing approvals that are "low doc" loans has fallen to 0.7 per cent in the quarter, compared with 1.1 per cent a year earlier.

The percentage of new mortgages where the loan is worth more than 90 per cent of the property value has also fallen slightly in the past year, from 14.4 per cent to 13.4 per cent.

The APRA figures also showed banks' exposure to commercial property has increased by 2.5 per cent in the past year to $213 billion."

Strong quarterly property growth (except Adelaide)

RP Data's Daily Home Value Index shows very strong q/q property price growth in Sydney (+5.09%), Melbourne (+4.06%) and Perth (+4.22%).

These are worrying numbers for those who stated that lower interest rates would not have an impact on property prices.

Brisbane also records q/q growth (+1.83%).

Adelaide is the only city in the index remaining in the red for the last quarter.


Source: RP Data

APM: Sydney's winter market "the strongest ever" due to investor activity

From Dr. Andrew Wilson of Australian Property Monitors:
"The Sydney auction market clearance rate at the weekend was 79 per cent, the first result below 80 per cent recorded for seven weeks.
Despite the small fall from last weekend's 81.6 per cent – which was also the average rate over the past six weeks – the Sydney auction market remains on record pace.
The all-time highest monthly Sydney auction clearance rate of 78.3 per cent was recorded in April 2002. Next weekend's final August – and winter – auction market will determine if that long-standing record is to be broken. Regardless of the result, the 2013 Sydney winter market will be the strongest ever recorded.
Some strong regional results were recorded at the weekend, with the south leading the way with an outstanding auction clearance rate of 92 per cent. The next best result was recorded by Canterbury Bankstown with 85 per cent, followed by the inner west with 82 per cent and the lower north shore with 79 per cent.

The latest ABS data confirms the significant role investors continue to play in the strong Sydney winter housing market. June data reports that the level of investor finance approved for home purchases in NSW reached an all-time high."

The ongoing level of activity continues in stark contrast the predictions of a bust over the last five years. 

Instead, price gains continue to be recorded. At this stage, there do not seem to be excessively high gains, rather the market steadily pushing up to all-time highs.

Monday, 26 August 2013

Property Update: Why Sydney is taking off

Read my article on Property Update here on why the Sydney property market is getting set for take-off.

There are a couple more of my recent articles there at Property Update too - take a read and sign up for the newsletter there for important property investor information.





5 things that I learned in London

I was fortunate enough to share a coffee last week with the Chairman of the real estate division from one of Europe's most established banks. I'm always interested to hear what is happening in London property to see what the future might or might not hold for some less developed real estate markets such as in Australia's main cities.

1 - A global city

London has changed so much since I worked there in the 1990s. 

Not only is the city a gleaming financial centre, London is also now a truly global and multicultural - and cultural - city. With a population of more than 8.3 million (potentially significantly higher depending upon where you prefer to draw the boundaries) more than 300 languages spoken within the city.

Whatever you now seek from life, London now offers.

2 - Premium sector has outperformed due to foreign capital 

The biggest real estate story in recent years has been one of foreign capital inflating of the premium sector of the market. 

In spite of talks of 'headwinds' through the financial crisis, the premium sector has continued an astonishing run, prices increasing by well over 150% since that time.

With very few restrictions of foreign capital flows in today's technological world, prices have largely been forced higher by international investors looking for an asset class in which to park their capital, at times almost regardless of yield.

3 - The path forward will be different - different boroughs to outperform

Trees don't grow to the sky and it seems likely that least an element of mean reversion is likely to impact the premium London market at some as yet uncertain point in the future.

Instead investors, may sometimes be wiser to seek out traditional working class London boroughs, but with a key focus on those located within comfortable commuting distance of the City and the West End.

Suburbs that were once seen as less desirable for professionals and middle classes such as Shoreditch, Whitechapel and Bethnal Green are becoming increasing popular for buyers and renters alike. To the north of the City, opportunities will also exist.

4 - Construction inadequate

On the face of it, London's construction future seems exciting with the skyline now dominated by breathtaking new developments, christened with an array of amusing nicknames by ever-witty cockneys: the gerkin, the walkie-talkie, the cheese-grater.

