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.

Friday, 31 January 2014

Stocks have worst January in 4 years

Shares finished fairly flat today to conclude the month - the worst January in 4 years. 

The ASX 200 (XJO) shed 2.9% in the month, mining stocks such as BHP (-3.1%) and particularly iron-ore exposed Rio Tinto (-3.6%) feeling the pain of the lower iron ore prices. 

Naturally iron ore producer Fortescue Metals (FMG) felt that pain even more acutely with the share price closing at $5.33 having threatened $6 earlier in the month. Fortescue's production suffered a little from adverse weather in addition to the drop in the iron ore spot.

But perhaps the bigger story if that bank stocks have at last had some of the air sucked out of them in January. 

Commbank dropped 4.2% to $74.23 in January, Westpac lost 3.9%, NAB shed 3.8% to $33.25 and ANZ lost a lost 5.9% to $30.13. 

This in spite of evidence that business credit started to pick up in December, a point which ANZ highlighted yesterday. 

The Reserve Bank's financial aggregates showed that business credit picked up by 0.4% in December, but this still lagged behing the acceleration in housing credit which increased by 0.6% in the month and by 5.4% over the past year. 

As for retail, a few shockers this month: The Reject Shop (-35.3%), Super Retail Group (-19.4%) and JB Hi-Fi (-15.4%) variously suffering downgrades and trading woes respectively.

A bit of a slow week for data, but fear not, next week has some good stuff coming including Building Approvals figures on Monday and Retail Trade on Thursday. The excitement builds...!

Source: XJO

Meanwhile, January came to a close with RP Data recording dwelling prices as having concluded an 8th consecutive month of rises in January, with no surprises that Melbourne and Sydney are leading the way. 

Enjoy the weekend all!

Sydney house prices to rise 20% in 2014?

Whether or not he is right this time, I note that Louis Christopher of SQM Research has a good track record of near-term house price forecasting in Australia, which included correctly calling falling dwelling prices in 2011. 

From Sydney Morning Herald's headlines today here:

"Experts are divided over the longevity of Sydney's property "boom" this year, with most not expecting a repeat of last year's 15 per cent median house price growth.

Yet one commentator, Louis Christopher of SQM Research, is sticking by his bold prediction that Sydney could record up to 20 per cent growth in 2014.
Australian Property Monitors data shows median house prices jumped $100,000 in 2013 – the strongest growth in a decade – to $763,169. Apartments rose 10.9 per cent to $541,992."
The article continues:
"But Mr Christopher expects bluer skies than last year's Sydney price growth. "Our forecast last September for 2014 was 15 to 20 per cent and we hold by that," he said.
"The market we're going into is the hottest we've seen."
"It's going to take some sort of trigger in the market to create a slowdown – for example a rise in interest rates, which we are not anticipating, or a sudden surge in new supply, or some sort of major global crisis."
Mr Christopher is even making brave predictions about the luxury property market, which hasn't recovered to previous highs. He believes Sydney properties priced between $2 million and $3 million are "just going to fly off the shelves; that's where we'll see some real strength in the market".

US economy humming along at 3.2% annual pace

US GDP came in with another solid result, which is great news. The stimulus 'taper' looks set to continue and gold looks risky.

As cautioned the gold price dived by more than 1.5% overnight and stock markets reacted favourably.

Reuters reported:

"Gross domestic product grew at a 3.2 percent annual rate in the final three months of last year, the Commerce Department said on Thursday, in line with economists' expectations.

While that was a slowdown from the third-quarter's brisk 4.1 percent pace, it was a far stronger performance than had been anticipated earlier in the quarter and welcome news in light of some drag from October's partial government shutdown.

"The economy was firing on almost all cylinders as 2013 came to a close. For today, the sun is out and shining," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
Early in the quarter many economists were expecting a growth pace below 2 percent given that an inventory surge accounted for much of the increase in the July-September period.
Taking both quarters together, growth came in at a 3.7 percent pace, up sharply from 1.8 percent in the first six months of the year. It was the biggest half-year gain since the second half of 2003."

Thursday, 30 January 2014

Best new home sales in 5 years

Not much fun in the share markets at present with the markets set to record yet another day in the red, and quite sharply so.

Strange as one would have thought that markets would have fully priced in a 'taper' in the Fed Reserve's stimulus, but seemingly this was not the case. Such is the fickle nature of short-term market movements.

On a brighter note, while some will try to portray the latest Housing Industry Association release in a negative light, the blunt truth is that new home sales recorded their first annual increase in 5 years, and more than that new home sales have come roaring back from very low levels in the middle of 2012.

Meanwhile, Sydney property markets are back in the headlines, with dwelling prices having picked up sharply through 2013. 

Australian Property Monitors announced today that median dwelling prices in the harbour city increased by some 6% in the last quarter of the year. The Sydney market remains exceptionally tight with very little in the way of stock on the market.

Auctions recommencing forthwith...

One final note: the HIA highlights that in the last quarter of 2013, detached house sales in South Australia increased by some 50.9%. Adelaide turning the corner at long last?

Source: HIA

3 reasons the Reserve Bank can't overlook the inflation genie

Inflation targeting

All too often, real estate-slanted commentary on interest rate decisions follows a line something like: "With dwelling prices in 'X' doing 'Y', then interest rates should fall..."

