Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 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 finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete 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'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - & author of Things That Make You Go of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Wednesday, 31 December 2014

Iron Ore Surges +5 Percent

Stimulus Measures

A sizeable rebound was reported by Commsec overnight for iron ore of 4.9 percent or $3.30 to US$71.20/tonne (62% Fe).

Not that much in the grand scheme of the past three years, of course, but hey, at least it's the highest spot price seen since the third week of November (!).

The assumed cause was a stimulus announced by China's central bank designed to free up $800 billion of loans for commercial banks.

Chinese demand is ultimately one half of the key to the iron price since it imports two-thirds of the world's seaborne ore as material for its monstrous construction boom, with 1.4 billion tonnes of imports expected in 2015.

However, an unprecedented flood of supply this year has seen prices nosedive by the best part of 50 percent since January 1.

With China's property market slowing, further interest rate cuts could be seen in that country next year.

The iron ore price has now rebounded by 8.5 percent after hitting its lowest price since mid-2009 last week.

But to put that in some context...

Tread with Care!

No doubt there will be a boost to iron ore producer valuations during the next trade and a spate of articles suggesting "investing" in them in 2015.

Each to their own, of course, but...well, as the chart shows there have been some truly epic "bull traps" in the not too distant past, so I'd probably be skipping the junior/highly leveraged/marginal producers meself (same applies for coal)!

Tuesday, 30 December 2014

Super News! 2015 ASX Close...

Stocks to Finish in the Black...Just

The penultimate ASX trade for 2015 saw share markets close in the red and down by around ~1 percent reversing much of the previous day's gains (the market closes early today at 1410 hrs).

Despite a rally at the end of the year, the ASX benchmark index closed only 1.2 percent higher for the calendar year to date.

No doubt this will be used as ammunition for more "doom and gloom" headlines!

However such pieces are often deliberately disingenuous. 

The plain facts are that the XJO (ASX 200) closed at 5416, thus generating returns on an accumulation basis (inclusive of dividend returns) of a solid if not spectacular 6.8 percent for the calendar year so far.

This means that any managed superannuation fund worth its salt in 2015 will have recorded another positive year, adding further to record total Australian household wealth.

Beneficiaries from the "quest for yield" this year have included Telstra (TLS) which recently hit a 13.5 year high breaching $6/share, and the major banks. 

5 year returns for superannuation balances should also be solid despite the dip experienced by many global share market indices through a wobbly 2011.

Record Household Wealth in 2014

The good news for Australian households is that this will push aggregate household wealth to new record levels at the end of 2014.

The Q3 2014 Household Finance and Wealth figures (analysed here) already showed that household balance sheets retained a record net worth of $7,718 billion, a massive 51 increase on the financial crisis lows of March 2009 ($5,107 billion).

Even in per capita adjusted terms, these represent very impressive gains.

The purple "net worth" line shows how household wealth had been increasing at an unsustainable quarterly pace of a massive 2.7 percent in the 8 years leading up to the financial crisis, miles ahead of the 1.8 percent pace seen 1994-2000.

A correction through 2008 put the upwards trajectory back onto a more sustainable course.

Interestingly the growth in household wealth in recent times has not all been driven by house prices, contrary to what the popular media might have us believe.

Further, the ratio of household debt to assets has declined moderately since peaking in March 2009, which is good to see.

Read more here

2015 Capital City Property Market Forecasts

2015 Aussie Property Market Forecasts

Many of our supporting charts and data have been published here before, so there is little need to reproduce too many of them, except intermittently as required. 

Presented below are our 2015 property market forecasts by capital city. 

Employment growth outside of the Australian capital cities - with a few notable and honourable exceptions as recorded here previously - is all but non-existent at the present time, and we generally see capital cities faring considerably better than regional areas.

We do not prepare a range of scenario-based forecasts (after all, you can probably work out for yourself that dwelling prices will either rise or fall from -5 percent to +15 percent in 2015) so presented here are solely our “base case” forecasts.

We have worked on the assumption that the economy will record sub-trend growth, with the labour market and wages growth each remaining soft through CY2015.

We have assumed one solitary interest rate cut to be delivered in the month of either April/May 2015, which is broadly what the market expects to happen too.

In terms of macro-prudential measures we have assumed that APRA remains watchful but makes no specific intervention which seriously disrupts or derails the investor market, which seems to us to be the most likely outcome at this juncture.

Let’s take a look in alphabetical order, commencing with…

1. Adelaide

Adelaide’s local economy has been a real stinker over the last half decade - the employment market in the state has not added a single solitary job to the labour force on a net basis for more than four years, which is a dire state of affairs. 