But the real story back at ground level is more concerning. 

London has a chronic shortage of affordable residential dwellings both for buying and renting and building levels must be accelerated in order to cope.

The city risks a genuine 'brain drain' as talented professionals opt to move elsewhere. 

The city needs approximately 1 million more homes by 2031. The colourful and ubiquitous Mayor, Boris Johnson, announced last month that he is working "flat out" to keep up with the demand but warned that construction activity must speed up dramatically from its current levels.

5 - Reverse yield gap to drive market for 2-3 years

Finally, cheap credit will be a key driver of the market dynamics over the next 2-3 years.

The new Bank of England chief Mark Carney hinted that interest rates could remain at the record low level of 0.5% for a further three years. While three years at the effective rock bottom may not eventuate in full, mortgage debt does seem likely to be very cheap for the foreseeable future.

Incredibly, buy-to-investors with the requisite deposit can contemplate mortgages from an unprecedented low of just 1.49%pa.

This product may appear to be something of a gimmick, but when buy-to-let investors can also consider fixing for an entire 10 years at a mortgage rate owning a '3-handle' many are beginning to see this as something of a no-brainer.

The outcome for investors is what we used to call in the old money a "reverse yield gap" - rental yields can be considerably higher than the cost of debt and thus mortgages are easily serviced with a minimum of fuss.

This dynamic is likely to see the property market showing gains in both London and the south-east of England in the coming years.

And for Australia?

There are some clear parallels with Australia here.

Adequate and appropriate dwelling construction is clearly an issue for some locations, particularly with Australia's population continuing to grow at a rate of above 1.5% per annum or close to 400,000 persons per year.

Similarly, previously unpopular suburbs located close to key employment hubs and capital city centres will gradually become more popular as affordability issues bite. Just as in London, though, few will want to venture too far from where the action is.

The role of foreign investment capital is debated in Australia. Clearly many new developments are sold very quickly to investors from Asia as highlighted by Meriton's Harrgy Triguboff when he stated that 70% of his units were sold to Chinese investors. However, established dwellings should under normal circumstances be bought by Australian residents.

As for the yield gap, Australia's mortgage rates have not yet fallen to anything like the same level as currently being seen in Britain, although there have been signs that banks are competing for business with the most recent interest rate cut being passed on in full by some lenders.

The official cash rate in Australia at 2.50% remains two full percentage points higher than the level set by the Bank of England, although with Australian economic growth slowing and unemployment threatening to tick up towards 6%, it is deemed likely by futures markets that there will be a further cut in this interest rate cycle.

What's happening to stocks?

Up a little today, the XJO ticking up by 0.24%.



Source: ASX

It seems likely that the market will be a little directionless in the coming weeks as the "will they, won't they?" talk continues with regards to the taper of monetary stimulus in the US.

AMP's view has been that the announcement (or definitive suggestions thereof) will see a likely downturn in market valuations, yet they also see stocks moving a little higher by the end of the calendar year.

On the domestic front, reporting season has been a mainly positive story, with most companies reporting higher profits and higher dividends.

The major resources companies have some readjusting to do in the face of lower commodity prices.

The beneficiaries today including the major banks - with all of them moving - and gold stocks as gold continues in its recovery after finding a nasty trough back at the start of July.


Source: kitco

Aussie retirement savings to new record highs

From SMH:

"Australia's pool of retirement savings has overtaken the total value of Australian bank deposits, after superannuation assets swelled to $1.62 trillion in the year to June.

Superannuation assets soared by $217 billion, or 15.5 per cent, last financial year as a result of a buoyant sharemarket and growing member contributions, figures from the financial regulator show.

The surge means the super pool now exceeds the $1.6 trillion that households, businesses and others have on deposit in the banking system, an amount that grew by 6 per cent over the financial year.

It comes after a sharemarket rally helped funds post their best returns in 16 years, but it is also a reflection of super's meteoric rise as the main vehicle for household saving. With its concessional tax treatment, super has established itself as the primary way for people to save for their retirement, creating an enormous pool of money that is projected to expand by trillions more in the coming decades."