Which would be all well and good if we had a dwelling price targeting Central Bank. But we don't. We have an inflation-targeting Central Bank.

The most recent inflation print from the Australian Bureau of Statistics at last showed what some commentators have been fearing of flagging for a while: signs of higher inflation.

In particular, some experts believe that a lower Aussie dollar will be reflected in higher prices at the fuel pump, which is clearly bad news for motorists: we might see a petrol price of well above $1.50 per litre through 2014, although that remains to be seen.

The headline consumer price index (CPI) print was 0.8% for the quarter and the 'core' inflation came in at 0.9% for the quarter and 2.6% over the past year. 

The Reserve Bank's own chart pack has shown for some time shown a notable split on where the inflation is coming from (non-tradables being items which are not readily exported or important - such as medical services or housing). Note the 'imported' tradables deflation, largely brought about by the rapidly climbing exchange rate at the end of 2011 and in 2012.

Non-tradables and Tradables Inflation graph

While there will no doubt be some discussion about 'looking through' the inflation to allow the economy to grow, there are a few reasons why a subsequent strong inflation print could cause interest rates to be hiked.

The challenge as ever facing the Reserve Bank, is to keep inflation under control while allowing the economy to flourish. Who'd be a central banker?

1) RBA policy

The Reserve Bank has a policy of targeting inflation and keeping CPI to within 2-3% over the medium term as part of its approach to price stability. In fact, here is the RBA's monetary policy in full:

"The Reserve Bank is responsible for Australia's monetary policy. Monetary policy involves setting the interest rate on overnight loans in the money market (‘the cash rate’). The cash rate influences other interest rates in the economy, affecting the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation.
In determining monetary policy, the Bank has a duty to maintain price stability, full employment, and the economic prosperity and welfare of the Australian people. To achieve these statutory objectives, the Bank has an ‘inflation target’ and seeks to keep consumer price inflation in the economy to 2–3 per cent, on average, over the medium term. Controlling inflation preserves the value of money and encourages strong and sustainable growth in the economy over the longer term."
So, in effect, the bank's hands are to some extent tied. If we want a Central Bank which overlooks inflation, then we need a new policy. 

Interestingly, Australia's policy of a 2-3% target range of inflation reflects a higher target than our major trading partners. The US Federal Reserve has an inflation target of 2% and so does the Bank of England (not that the BoE has had much success in hitting its target in recent years!). 

2) Credibility

I think the key point is credibility. It's all well and good a Central Bank attempting to imply that "we'll get tough on inflation next time around" but, like the boy who cried wolf, credibility can be quickly lost.

Therefore it is important that announcements are followed up with appropriate future policy. When credibility is lost, monetary policy may no longer have the desired effect and the system breaks down.

Moreover, where businesses don't believe policy announcements are credible, they tend to expect higher inflation and behave accordingly - wage-setting behaviour is adapted, wages tend to rise with inflation to follow, in all likelihood with little or no benefit from increased output. 

Despite having 'missed' the inflation target band on occasions since 1993 as the chart below shows, the RBA notes that the inflation target is a medium term average of 2-3%. At times, CPI will inevitably run outside the target band, but broadly speaking markets seem to believe that the Reserve Bank is serious about its inflation target. 

As a result of this the Reserve Bank retains some power in its 'jawboning' - comments made in interviews concerning bringing the level of the Australian dollar down, for example, can have an effect while markets believe in the credibility of the Central Bank and its Board.

Of course, one of the challenges for a Central Bank is that in order to continue to meet a medium term average inflation target of 2-3%, the Board needs to look "out of the windscreen" and "not out the window". Not a great analogy, but one that is frequently applied in this case.

3) Human nature

Perhaps a slightly less important point, but although we tend to think of central bankers as aloof, like you and I they are human, and by and large they probably do care about what people think of them.

On any Board, it stands to reason that some members will hold more sway than others (particularly the Governor, one would assume), leading some to suggest that central bankers can gain reputations for being 'tough' or 'soft' on inflation (or 'hawkish'/'dovish' as it is sometimes labelled).

This is led some academics to spend (too) much time discussing whether there should be some kind of automated monetary policy system i.e. "If X happens to inflation, then interest rates should be Y". I'm not even sure this is a good idea in theory, but it's certainly a terrible idea in practice.

In reality, economies are complex and human experience must play a part in attributing importance to the various sectors of the economy and the way in which they will interact with one another.


Of course, housing markets, and particularly dwelling construction, will be one element considered by the Reserve Bank at its meetings in 2014. Further, the financial crisis has shown the Central Banks would be foolish to turn a blind eye to asset price bubbles in order to concentrate solely on an inflation target.

If you take a read of the Minutes of a Monetary Policy meeting, you will see that a broad range of issues are considered under the broad headings of International Economic Conditions, Domestic Economic Conditions and Financial Markets. 

An inflation targeting Reserve Bank must consider the current and future trajectory of the inflation rate, and therefore if we have another strong core inflation print on 23 April, one would have to assume that the top of the inflation target band would be in danger (the most recent prints are following an upwards trend) and therefore interest rate hikes may follow.

It will be interesting to see how 2014 pans out. Future markets seem torn, and on balance, suggest that perhaps a cash rate stuck at a generational low of 2.50% is the most likely outcome for some time to come yet.