Meanwhile the Australian National Accounts have shown that State Final Demand in South Australia…well, moving on, this has resulted in a rising headline unemployment rates, particularly in certain outer suburban areas of Adelaide, a situation which appears likely to worsen as the automobile manufacturing industry shutters.

Population growth is soft in Adelaide and continues to bumble along at a considerably slower pace than the national average as analysed here previously.

Demand from owner-occupier property buyers peaked months ago, but while the investor loan finance data may appear to be flat on a rolling annual basis, a closer and more detailed inspection reveals that there might just be the early signs of an uptick for South Australia in the latest figures.

Rental growth in Adelaide is soft and softening.

For all of the above, it needs to be remembered that real estate is a cyclical, as it always will be.

Although lobbyists argue that the rate of dwelling construction is somehow linked to and can be increased by negative gearing rules, any property development company will confirm that the motives and personal tax position of buyers play no significant part in a project investment decision. 

What does is rising market values and acceptable profit margins.

Following six years of flailing Adelaide dwelling prices which have failed to increase above the rate of inflation, dwelling starts, completions and building approvals have all been lacklustre in South Australia for a prolonged period of time.

Consequently the market has gradually been tightening and stock on market has declined slightly.

We suspect that with another rate cut looking as likely as not, Adelaide's property market may fare better in 2015 than is warranted by the state of the local economy, particularly as dwelling prices in some areas now look to be comparatively good value.

BIS Shrapnel forecast 2.8 percent growth for Adelaide in 2015.

Our data compels us to be marginally more positive, and demands a slightly stronger forecast for 2015 than it did for 2014!

Adelaide 2015 forecast: +2 to +5 percent

2. Brisbane

Parts of regional Queensland face significant challenges as the mining construction boom fades and following the crash in coal prices.

Unemployment has clearly been rising in regional Queensland, but to date Brisbane’s economy appears to be holding up relatively well.

Owner-occupier demand for housing finance has been rising solidly and investor demand has continued to increase to its highest level since 2007 after a significant dip in the intervening time.

Population growth in Queensland is notably slowing as interstate migration to the sunshine state tails back from very high levels.

While apartment completions have not yet been anything too remarkable (see below chart), the number of commencements and approvals have picked up sharply in Greater Brisbane.

Unit approvals now seem to be receding again which is good news for the Queensland capital.

Vacancy rates are a little elevated in certain parts and suburbs of Brisbane, so investors need to tread carefully and asset selection will be key.

But the housing finance data suggests that for Brisbane we can expect to see a solid year or three ahead, beginning with robust capital growth in 2015.

Brisbane 2015 forecast: +5 to +8 percent

3. Canberra

Canberra's property market appears set to be in for a rough ride, with the MYEFO confirming a pending rationalisation of the workforce and the closure or merging of scores of government agencies.

The quantum of federal public servant positions to be cut is not yet entirely clear, but the number could run into the thousands which would be a material shock to the relatively small local housing market.

All other data is secondary to this key point.

Owner-occupier housing finance has held up solidly to date, but population growth is slow and rents are declining (quite sharply so in some cases).

A moderate level of dwelling completions continue to trickle through.

2015 will be a soft year for Canberra with emerging risks to the downside. Pass.

Canberra 2015 forecast: -2 percent to +1 percent

4. Darwin

Darwin remains the classic “thin” market and it is forever difficult to predict what will happen at the margin (even as an former inhabitant I had trouble following the seasonal whipsaw that is Darwin), so it is certainly also a challenge to anticipate annual dwelling price movements on a macro level.

With the mining construction boom unwinding, both labour force activity and population growth are likely to ease back. Stock on the market is rising and so too are vacancy rates, albeit from previously exceptionally low levels. Rents are also set to decline.

Indeed, after an incredible decade there appear to be few positives for mightily expensive Darwin right now. 

All indicators appear to be pointing south, but we acknowledge that the "Top End" is a tricky market to predict.

Darwin 2015 forecast: -3 percent to 0 percent

5. Hobart

Population growth in Tasmania remains considerably flatter than the Bass Strait.

While Hobart's economy has been even weaker than that of Adelaide in recent years with several "kinghits" to the local market, there have been a couple of surprise flashes of Tasmanian inspiration in terms of retail activity and state final demand.

Meanwhile unemployment rates in Hobart itself have meandered back down to earth from concerningly high levels.

Housing finance has been nothing to write home about as yet, but a dearth of construction, new dwelling starts and completions - indeed a dearth of virtually any interesting news at all for half a decade - has led to the market now becoming relatively tight with vacancy rates declining. 

In fact, on a city-wide basis vacancy rates in Hobart are now as low as anywhere, which suggests that we may see a "landlord's market" emerging. 

A declining Aussie dollar and a tightening housing market could lead to an upside surprise for Hobart in 2015.