Surprisingly at some 31.3%, self-managed super assets are now the largest sector.

These trends are important. 

Because of the favourable tax treatment of super, Australians are more inclined to move assets into equities and property, and will become less likely to deposit money in the bank. 

This is particularly the case at today's record low interest rates.

Sunday, 25 August 2013

House prices rise in NI

It's been a long, long time coming. From the BBC:

"House prices in Northern Ireland have shown an increase across the board for the first time since 2007, according to a new report. The NI Residential Property Price Index indicates that residential property prices rose by 2% between the first and second quarter of the year. All property types have increased in value. This is the first time since the second quarter of 2007 that all property types have shown an increase. However, prices are still 3% lower than this time last year, and 11% lower than in the first quarter of 2005."

It's also notable that the UK economy is picking up, with growth for the quarter being recorded at 0.7%.

The economy in Britain looks brighter than today's weather - an utterly dreadful day here!

Meanwhile back in Oz, it looks as though Melbourne will the story this week after it recorded a very strong preliminary auction clearance rate of 82% according to the REIV, coming in even higher than Sydney's very high 79%.

The ongoing strength of Melbourne's markets after its great boom in prices have been a real surprise to me. Probably to plenty of others too, I guess.

Friday, 23 August 2013

China manufacturing turns positive

From SMH:

"Australian shares have outperformed Wall Street as the first positive Chinese manufacturing data in four months boosted the big banks and miners.

The benchmark S&P/ASX200 index was up 47.7 points, or 0.94 per cent, at 5,123.4 points. The broader All Ordinaries index was up 48.5 points, or 0.96 per cent, at 5,115.2 points.

RBS Morgans senior private client adviser Bill Chatterton said China’s upbeat purchasing managers’ index reading for August helped Australian shares gain almost one per cent, against a smaller 0.44 per cent gain for the American Dow Jones Industrial Average overnight.

‘‘You go back three or four months and there were some concerns that China wasn’t going to grow,’’ he said.

‘‘Irrespective of commentary from some of the political areas ... saying the mining boom is dead, it’s not.’’

Resources stocks benefited from the news, with Rio Tinto adding 89 cents, or 1.5 per cent, to $59.93.

BHP Billiton gained 27 cents to $35.64 as Fortescue Metals put on 19 cents to $4.45.

Most other sectors of the market were higher, overcoming Thursday’s losses.

The big four banks continued to perform well following a strong week of profit results, with ANZ adding 14 cents to $29.64, Commonwealth Bank gaining 79 cents to $72.05, NAB putting on 12 cents to $32.46 and Westpac jumping 47 cents to $31.47.

Property and development companies also climbed, as several of the larger companies released their full year earnings reports.

Lend Lease shares were up 11 cents to $9.13 after its full year profit rose by 10 per cent.

Mirvac gained 2.5 cents to $1.67, despite a 66 per cent fall in full year profit based on a $273 million residential writedown on luxury apartments announced in February.

Casino operator Crown gained 76 cents to $14.34, despite a full year profit fall of more than 20 per cent, as it flagged future strong earnings from its Macau operations."

Wednesday, 21 August 2013

Westpac index still says above-trend growth

Westpac's leading index for economic activity remains essentially unchanged with a reading of 293.4.

The leading index is designed to forecast economic growth for 3 to 9 months into the future, and continues to predict above trend economic growth, with a likely pace of economic activity way up at 3.6%.

While some components of the index weakened a little, this is still a very strong result, and implies a far better outlook than the Reserve Bank's own forecasts of 2.25% growth in 2013, returning to 2.5% in 2014.

Westpac's senior economist Bill Evans thinks there will another interest rate cut in November (see yesterday's post) followed by another in 2014.

Meanwhile, others continue to predict a recession.

Someone is getting it wildly wrong - not quite sure who yet.

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Just hopping on the train into London. Beautiful sunny day here.

Rates on hold...for a few months?

Just got around to reading the latest missive from one of my favourite blogs, Ricardian Ambivalence here.