Wednesday, 29 January 2014

ANZ: The capex cliff

It's worth taking a minute or two to look at what the chart tells us about the so-called 'mining cliff' or 'capex cliff'.

Depending on cost overruns and whether any 'possible' or 'delayed' mining projects are given a green tick, Australia's mining construction capital expenditure could either fall quite a bit by 2016...or quite a lot!

If the answer is 'a lot' then this will represent quite a serious drag on GDP, and the rest of Australia's economy will need to step up to plug the gap.

It's one of the arguments for interest rates needing to staying low through 2014, especially as the unemployment rate is still in a bit of an uptrend.

The next capex survey is due for release by the Australian Bureau of Statistics on February 27.

For all the fears of mining capital expenditure collapsing over the last couple of years, it hasn't happened to date, but the chart below shows that it is surely in the post...

UK houses prices +0.7% m/m (+8.8%) y/y

Nationwide reported UK house prices as being up by 0.7% in January, so 2014 is picking up where 2013 left off.

Over the last 12 months, UK house prices were reported as being up by 8.8%, as a result of low interest rates, rising employment and steadily increasing confidence returning to the UK economy.

The average price of a home increased to £176,491 as housing market activity picked up sharply towards the back end of 2013. 

Meanwhile, in Q3 2013 the number of first-time buyers increased by 32% on the corresponding prior year figure. 

With a sharp increase in mortgage activity, more than 1 million homes were sold in the year.

Only 12,875 of these properties were bought under the Help to Buy equity loan scheme in the the first 9 months of its operation.

The scheme is aimed at potential buyers with a steady income but who have been unable to raise a deposit. 

Under the scheme, which started in April, the British government offered a 20% equity loan to buyers of new properties. The buyers were required to offer a 5% deposit.

Interestingly, more than half of new mortgages (52%) were for a duration of more than 25 years, up from just 40% in 2007, as buyers seek new ways to reduce costs. Very few interest only loans were issued to first homebuyers (2%). 

Borrowers should expect interest rates to rise some time in the near future as the economy at last begins to grow and unemployment looks set to fall below 7%.

Stocks in green text?

Hooray. I had forgotten shares can go up as well as down after 4 consecutive trades in the red.

A nice little 1.04% boost for the XJO today after consumer sentiment picked up in the US overnight.

6 month chart still looks OK, if a little winded in the mid-section.

In other news, Barack Obama must have broken some kind of world record for standing ovations at the SOTU address today. Obama is to raise the minimum wage in the US. 

Futures markets are pricing in only 1 chance in 20 of Aussie interest rates being cut again on February 4. 

And indeed, at this juncture, markets appear to think that there may be no further cuts to come as low rates begin to bite in earnest.

We've already seen an exuberant inflation reading, we just need some decent jobs numbers then the next move could in interest rates could well be up.

Dwelling prices continue to bound along, with January set to record further increases of well over 1% nationwide.  

Source: ASX

Bloomberg: Chinese buyers forcing up Sydney property prices

Here's the Bloomberg article I was referring to.

I can't say I agree with pointing out people simply for having an Asian skin colour, when those buyers may be just as likely to be Australian as you or I, while good ol' 'Tina Ford' is referred to as an Aussie. 

Nevertheless, there may be some level of truth behind the hearsay:

"Tina Ford, an Australian public servant, said she could hardly believe it when her three-bedroom apartment sold this month for A$1 million ($877,000) at an auction in which all 16 registered bidders were ethnic Chinese.

“I’m over the moon, I’m gobsmacked,” said Ford, 53, adding that she “would have been ecstatic with A$940,000” and didn’t expect to double what she had paid 14 years ago for her third-floor unit with a balcony 11 kilometers (7 miles) from downtown Sydney in the suburb of Chatswood. “I suspect that overseas investment, Chinese or otherwise, is certainly pushing prices up, but from a vendor’s perspective, I’m ecstatic.”
Such buying by locally resident Chinese and those from mainland China is inflating housing bubbles in and around Sydney, where prices in some suburbs have surged as much as 27 percent in the past year. That’s almost three times faster than the overall market.
Many of the neighborhoods with the biggest price gains “are areas that are popular with Chinese buyers,” said Andrew Wilson, senior economist at real estate data firm Australian Property Monitors. “Some of these suburbs are seeing price growth that we haven’t seen in Sydney since the early 2000s.”
The proportion of foreigners purchasing new homes in Australia more than doubled to 12.5 percent in the three months to September, from 5 percent throughout most of 2011, according to a survey of more than 300 property professionals by National Australia Bank Ltd.
On visits to several home auctions in Sydney’s sprawling suburbs, a dozen or more registered bidders, all of them Asian, could be seen vying for each property."
Article continues here.

Tuesday, 28 January 2014

Ugly start to 2014

Emerging markets jitters...

Source: XJO

Business conditions take off to near 3 year high

Well well, business confidence at +6 in December 2013 according to the NAB survey and business conditions up to +4 (from a rather poor -3 in the previous month). 

Both are well up from their previous cyclical lows perhaps suggesting an economic recovery is now underway. 

Other indicators looked good too, with trading (+12) and profitability (+6) turning in good results.