Hobart 2015 forecast: +1 to +4 percent

6. Melbourne

Melbourne's data presents a genuine mixture of signals including ongoing very strong population growth, but a softening labour market.

Real rental growth is easing back. Owner-occupier demand appears to have rolled, but investor demand is still rising, albeit more moderately than was previously the case.

Dwelling starts and completions data have long pointed towards localised spurts of overbuilding in Greater Melbourne, particularly the over-construction of high-density dwellings, but also of fringe detached housing.

Building approvals data suggests that there may be more in the pipeline to come too (of both).

Vacancy rates are elevated in Melbourne and so too is the level of stock on market, although this has declined a little over the past year.

Melbourne looks to be a real mixed bag of signals dependent upon the property type and the location in question. On balance, though, price growth on a city-wide basis does look to be easing.

The impact of foreign investment capital remains a curve ball since we have so little reliable data available thereon, but one suspects its impact may be material.

Melbourne 2015 forecast: +2 percent to +5 percent

7. Perth

Despite the mining construction boom transitioning into a boom in resources export volumes, total employment growth in Western Australia has remained surprisingly robust to date. Unemployment in Greater Perth remains low at only 4.5 percent.

State population growth is slowing considerably, but on a percentage basis remains the strongest in the nation. Real rental growth is in decline.

Despite intense spruiking about a property correction, the data shows that the total value of investor finance demand in Western Australia actually increased very solidly by 14 percent over the past year (owner occupier demand also increased, but much more slowly at around 3 percent).

There are building approvals aplenty in the pipeline, both for detached housing and apartments.

2015 is likely to be a year of transition for Perth, and the market - most likely - looks set to be fairly flat.

Perth 2015 forecast: -1 percent to +2 percent

8. Sydney

Home to comfortably the strongest economy in Australia with booming retail, final demand and dwelling prices together with declining unemployment, Greater Sydney is experiencing very strong population growth – the strongest absolute population increase in the nation (net interstate migration away from New South Wales has dived to the lowest level in the history of the data series).

Unemployment rates in many of the inner suburbs of the city remain very low as identified by our analysis here earlier in December.

Rental growth has remained robust reflective of a pre-existing undersupply of dwelling stock in the harbour city's inner- and middle-ring suburbs.

Owner-occupier finance demand remains robust, while investor finance demand is soaring to new record heights by the month.

New South Wales may be set to hit ~50,000 dwelling starts in 2015, but unit approvals are already declining again, suggesting that the dwelling deficiency (as evidenced by ongoing low vacancy rates) is unlikely to be addressed in full in the years ahead.

With further interest rate cuts the Sydney property market could be anything in 2015, but while stock on market is not especially high, there do appear to be plenty of vendors ready to cash in on strong gains reflected in record numbers of auctions in 2014.

This may cap price growth below the double digit levels of growth that have been forecast elsewhere, but inner- and middle-ring Sydney remains a hot market as 2015 gets underway.

Sydney 2015 forecast: +5 percent to +8 percent

The Wrap

A caveat - the above data offers part of a framework for making investment decisions, but clearly asset selection is vital for securing outstanding long term returns.


Invest in outperforming properties:

Monday, 29 December 2014

Monthly Macro Housing Market Update - December 2014

December 2014 Update 

It's time for our monthly macro property market update for December 2014 with a few choice graphics from our chart packs.

Clearly we can't go into endless detail in one blog post, but follow the links for more details on each section from previously published analysis.

And don't forget to share online...thanks! OK let's take a look in 7 short parts, beginning with...

Part 1 - Demand: Population Growth

Population growth is slowing in Australia on a national basis, dribbling along in South Australia and is slowing sharply in the mining states.

Population growth is all going to be about Greater Sydney and Greater Melbourne in 2015, with huge absolute population growth expected and net interstate migration away from New South Wales falling to the lowest level ever recorded. 

More details on what to expect from the most up to date population trends can be found here.

Part 2 - Demand: Jobs, Jobs Jobs!

Employment growth has continued through 2014, but at a somewhat slower pace than would be desirable and has only taken place materially in the four largest states. 

Headline unemployment rates are generally ticking higher way from Greater Sydney, which has by far and away the strongest economy.

Our recent analysis has highlighted a quite alarming disparity between capital city jobs growth and what is happening (or rather, what is not happening) in regional Australia where jobs growth has stalled.

This is just beginning to flow through to a notable variation in unemployment rates between metropolitan and regional Australia. 

New South Wales is a fine case in point with Greater Sydney unemployment set to head below 5 percent on a rolling annual basis in 2015 but regional unemployment in the state rising sharply to head above 7 percent.