The blog explains why futures markets have all but discounted an interest rate cut in September (only a 7% chance is presently priced in) and don't expect to see any cuts for a few months, implying perhaps on balance not even until early next year.


"...with growth expected to remain below trend for longer and inflation to remain within the target even with the effects of a lower exchange rate, members concluded that a lower level of the cash rate would better contribute to achieving sustainable growth in demand consistent with the inflation target. 

Regarding the communication of this decision, members agreed that the Bank should neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates further. The Board would continue to examine the data over the months ahead to judge whether monetary policy was appropriately configured."

As RA points out, while the next move for interest rates could be down, there is no urgent rush for the trigger to be pulled again.

Firstly, because lower interest rates are having some effect on the areas of the economy which tend to be impacted, and secondly, because the drop off in mining capital investment - to date at least - has not been sharp.

The last round of ABS figures showed that mining capex may yet fall in a more measured fashion.

As a recap, these are the actual and expected figures for total capital expenditure:


Financial year actual and expected expenditure - Total Capital Expenditure

Source: ABS


And this is part of the same data set for mining only capital expenditure, actual and expected:

Financial year actual and expected expenditure - Mining Capital Expenditure

Source: ABS


The estimates in the March quarter implied that the RBA still has some time on its hands before another cut will be needed.

The data for the next quarter will be released on August 29, so it will be interesting to note whether the June quarter figures hit expectations or whether we are on a steeper downward trajectory than feared.

However, as noted by RA, if unemployment does rise back to 6%, then that would likely be a trigger for another cut.

Best guess therefore: interest rates on hold for a couple/a few months, until a slowing of capital expenditure or an uptick in the unemployment rate sees another cut in the official cash rate to a new cyclical low of 2.25%.

Tuesday, 20 August 2013

Property Update: What does GROWTH actually mean in property?

I write for Property Update today here:


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Will be up in London's sunny Square Mile tomorrow, catching up with an as yet undetermined number of my brothers. And it's the 5th Ashes Test! - Leadenhall Market pub from 5pm...

BHP production volumes continue to grow - what about China?

Interesting to read the preliminary results presentation ASX release from BHP Billiton today, which announced a handsome final fully-franked 59 cent dividend for holders, a small increase on FY12. The FY13 profit was well down on the prior year, but production volumes continue to soar and look likely to be very strong in the coming year:


Source: ASX

There is certainly a theme throughout of "testing times" and a need to keep a lid on costs. The most notable point for me in the release was the projected fall in capital and exploration expenditure for the coming year.

This mirrors what is happening across Australia. The mining construction boom is passing (or, probably more accurately, has passed) its peak. The story going forward is about production, and resources exports look likely to continue to grow strongly.

The RBA's Chart Pack puts growing export volumes trend and what is happening over in China into graph form. Export volumes of resources continue to grow very sharply:

Export Volumes graph

Bulk commodities exports have been absolutely rocketing over the past decade. This means that the continued growth of China is vital, because there is a deluge of ore hitting the market which is likely to put downward pressure on that commodity price:

Bulk Commodity Exports graph

And as for where all of Australia's earth is going? Well, increasingly it's heading to China. Note how the percentage share of values of exports heading to India has waned.

Exports by Destination graph

China's GDP growth has been threatening to stall, although the latest data dump has since suggested that the red line may yet be pointing towards a number starting with a 7 (i.e. good). Will the sliding trend be arrested?

GDP Growth – China and India graph

China's monthly indicators show that Fixed Asset Investment (FAI) remains strong, as did the latest data dump. This is important for Australia:

China – Monthly Activity Indicators graph

China's property bubble remains a key worry - ghost cities and all that...

China – Residential Property Market graph

But credit growth does appear to be in a downtrend:

China – Credit and Money Supply Growth graph

And finally, China's industrial production (IP) remains on an upward trajectory, which hopefully means that China can achieve its GDP growth of 7%.

China – Output Indicators graph

Our economy is highly leveraged with regards to private/household debt, and it is now also highly leveraged against the iron ore price and our fuelling of the China boom. The future is inherently uncertain, but there is one thing that does look certain: Australia's future will not be dull!