Employment - and recessionists will laugh here - tends to be a lagging indicator. Ha, but, of course! Results here were still weak enough, although perhaps hearteningly better than they have been. 

NAB specifically notes that sectors such as personal and recreational services and the wholesale and retail sectors have driven the rebound. 

In other words, low interest rates have spurred on dwelling prices and the wealth effect is flowing through to consumers as one might have hoped/expected. 

Still some challenges ahead as mining investment falls in 2014, of course, but, who knows another good month or two might have the Reserve Bank looking at its monetary policy stance.

Even the Aussie dollar looked some heart in the news and bounced back above 87.5 US cents.

Some bright news on a ripper of a day in Sydney.

Source: NAB

Property prices to rise in 2014 - but not everywhere

Optimism in 2014

Almost all market analysts appear to believe that Australian property prices will rise in 2014, and looking at the most recent housing finance data I can't disagree, broadly speaking. In the true spirit of a market cycle, it follows that analysts have suggested that there are likely to be price corrections in 2015. 

Despite being a preternaturally optimistic property spruiker, that to me sounds like a reasonable base case scenario. The corrections will, of course, likely be more severe in 'looser' markets than those where appropriate stock is tight. However, as always, the 2014 picture will no doubt be fragmented.


I find it hard to picture much in the way of growth in Canberra/ACT, for example, given the likely impact of public sector cutbacks. Asking rents in the city have been plummeting with houses -8.4% y/y and units -5.3% y/y per SQM Research, which suggests that in 2014 prices will follow a downward trajectory. Alan Kohler recently predicted 10%+ growth for Canberra in 2014 - I don't know what he's on, but I want some of it! I'll take a bet that growth is lower than double digits, though, and wouldn't be surprised if there's a minus sign or two somewhere in this year's data.

The optimistic Kohler also predicted 10%+ growth for Darwin! Now, despite having lived in Darwin, I don't pretend to understand too much about the property markets up there except that the supply always seems to be outrageously tight and rents bordering on the extortionate. In spite of that, after a confounding run over the last decade and more I've heard a number of analysts suggest that 2014 won't be a great year for property in the city. 

I'll take their word for it, as my track record on working out what goes down in Darwin is mostly balderdash, but I do note that Darwin has been a massive outperformer in terms of 2013 asking rents growth (houses +5.9% y/y for houses and +7.7% y/y units per SQM again). It's always seasonal in the tropical north, remember. I'm a little ambivalent, so let's wait and see on the NT capital - Darwin has proved people wrong before and it might again.

As I've detailed in previous posts, Adelaide has ongoing problems of an economic nature, which is one of the likely reasons why the city's property market has been the weakest of the major capitals. It's hard to see that changing too much in 2014 given recent adverse news on the automotive industry, although in certain sectors of the market vacancies appear to be reasonably tight. 

On a recent visit to the city, it did appear to me that land release, if it were to be or could be facilitated, could actually bring dwelling prices down (always a big 'if' in Australia's capitals). Recent dwelling price data for Adelaide has yet to show any meaningful pick-up and investor interest, relatively speaking, appears to be quite substantially lower.

Hobart's economy is fundamentally rather weak, with unemployment in Tasmania comfortably and for some time the highest of any state. Yet there are rumours that, with attempts to stimulate the market via grants, the property market may finally turn or have turned the corner. Keep a close eye on SQM's vendor sentiment index for our best leading indicator on likely changes, though there doesn't seem to have been a material improvement to date. 


As for regional markets, I certainly don't pretend to follow them all, but note that in my home state of New South Wales any pick-up has been pretty subdued. Asking prices on the NSW south coast, for example, have been flatter than England cricket team morale for some years (and that's pretty flat). 

Also, as Louis Christopher of SQM Research has been warning lately, watch out for the impact of steepening vacancy rates in certain Queensland towns and mining towns (follow his Twitter account for more details: @LouiChristopher). Bowen (seasonal), Mackay, Gladstone, Townsville, Karratha and Port Hedland each face challenges of varying magnitudes. Read more about this concerning trend here


Perhaps unsurprisingly, given the tight nature of our capital city planning regulations, the strongest 2014 capital growth seems likely to be in Sydney's inner and middle ring suburbs, with Melbourne, Perth and Brisbane vying for second place. I'll have a better picture to present to you after attending some Sydney viewings during the middle of this week, and particularly after the auction market begins in earnest in early February.

Certainly, the first inspections I've been to in 2014 had 'seemingly interested' buyers crawling all over them - four dozen people virtually queueing out the door in one instance - and that was midweek! I'm not sure I'd buy the line just yet that the market is going to show slowing growth in the early part of the year.

Impact of low rates

If you hark back a year or so before the market took off there was plenty of reverse-spruiking (if that's even a thing) which claimed that falling interest rate cuts would not impact the property markets favourably. I have some sympathy with the viewpoint because historically dwelling prices have at times moved in concert with the interest rate cycle (i.e. rate cuts being reflective of a weakening economy and deteriorating confidence and thus prices falling...and vice-versa), and not only in Australia.

However, what looking too much in the rear view mirror fails to observe - and why I disagreed vehemently with that view - is that, certainly in capital city markets such as Sydney where I live, the market is largely now being driven by yield-seeking investors. Perhap~50% of mortgages are being written for that sector of the market rather than for homebuyers in recent months. And, for that reason, the inner/middle ring capital city markets are interest rate sensitive, whatever anyone tries to claim to the contrary.