There are also significant variations between inner suburban, outer suburban and regional unemployment rates to be considered (especially in NSW).

There is no need to reproduce the entire contents of our entire chart packs here in one blog entry, merely to note that property buyers need to remember these three words: research, research and research!

Note that while unemployment rates may be very low in the inner suburbs of Sydney and Brisbane, regional areas often enjoying few such luxuries. 

See here and here for further detailed analysis of regions with elevated and rising levels of unemployment, which include certain parts of outer Adelaide..

Part 3 - Demand: Housing Finance

Total housing finance has continued to rise, but investor finance has been the real driver of increased activity.

As a result it is the properties favoured by investors - those located in the inner suburbs of capital cities, particularly Sydney, Melbourne, and next to go, Brisbane - which are outperforming, while plenty of regional centres and outer suburban areas are lagging badly.

Owner-occupier commitments may be rising in dollar value terms in most locations...

But in terms of the number of loans being written, Victoria has already rolled and South Australia is already well past its peak.

Sydney looks solid, and the other out-performer in 2015 will be Brisbane.

Investor loans on the other hand are trending higher in the four largest states.

Sydney is due to break all manner of records hitting new record high loans written by the month.

Investor activity in Queensland is rising and is up to its highest level since 2007. The outlook looks good for Brisbane here too.

More detailed analysis on housing finance and owner-occupier commitments can be found here and on investor loans here

Part 4 - Rental Yields and Interest Rates

The rent versus buy decision and investment decisions are impacted by rental yields and interest rates.

Interest rates are considered to be only a 20 percent chance to be cut in the month of February 2015, but futures markets believe that the cash rate is all but certain to fall at some point in the next year, which will continue to make owning property an attractive proposition for many Australians as term deposit rates fall yet further.

The rate of real rental growth is generally declining as supply comes online and has already turned negative in Canberra and Darwin, with Perth threatening to follow suit.

Rents in Sydney have remained very robust and are still growing at around 4-5 percent per annum, reflective of there being no oversupply of dwellings in the harbour city.

More detail on the inflation figures can be found here, including why soft inflation data will leave the door open for an interest rate cut in 2015.

Part 5 - Supply: The approvals pipeline

Stacks of detached house building is set to take place in the outer suburbs of Greater Melbourne, with Greater Perth having increased the number of its approvals in 2014.

For such a populous city the levels of detached housing construction in Greater Sydney are absolutely nowhere by comparison.

Sydney unit approvals initially responded to rising prices but have long since peaked with approvals tailing back towards a comfortably manageable 20,000 per annum.

However, an oversupply of apartments is going to land squarely in Melbourne (see link!) with some areas already well oversupplied.

It has been heartening for Greater Brisbane to see that unit approvals have now eased back considerably after a big pick-up in 2014 - it is possible to have too much of a good thing.

More up-to-date and detailed analysis on the approvals and dwelling supply by city and state can be found here.

Part 6 - Supply: Vacancies and stock on market

Vacancy rates have fallen to very tight levels in Hobart, and remain tight in Adelaide, thanks to a lack of construction in those cities.

Inner and middle ring Sydney is also very tight, with vacancy rates hovering around just 1.5 percent.

Melbourne is not a tight market, and there is a net oversupply of units in the Victorian capital.

Melbourne also has a glut of stock on the market and price growth in that city will likely ease in 2015.

We looked at vacancy rates in a little more detail here as well as looking at NSW in more detail recently here

Record numbers of auctions in 2014 suggest that plenty of vendors are ready to capitalise on the upswing in prices, which in turn may cap price growth.

Part 7 - Dwelling prices

Sydney continuing to be the hottest capital in 2015, with Brisbane also now set to pick up.

Hobart could be a surprise package next year, but generally capital growth will be soft away from Sydney and Brisbane.

We'll release our 2015 housing market forecasts by capital city tomorrow. Our forecasts will show the strongest growth expected in Sydney, with Brisbane not far behind, which is why we will be focusing on those two cities in the next calendar year. Stay tuned.


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Double-Digit Growth Forecast for Sydney in 2015 (Inner/Middle Ring)

Sydney Leads Again in 2014

There has been a lot of excitement about house prices over the last 5 or 6 years, but the reality is that while prices in Sydney have been very strong, elsewhere there has not been so much to cheer.

Same again in 2014 really, which is once again what we expected to see.

CoreLogc-RP Data's Daily Home Value Index is a sea of green ink with prices rising everywhere, but the strong gains have only really been seen in Sydney.

"Sydney is tipped to once again outperform all housing markets in 2015 in what will be a more subdued year for property, according to most analysts.

With just a week to go until the end of 2014, property prices across the five capital city markets should end the year up about 8.4 per cent, according to the CoreLogic RP Data Daily Home Value Index.

The standout performer has been the country's biggest city, Sydney, where values climbed almost 13 per cent since January 1, fuelled largely by investor activity and pent-up demand."

Expect more of the same in 2015, with generally soft growth but another strong year for Sydney ahead, with Brisbane also now set to pick up its pace of growth after a lean half decade.

SMH again:

"Andrew Wilson, senior economist at Fairfax Media-owned Domain Group, said house price growth for most capitals in 2015 was likely to be "modest at best, hovering around the inflation rate".

"The prospects for housing markets in 2015 remain generally subdued. Concerns over the performance of the national economy are growing, particularly in regard to unemployment," Dr Wilson said.

While the official cash rate has been unchanged at a 60-year low of 2.5 per cent since August 2013 and could fall further in 2015, Dr Wilson warned: "Without improved economic conditions and the return of incomes growth and confidence, marginally lower interest rates however are unlikely to have a significant effect on housing markets."

Dr Wilson said the Sydney housing market was set to remain the best performer, with growth likely to be at least twice the inflation rate.

"A top-performing local economy and the continued undersupply of housing will generate consistent buyer activity over the year. 

Inner and middle ring mid-price range suburban regions are set to continue to record double-figure prices growth," he said."


We'll release our 2015 housing market forecasts tomorrow.

Sunday, 28 December 2014

Telstra - A Turnaround Tale that Did Turn

Telstra Turns

"Telstra's ten percent yield too good to be true" they tipped.

"From time to time turnaround tales don't turn".

Typically true. But Telstra's turnaround tale did turn!

A Healthy Rebound

Yuletide tongue-twisters aside, it has been interesting to watch the studious recovery of Telstra (ASX: TLS) over the past half decade.

When down in the doldrums in 2010 TLS was a paying both interim and final franked dividends at 14 cents, equating to a grossed up yield of more than 10 percent, which certainly attracted some interest!

The stock tipsters were understandably not that keen on the shape of the chart at that time, and there was a general feeling that such a superficially strong dividend may not be sustainable.

13 Year High

In the event, the share price has really rebounded, this week springing to a 13 year high.

The 2014 full year results revealed after-tax profits increasing by a tidy 14 percent to $4.28 billion.

The real icing on the cake for investors has been the franked dividends.

Telstra has been pumping out 14 to 15 cent fully franked interim and final dividends for years now, meaning that each individual share in TLS has paid an impressive $1.415 in tax-favoured income over the past five years.

And the share price has soared to above $5.90 too, doubling the initial outlay invested.

It's certainly true that picking turnaround stories can be a risk-laden approach to investment.

But this turnaround actually did turn around. Terrific.

Sydney - Undersupply/Oversupply?

Slowdown didn't happen

We have been reading articles about an "inevitable" slowdown in Sydney property for at least 18 months now, but this hasn't happened at all through the 2014 calendar year.

In fact from our experience, while the market is not displaying the same signs of mania that we saw at the end of 2013, there is still plenty of momentum in the market.

SQM Research forecasts +8% to +12% capital growth for Sydney in 2015, and +11% to +15% if there is an interest rate cut in the first quarter of 2015, which there now seems more likely than not.

Why hasn't the market slowed?

The short answer is a huge demand from investors and now from owner-occupiers, and not nearly enough of the right type of dwelling stock.

There has been plenty of nonsense written about a non-existent "oversupply" in Sydney, presumably written by people who have never tried to undertake the arduous task of buying property in the inner ring suburbs.

Sometimes, it's true, folk see a few cranes on the horizon and assume an oversupply of property without considering the growth of the city's population.

But while there is an oversupply of apartments in a few pockets, it can hardly be said to be the case on a city-wide basis.

If a "balanced market" tends towards a vacancy rate of 3 percent, then Sydney's inner ring is a long way from that a just 1.5 percent as documented here previously.

BIS Forecasts

BIS (not the Bank for International Settlements or the indie pop bad...another one) have forecast that if the harbour city gets its act together and constructs a lot of new stock Sydney's dwelling deficiency could reduce from ~55,000 to ~37,500 dwellings by 2017.

The majority of other states are forecast to have a net oversupply of dwellings by that time, particularly in South Australia and the ACT (neither of which have strong population growth to absorb new supply).

Source: BIS Shrapnel

This seems feasible, particularly if New South Wales can get itself up close to 50,000 dwelling starts in 2015.

However there may be a question mark surrounding one of the forecast inputs used by BIS Shrapnel.

As per the below graphic BIS forecasts that net interstate migration could pull up to ~17,500 persons per annum away from New South Wales to cheaper and/or sunnier climes.