What this means, naturally, is that these investor-led markets will likely be sensitive on the way back up as well as on the way down, at least as much in terms of future expectations as actual interest rate hikes. Therefore, much interest will be shown towards the Reserve Bank's monetary policy in the first half of 2014. 

For my cautious money, interest rates are going nowhere for some time yet, and with the cash rate stuck at a generational low of just 2.50%, any moderate hikes back towards a neutral cash rate won't be enough to stall the property markets until at least 2015. That's my best guess anyway, and, let's face it, it is a guess.

Lowest rung problems

The downside to all this is that in those four major capital city markets which look set for capital growth, and particularly properties at the bottom end of the market which should suit those trying to hop aboard the 'housing escalator' (as they used to call it euphemistically in decades gone by), is that (a) the goalposts are likely to move unfavourably away from them, and (b) typically, 1 and 2 bedroom units are also often the dwelling types which appeal to investors.

I have a great deal of sympathy for those genuine homebuyers who are stampeded or beaten to the mark by return-seeking investors, and it's a problem with seemingly few easy answers. I note that there are answers, just not easy ones to implement.

The more heartening news is that the most recent data from Rate City showed that well over four-fifths of today's mortgage products are now offering 95% LVR products - at least, to those who are able to qualify for them. This presumably helps to bring down the required deposit for those who can obtain such a loan, even in the most expensive metropolis of Sydney, to a more manageable level, with the added bonus that mortgage repayments are at the cheapest levels we've seen in a generation right now.

Remember that first-timers who are being realistic shouldn't be looking at buying median-priced property. If, collectively, they are looking at the middle sector rather than the lower rungs of the ladders, then essentially our market dynamics are truly stuffed beyond repair.

I'd caution, though, that if you aren't in a position to save such a deposit comfortably, it's probably not a great time to buy, for interest rates close to the zero bound only realistically have room to move significantly in one direction over the medium term, and that's not down. If saving a deposit is not a manageable task at this point, taking on a 25 year mortgage is probably too risky a financial decision and in the absence of wage increases would leave the potential buyer massively exposed to default as and when the official cash rate reverts to the mean and borrowing rates follow.

Clearly, in today's markets, the dice are firmly loaded in favour of the dual income household, which is one of the reasons I expect that first homebuyers in the future are likely to be in their early 30s rather than 20s.

In a generation we've seen a tremendous shift in the labour force towards both young men and women earning salaries, which most people agree is a great thing and representative of progress. The clear downside has been that, in trying to 'keep up with the Joneses', we've collectively lifted the deposit hurdle by using two incomes instead of one to 'get ahead' and to lift dwelling values higher. Unfortunately, with two incomes now as much the norm as the exception, those of us in dual income households really aren't all that much ahead. Ah, the fallibility of it all. 

All of the above said, I do believe that ultimately the market will speak, and as and when property prices cannot be afforded they will not be, and dwelling prices will correct themselves. Presently, our major bank data shows that non-performing loans are running at low levels in Australia. If that changes, I believe, so will market prices. 

Monetary policy

Watch out for any changes in the wording in the next policy statement from the Reserve Bank, and expect to see the first meaningful references towards noting a shift in real estate speculative investment activity. The December 2013 statement appeared remarkably flippant towards the sector, seemingly implying that an uplift in prices should encourage more investment (i.e. dwelling construction, rather than speculation) with little in the way of caution expressed.

Here's what RP Data reckons has happened to dwelling values over the past 12 months. Not much cop in Adelaide, but prices recovering in most other cities to either close to or above previous nominal highs. 

In inflation-adjusted terms (by which I think he means CPI) RP Data's Cameron Kusher has prices at ~5% below previous respective peaks. I'd probably normally say that an adjustment for household incomes rather than a basket of CPI goodies would be a superior measurement criterion, but given that wages growth has been subdued, the results would probably be fairly similar in any case.

Anyway, that was my half hour brain dump. Better go do some work now. Cheers.

Source: RP Data

Monday, 27 January 2014

UK economy to come bouncing back

Tomorrow, the Office for National Statistics in Britain will release the GDP result for the 4th quarter of 2013.

A survey of economists expects the figure to come in at around 0.7% q/q to follow on from the 0.8% q/q seen in the previous 3 months (the Bloomberg-surveyed economists' forecasts range between 0.3% and 1%, to be fair).

This will be the best rate of growth since all the way back in 2007 and the first full year since the financial crisis when the economy has grown in all four quarters.

It appears that the Bank of England's Governor Carney has successfully broken the downward spiral of credit creation.

However, he isn't expected to raise interest rates any time just yet until business investment also picks up.

Growth and economic recovery to date has been said to be somewhat uneven.

Analysts expect dwelling prices to rise reasonably strongly in 2014 as monetary policy remains exceptionally loose. 

Sydney's newest suburb emerges from the earth...

At the King Street Wharf end of Barangaroo, Lend Lease is busily constructing a high rise commercial tower block. 

At the far end (Harbour Bridge/Rocks end) landscaping is underway to recreate the same contours as were present at the time of the first fleet, before the site was flattened.

Until recent years the area had been used as a shipping terminal. 