Source: BIS Shrapnel

Economy is now transitioning

While this may have been a typical dynamic throughout the past decade, there is a structural shift looming, that being the end of the mining construction boom.

We see a markedly different pattern for the years ahead.

As our chart packs show below, it was perfectly logical for Australians to relocate to Queensland and Western Australia from around 2002 forth for there was plenty of employment activity to attract willing workers to those states. 

However, mining and engineering construction activity which has exploded to unheard of levels in the mining states since 2002 will start to pull back dramatically in 2015 as shown by capex intentions surveyed and as noted on this blog at the end of the last quarter.

Consequently we see net interstate migration from New South Wales fading to record lows.

In fact our chart packs show that this has already happened, with net interstate migration away from NSW set to continue to a new record low next quarter too. 

Whether or not Sydney can successfully address its dwelling deficiency will depend on whether it can sustain an elevated level of building approvals and dwelling starts into 2015, but this does not appear to have been happening over the past 6-9 months.

Approvals in Greater Sydney have already meandered lower.

In any case, much of the construction is high rise stock or fringe housing, neither of which are property types which will satiate demand. 

Hence why SQM forecasts that Sydney dwelling prices will rise further in 2015. 

And they'll be right.

Saturday, 27 December 2014

Global Growth (US Booms)


There used to be a saying that "if the US sneezes the rest of the world catches a cold".

These days journalists tend to use variations of the same phrase when stuck for a headline, but the underlying reasoning behind the idiom still holds.

The 20 countries which comprise the "G20" comprising 20 major economies account for more than three quarters of global GDP.

There are a number of other countries of importance - in Eastern Asia and Western Europe, for example - but the below chart identifies the big players. 

China will probably grow at somewhere around 6.5 percent over the next couple of years through 2016, and India is forecast to grow at around 6 percent.

Japan continues to stutter along with its experimental policies with Japanese Prime Minister Shinzo Abe planning to deploy a massive Y3.5 trillion stimulus in order to stave off recession, to be approved by the Cabinet on Saturday.

This week Abe was elected for a third term, and with the rate of inflation in Japan ticking back to 2.1 percent (despite very low unemployment of 3.5 percent) both the government and central bank will continue to take extraordinary measures in order to get the economy to positive territory and growing again.

Thanks to a rebound in 2014 and changes to measurement criteria, Britain is now considered to be the world's 5th largest economy and slowly the media is begrudgingly accepting that the UK is in recovery mode, as reflected by record total employment a number of positive articles in the serious press over the Xmas period.

Much of the Eurozone on the other hand is in a complete mess, and so now too is Russia.

The US continues to have what is perhaps the most influential economy, so let's have a look at what's happening over there in three parts.

Part 1 - Unemployment Rate and Earnings

The headline unemployment rate has fallen from double digit levels to just 5.8 percent since 2009.

The total number of US unemployed recorded by the Bureau of Labor Statistics at 9.1 million has declined by 1.7 million over the past year.

The number of long-term unemployed at 2.8 million was unchanged in the last month but 1.2 million lower over the past year.

Over the past year average hourly earnings have increased by 2.1 percent and the workforce participation rate is essentially unchanged since April at 62.8 percent.

It's been a long time coming, but it is good news.

Participation rates are still well down, however, and it is also important to consider...

Part 2 - Payrolls

The long run payrolls data shows why there is always so much ongoing debate about the health of the US economy, largely due to the volatility of the figures by month. 

In November the US economy added a massive 321,000 jobs.

This was the greatest number of jobs added on the survey in 3 years, and well above the average monthly gain over the past 12 months of 224,000.

Reported jobs gains were widespread including across professional and business services (+86,000), retail trade (+50,000), healthcare (+29,000) and manufacturing (+28,000).

I recently wrote a blog post where I suggested that while the monthly figures do jump around plenty, the trend in average monthly payroll gains over the last five years is clearly positive.

Certainly it's been a long, slow haul back from the horrors of 2009 but, in part thanks to experimental use of quantitative easing (QE) the US economy has seemingly reached escape velocity.

The most recent set of data released, which was also positive, concerned...

Part 3 - Growth

On Tuesday, the US Bureau of Economic Analysis released its National Accounts figures inclusive of the third estimate of GDP for Q3 2014 which revealed that:

"Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 5.0 percent in the third quarter of 2014, according to the "third" estimate released by the Bureau of Economic Analysis."


A 5 percent annualised rate of growth, the fastest in well over a decade.

The usual points will be raised about whether the figures have been distorted by the "Big Freeze" (see the most recent trough above), or by Obamacare, or by something else or other...but such pleas are beginning to sound increasingly desperate.

Real GDP has now soared well past the pre-financial crisis peak, driven as confirmed by the BEA by a wide range of positive contributions.

"The increase in real GDP in the third quarter primarily reflected positive contributions from PCE, nonresidential fixed investment, federal government spending, exports, state and local government spending, and residential fixed investment."

You can run other charts yourself, such as real GDP per capita (which is also now 2.6 percent higher than the pre-financial crisis peak) or indeed any number of other metrics.

But the conclusions should be the same.

The US economy is in recovery - and that's great to see.

Friday, 26 December 2014



Merry Xmas from a the Old Dart (spending some time round at me Mum's this Xmas - ahh) where the bookies will not be paying out on a "white Christmas" event this year - in fact it's a positively glorious and sunny day in the environs of London, where sadly Boxing Day sales are all but underway already!

A sublime gift for a history geek like myself - more than 1,300 pages of Peter Ackroyd - which should make the 24+ hour return flight to Australia marginally more tolerable.

Year Closes

It's been a quite amazing year in many ways.

In Sydney we have seen house prices continue to boom by more than 17 percent over the last 12 months and apartment prices by around 14 percent. 

It has not been such a good year if you invested in iron ore mining companies, though, and it was quite apt that prices finished the last trade at their lowest point in 5.5 years down at a painful US $66/tonne.

This will lead to the Western Australian government cutting or deferring iron ore royalties on a case by case basis in order to keep the state's junior miners afloat - a fair few juniors will not be breaking even at these prices.

In the meantime producers are scaling back production levels by millions of tonnes.

Expect that the Aussie dollar (now down to 81 cents) and interest rates may have further to fall in the first half of 2015.

On the plus side there was a huge upwards revision for the US economy this week, where growth is now reportedly tracking at a booming 5 percent pace on an annualised basis.

This has sent US stock valuations to yet another record high with the Dow Jones incredibly zooming past 18,000 for the first time in history. 

More on this tomorrow.

We'll also publish our property price forecasts by capital city for 2015 later this week, where we expect another big year for Sydney where upwards momentum has not stopped, with Hobart and particularly Brisbane to be the other outperformers in the year ahead.

Most other cities we expect to be considerably softer in 2015.


In keeping with the south of England theme for this blog post, a UK #3 Christmas hit from 1980.  Jona Lewie's protest song was kept from the number 1 slot by John Lennon who had been murdered earlier in that year.

Cheers & thanks for reading for another year! PW

Wednesday, 24 December 2014

Australian Population Grid

Population Grid

The ABS has released its first edition in a brand new series - its Population Grid based upon the Census Data from 2011.

The Census data helps to produce graphics of population density per 1km2 as at August 2011.

Every so often a smart Alec produces a graphic a it like the one below together with a comment with the subtext "no land scarcity in Australia! Property prices will crash!"

And indeed to look at the Population Grid, you would be forced to conclude that there is indeed no scarcity of land in Australia!

Australia the sixth largest country in the world comprising well over 5 percent of the total landmass of all the countries on earth, and is the largest country on the globe with no land border to neighbours.

And most of Australia is completely empty!

Clearly there is no actual shortage of land, particularly out in regional Australia.

Scarce Commodity?

Yet since 2008 house prices in Sydney have continued to rise at around 7-8 percent per annum on average to be well over 50 percent higher than they were at that time, so the crash theories haven't worked out too well.

Why so? 

There are essentially three reasons why land can be a scarce commodity in Australia.

The first reason is that a huge amount of land in Australia is arid and close to uninhabitable, which any satellite view of the country clearly shows.

Shifting the Population Grid to the "mesh view" below reveals the second reason, that most of the land in Australia is completely restricted from the building of dwellings.

The mesh view shows a number of large areas which may not be built on - you can see in the centre of Australia for example a good deal of land within the Simpson Desert which is restricted, and to the west in the Great Victorian Desert. 

There are also National Parks surrounding cities such as Sydney and other land which is zoned not for residential use.

We need to zoom the chart in to see the third reason, and that is that in Australia's largest cities where most of the employment opportunities, infrastructure and facilities are located, folk ideally don't want to live more than about 25 minutes from the centre of the cities.

The largest cities are relatively centric in nature.

Artificial Scarcity

Much of Australia's land "scarcity" is artificial, which has been the case since the main capital cities were first founded using the US-style grid system.

The land was quickly zoned into roughly equivalently sized plots which encouraged speculative activity (the plots were never completely evenly sized - due to inexperienced or fraudulent use of the chain measures, and sometimes plots had to skirt around existing landmarks or buildings).

The issue was exacerbated by all of the main cities being located beside water, preventing outward sprawl.

Cities with land scarcity particularly include Darwin and Canberra, but it's actually the case in almost any large city to a greater or lesser extent due to zoning restrictions and the management of land release.