The site will also include parkland, harbour front apartments (with hefty price tags) and, eventually  in 2019, a new $1.3 billion Crown Hotel complex tower and VIP-only gambling casino. 

This assumes that the final permits are granted by the Independent Liquor and gaming authority. 

James Packer has pledged to do everything he can to make the hotel the finest in the world. The proposed designs, it has to be said, look stunning. 

Saturday, 25 January 2014

Stock markets smoked?

The Aussie stock markets will be closed on Monday for Australia Day

But XJO futures are down quite sharply unsurprisingly after the US markets got zinged again on Friday.

The S&P 500 was down another 2.1% after another poor trade the day before while the Dow plunged another 318 points or 2%.

The Dow Jones (DJIA) is now at from 15,879 from a peak of above 16,500.

It's a long overdue pullback, of course. 

The 5 year chart puts it in a bit more of a realistic perspective! 

Can you see the drop?

Source: Yahoo Finance

A coming UK property hotspot - take note

From the London Daily Telegraph today:

"More diggers and cranes may be heading to Croydon, where plans for a £1bn project, led by a new Westfield shopping centre, has created a wave of interest. 

Over 2014 the developers will hope to receive outline planning permission, and can then go about buying up the land they need. 

Forward-thinking investors might want to take a punt soon, before buyers flock to the new hot spot and push up prices."

This is close, but not quite correct.

Forward-thinking investors have already bought property in Croydon, before the newspapers started telling everyone else to, because we are forward-thinkers... ;o)

Croydon is located in South London, 15km (9 miles) to the south of Charing Cross and fast train links have commuters to Victoria in 15 minutes or London Bridge in 13 minutes.

According to almost every forecasting house, it's going to be another corker of a year in London property, but not so much at the top end of the market which has recently shown some signs of cooling as foreign investment pulls back.

A capital gains tax will be introduced on foreign owners in 2015.

This will likely impact the ultra-premium sector of the market.

In the more reasonably priced stock, however, prices are heading north, particularly for those who buy in the right zones. 

"Savills agrees that 2014 will see a continued increase in prices, with Greater London catching up with prime central London. It expects the commutable area around the capital to increase by five and six per cent, with central London rising three per cent. "

Sunday Times: Pricey property locations and their cheaper alternatives

A recent piece from the UK's Sunday Times, this article which looks at some of the world's priciest property locations and where you might have to try instead if you can't afford them.

Here are some of the world's super-expensive real estate markets they mention and where you should consider trying as a next-best bet):

"Can’t afford the heady prices in Verbier? Slope off to Nendaz

If the price of Megève is too steep, go round the mountain to St Gervais

Priced out of Portofino? Wander on up to Camogli 

Forget Provence — look west to Gascony

Turn away from South Beach and move to downtown Miami 

Say au revoir to Paris’s Latin Quarter and hunker down in the 17th, 10th or 11th arrondissements

Leave Barcelona and head to the Maresme coast

If Naples is too hot, cool down in Sarasota 

Muscled out of Manhattan? Head to Queens"

And here's the full Sunday Times section on Australia:

"If you can’t stretch to Bondi Beach, move along to Sydney’s Inner West

"Ask anyone who has holidayed in, or moved to, Sydney lately, and they won’t mention the weather or the beaches first; they’ll tell you about property values and the stratospheric cost of living. This year alone, Sydney house prices have risen by 13%, according to RP Data, propelled by a mining investment boom and Asian buyers. Bondi Beach, a prized enclave near the financial centre, is for the super-rich only, with detached homes starting at Aus$2m (£1.16m).

So those who are at home in pin-stripes during the week and flip-flops at the weekend are setting up their barbies in Inner West suburbs such as Erskineville, Newtown and St Peters. Still close to the centre, and with plenty of bars and restaurants, they are popular with younger buyers. Pete Wargent, Director of AllenWargent, a buying advisory agency in the city, says entry-level terraces in these areas start at Aus$700,000, but that doesn’t mean it’s easy to buy into the next hotspot: properties are often sold at auction, adding to the tension among competing buyers."

In fact, the tension among competing buyers is even more so the case since I made the comment late last year, with prices in the inner west having really taken off. 

I note, however, that the Sunday Times is incorrect in its assertion that Sydneysiders wear flip-flops at the weekend. They wear thongs, lol.

Is China slowing/contracting and what does that mean for Australia?

Industrial production is still strong.

A lot of reporting about China 'contracting' of late, but what does that actually mean?

In terms of the so-called flash PMI reports, a figure of below 50 denotes contraction and a figure of above 50 is expansion.

And yesterday, the flash PMI figure reported a reading of 49.6 - the first time the gauge has fallen below 50 in 6 months - indicating contraction or 'shrinking' factory activity. 

But such terms are relative.

The blue bars in the chart above shows the growth rates in China's industrial production growth figures back to 2008. 

Clearly, the rate of growth in China's industrial production is not as high as it was in the years of runaway growth, but then nor could you possibly expect it to be as China is well on the way to becoming the world's largest economy (as measured on a purchasing power parity basis) probably in the next few years or so. 

So as China's GDP growth "slows" from 8% to the recently reported 7.7% economic growth for 2013 this is perhaps not nearly as surprising as the headlines often imply, and what is termed 'contraction"' in activity still translated to a rollicking growth rate as, of course, the economy is still getting bigger each year. Much bigger. 