Property Prices

Property prices can be driven higher by:
  • an increase in the size of Australia's population; and/or
  • the increasing wealth of that population

Data from the Q3 2014 National Accounts released last week showed that household wealth in Australia roared to its highest ever level in September 2014 at $7,719 billion having soared by more than 50 percent since 2009.

Contrary to popular belief this was not driven purely by land and dwelling prices, with a substantial amount of that wealth being grown in currency, deposits and equities, particularly within superannuation balances.

Our recent analysis of demographic statistics here showed that population growth in Australia has slowed to around 360,000 or 1.6 percent per annum which is nevertheless a very large number of new persons each year.

Most of the population growth takes place in only four locations: Greater Sydney, Greater Melbourne, Greater Brisbane/south-east Queensland and Greater Perth.

Population growth is generally slower in the regions of Australia and now likely to slow further due to an ongoing dearth of employment growth or opportunities, as our recent analysis of the detailed labour force data revealed.

This is by no means a unique issue to Australia for there is a global trend toward urbanisation and mega-cities. 

The urban share of the globe's population has increased from 30 percent in 1950 to 54 percent in 2014. By 2050 some 66 percent of the world's population will live in urban areas, and in Australia the percentage share will remain far higher still.

Densest Cities

The Population Grid showed that Sydney is Australia's densest city with 21 square kilometres with more than 8000 people per square kilometre. 

By contrast Melbourne had just one square kilometre.

Unlike Melbourne the sprawl of Sydney is tightly contained on all sides by the Pacific Ocean and National Parks, which is one of several reasons we believe the harbour city will continue to be home to the most elevated dwelling prices in Australia over the long term. 

In 2011 Sydney also had much more widely spread high density living with some 93 square kilometres of land with 5000-8000 people per square kilometre (essentially much of the inner 12km ring) compared to only 33 such square kilometres in Melbourne.

Brisbane was the only other city to have any living at this level of density with 3 square kilometres at 5000-8000 people per square kilometre.

Elsewhere living in Australia is not dense by international city standards.

Sydney's most dense suburbs generally comprise those that are centrally located such as Woolloomooloo, Potts Point and Pyrmont. These "densest" suburbs are considerably denser than those in Australia's other cities!

International Comparison

Nevertheless Australia's cities are comparative lightweights when it comes to high density living.

For example, London has some 327 square kilometres of land with more than 8000 people per square kilometre!

The combination of London's restrictive green belt, within which more than 20 million people now reside, and woeful levels of construction it is small wonder than mix-adjusted house prices in London have zoomed more than 75 percent higher since 2007.

Undperformers and Outperformers

You would have thought that given the geography, economic make-up and planning constraints of Britain it would have been pretty obvious that London would see the greatest house price gains over the long term, which is precisely what has happened.

In truth though the property seminars prior to 2007 often spoke of using 100 percent(+) mortgages to invest in regional Britain for higher yields on the basis that "property always goes up!" - which it largely did until household debt levels peaked in 2007.

This is a confused approach.

While they may sound similar, yield (a spot percentage calculation made at the point of purchase) and income (total rental received over the live of the asset ownership) are very far from being the same thing.

The asset which is in the highest long term demand is the outperformer.

Look for Scarcity of Land

A good many British investors are now discovering just what a poor investment residential housing can be if you invest for yield first and growth second, with ex-London prices failing to record any growth at all in 8 years leaving many investors "under water" or in negative equity.

There are some lessons here for investors in Australia too.

Be wary about investing in outer suburban or fringe city areas where land is not a scarce commodity. 

A $200,000 outer suburban house may comprise only $50,000 of land value, so even in the unlikely event that outer suburb land values boom by 50 percent, the total value of the investment only increases by $25,000.

Why is this the case? Because outer suburban housing is readily substitutable with more fringe housing.

If you invest in property where land is not scarce or in high demand, then this can be akin to investing in the future price of bricks - and project homes actually seem to be getting cheaper over time rather than more expensive.

Asset Selection

The macro picture can only tell you so much, however. It's also important to understand markets at a micro level.

For example some years ago there was a widespread belief that Melbourne's property market must correct due to overbuilding, yet median prices have continued to rise.


Well I don't go to Melbourne all that often, and am surely no expert in that state, but if Melbourne's market mirrors that of Sydney in any way the likely answer is that the residential construction boom has largely comprised:
  • Fringe detached housing for which there is a relatively low demand; and
  • High rise unit blocks, with low owner-occupier appeal.

In the types of property and popular land-locked locations where most people want to live - particularly between 5 and 25 minutes from the city - available land is extremely scarce and, like most large, growing and thriving cities in the world, the prime location real estate becomes more expensive over time.