In the 'data dump' reported from China this week, retail sales grew at 13.6%, fixed asset investment at 19.6% and industrial production to 9.7%. In other words, a bit slower than before in some cases, but hardly slow.

In fact, the government's official growth target is China is only 7.5%, although there is doubtless a good deal of fudging the numbers so that they miraculously always come in close to spot on expectations in order to avoid spooking markets.

That is not to say that there aren't risks in the China model for there clearly are. Indeed, anywhere which produces ghost cites such as these and these with plans to populate them quickly must truly be facing challenges and stability issues. 

And for this reason, China is busy trying to implement a range of reforms to such as to fiscal policy and even family planning regulations in order to encourage stability. 

In that context, it's worth revisiting this article from Michael Pascoe which was published back in June.

Some of the numbers Pascoe quotes are food for fact, no, they are more than that...they are truly mind-boggling:

"To recap the latest figures that were greeted negatively by the markets: China’s retail sales growth for May was 12.9 per cent, up a fraction on April; Fixed investment was steady at 20.4 per cent growth; Industrial production increased by 9.2 per cent. Tell that to everyone who still thinks a PMI below 50 means production is contracting. And much of the pet shop squawked that these were bad figures. Oh please.

"We are talking about the world’s second biggest economy here that’s comfortably on its way to becoming the world’s biggest on a purchasing power parity basis in four years. Growth of 7.5 per cent is simply outstanding.

And that’s why the commodities boom really isn’t over. The construction bubble stage is, the stratospheric speculative prices are gone, but elevated demand for raw materials continues.

Half of China’s population lives at not much more than subsistence levels down on the farm. The urbanisation that has marked the past couple of decades is continuing unabated – another 300 million people or so will move into cities over the next 15 years. In terms of housing people, China is building Europe. Again. And the bigger infrastructure build to handle that rolls on.

A recent ANZ Bank presentation slide summarised some of the highlights: one million kilometres of new road, 28,000 kilometres of metro rail, 170 mass transit systems (twice the number that all of Europe has today), 97 new airports and energy demand more than doubling.

So, given the size of the task, who would seriously want China to attempt faster growth than it’s already planning?"

Of course, the eventual outcome of this incredible planned growth story is all rather important to Australia since, increasingly, that's we send most everything, particularly our vast reserves of iron ore which is used in steel production. It's one to watch closely.

Exports by Destination graph

Friday, 24 January 2014

Markets lacking direction

As has been the case for some time now, markets appear to be lacking any real purpose or direction and seem to be waiting for a lead.

In the US, the Dow shed 175 points over night (1.07%), Aussie stocks are down a bit, gold has recovered to its highest level in 16 months and the Aussie dollar hit as low as just 87.3 cents overnight.

All reflective of the mixed data from overseas - China looks like it might be slowing, but Europe has shown signs of expansion.

Confusion reigns!

Here's my bet for Australia: interest rates will stay on hold for at least two more months. 

I note no signs of the property markets slowing down in 2014 to date, although the Adelaide market is looking shaky.

Anyway, here's what Aussie stocks have done over the last 6 months.

Source: ASX

Thursday, 23 January 2014

Aussie dollar down to 87.8 cents

Quite a drop after the 'flash' data from China suggested a slight slowing in manufacturing activity.

More expensive holidays, but what the Aussie economy needs in general to combat the mining construction slowdown.

UK mortgage lending...woof (+49% y/y)

From the Council of Mortgage lending data, I've charted gross mortgage lending in Britain by month.

Source: Council of Mortgage Lending

This is a serious upturn in demand, with the amount in December of £17 billion being some 49% higher than the figure recorded in the preceding year.

Over the who year mortgage lending increased to £177 billion from £143 billion in 2012.

The quarterly figures are the highest since the third quarter of 2008.

London will continue to the problem child in 2014. According to Property Wire, there were an extraordinary 23 registered bidders for each London property listed in 2013. 

There is a clear undersupply problem in the south-east of England which will likely price many younger buyers out of the market. 


Opinions were rather divided somewhat by yesterday's inflation data.

On the one hand there are those who say that inflation is taking off - and it was a pretty big headline number for the quarter at 0.8% (and 0.9% underlying). 

That's rapid on an annualised basis.

Source: ABS

On the other hand, others argue that the main contributors to the inflation figure, which, as you can see above, included food and tobacco, may only have spiked temporarily. 

Graph: Contribution to quarterly change

Source: ABS

After all, the employment data hasn't been great, and year-on-year, the favoured underlying measures are still in the target 2-3% 2.6%. 

Consequently, opinions are also split on the direction of interest rates. 

Some forecasting houses are still expecting interest rate cuts later in 2014 as the Reserve Bank tries to lower the Aussie dollar towards 80 cents and get the labour market doing a little better. 

Others are a lot more hawkish.

And, as you might expect therefore, futures markets are hedging their bets and sit somewhere in the middle.

UK unemployment rate falls to 7.1%

Great report from the ONS today.

The UK is getting there it seems...

Reports the Beeb:

"The UK unemployment rate has dropped to 7.1%, close to the point at which the Bank of England has said it will consider raising interest rates.

The number of people out of work fell by 167,000 to 2.32 million in the three months to November, the Office for National Statistics (ONS) said.
The ONS also said the number of people claiming Jobseeker's Allowance fell by 24,000 to 1.25 million in December.
The Bank will consider increasing rates from 0.5% when unemployment hits 7%.
The fall of 167,000 was the biggest drop since the autumn of 1997. The number of 16-24 year olds out of work fell by 39,000 from the previous three-month period to 920,000.
The ONS figures also showed that the number of people in employment increased by 280,000 to reach 30.15 million."

Monday, 20 January 2014

China grows at 7.7% y/y

Nice result, and a bit over the forecasts.

Industrial production grew at 9.7% y/y in December and retail sales were on the money at 13.6%.

A sceptic, of course, would say that the Chinese data always hits expectations...

Saturday, 18 January 2014

Rich Chinese flee China to protect fortunes

From CNBC:

"A new report shows that 64 percent of Chinese millionaires have either emigrated or plan to emigrate—taking their spending and fortunes with them. The United States is their favourite destination.

The report from Hurun, a wealth research firm that focuses on China, said that one-third of China's super rich—or those worth $16 million or more—have already emigrated.
The data offer the latest snapshot of China's worrying wealth flight, with massive numbers of rich Chinese taking their families and fortunes overseas. Previous studies show the main reasons rich Chinese are leaving is to pursue better educations for their kids, and to escape the pollution and overcrowding in urban China.
But analysts say there is another reason the Chinese rich are fleeing: to protect their fortunes. With the Chinese government cracking down on corruption, many of the Chinese rich—who made their money through some connection or favors from government—want to stash their money in assets or countries that are hard for the Chinese government to reach.
According to WealthInsight, the Chinese wealthy now have about $658 billion stashed in offshore assets. Boston Consulting Group puts the number lower, at around $450 billion, but says offshore investments are expected to double in the next three years.
A study from Bain Consulting found that half of China's ultrawealthy—those with $16 million or more in wealth—now have investments overseas.
Most are looking for permanent residences, Hurun said. The United States was their top destination, which any real estate agent in San Francisco, Seattle or New York can confirm. Europe is their second favorite destination, followed by Canada, Australia, Singapore and Hong Kong."

Friday, 17 January 2014

Note: interest rates going nowhere in 2014?

Source: 2014

This assumes no material pick up in jobs.

Two more good prints at least before a hike...

Thursday, 16 January 2014

Weak jobs data - RBA forced to wear a Sydney property boom

A very poor Labour Force report from the ABS today. The unemployment rate was recorded as 5.8%, but at 5.845% it might just as well be rounded up to 5.9%.

Graph: Unemployment Rate

Source: ABS

But it was much more disappointing than that. Despite low interest rates (and a rapidly rising population) employment decreased 22,600 to 11,629,500 and full-time employment decreased 31,600 to 8,067,700. Yes, of course, the samples are small and the data is volatile, but that is a really poor result, and especially so for the full-time gigs.

This leaves the Reserve Bank with a real dilemma. Futures markets had a fit and are now pricing in a rate cut to just 2.25% by the middle of the year as a 50:50 chance. Other data has been more promising but we can basically forget interest rate hikes while the jobs market is so weak. 

The currency markets think they know what is coming and the Aussie dollar had a minor panic attack falling to a 3.5 year low and brushing just 88 US cents, well over 15% below where it was.

If you break down the data by state, the figures tell an interesting story. For example, here are the unemployment rates by state charted:

Source: ABS

South Australia continues to struggle. I didn't include Tasmania on my chart, but the picture there is even worse with an unemployment rate of 7.7%. And here are the 12 months jobs growth figures charted:

Source: ABS

Even more lame news for South Australia there, the state actually shedding jobs over the past 12 months, in contrast to all of the major states. But the 12 months jobs growth only tells a part of the story - check out what has happened to employment by state since 2010:

New South Wales is adding jobs at a rate of knots, but Tasmania and South Australia are going nowhere. I'm aware that yield-focussed investors have been tipping Adelaide for property price growth for the last 5 years, but I'm afraid to say that they were badly wrong and the jobs market data continues to do them no favours. 

Dwelling Prices graph

Not only has Adelaide failed to add jobs, it also fails to attract investors. 

If I had to pick one chart to explain why Sydney will be the gun property market performer this decade while other cities lag behind, it would be the one below from Westpac. 

There is essentially no interest in investment in South Australia and Tasmania, but Western Australia (+27% by housing finance value from June 2012 to November 2013) and Victoria (+37%) have really been picking up, as yield-starved investors seek out returns.

As for New South Wales, at +74%...well, you can only expect the price of quality existing stock to boom in the inner and middle rind suburbs and they are doing just that.

ScreenHunter_863 Jan. 16 11.08

Source: Westpac

The Reserve Bank is now stuck between a rock and a hard place. It can't hike rates while the jobs data is so wretched, yet low interest rates will continue to fuel a boom in Sydney's housing market. 

In theory, APRA could implement macroprudential measures to limit credit growth, but as I noted here, detailed research from BIS shows that such measures often tend to have very little (if any) discernible impact:

"None of the policies designed to affect either the supply of or the demand for credit has a discernible impact on house prices."

It's pretty much as you were for the property markets.