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.

Thursday, 27 February 2014

Interest rates to rise soon?


A few weeks ago with housing approvals at historic highs, business confidence up, resources exports flying and retail sales coasting along at an annualised 6.5% pace, things were all starting to look almost rosy for the Aussie economy.

Inflation looked like it might be picking up, although the RBA appeared to think that this may pass.

And, as we know, house prices had a very strong 2013 in Sydney, Melbourne and Perth.

The pendulum has swung back a bit the other way, though.

The jobs data has since been crap, and the capital expenditure data today was...even more crap.

Some high profile job cuts are unlikely to help confidence.

Mining investment could drop by quarter or even a third next year, which leaves the rest of the economy quite a lot of heavy lifting to do to fill the gap in the intervening period before resources exports really get going.

Even in the best case scenario interest rates are stuck where they are for months.

If the economy doesn't start to pick up further, the next move could still be down. 

The economy is supposed to rebalancing, but it's been a it sluggish to date.

Futures markets are 95% certain that rates will be on hold at 2.50% next Tuesday, with a cheeky 5% chance of a cut priced into interbank cash rate futures. 

Source: ASX

Mining cliff arriveth at last

Don't have time to analyse in full, but the capex data is out and it is very weak!

Total capex fell by a seasonally adjusted 5.2% in the quarter alone.

The downward trend in total capital expenditure is now at last here and entrenched.

Graph: Total asset, total industry

Source: ABS

Note, in particular, the massive 17.4% drop in the Estimate 1 for 2014/15:
  • "Estimate 1 for 2014-15 is $124,880m. This is 17.4% lower than Estimate 1 for 2013-14."
The market was looking for a 10% decrease so this was a huge miss to the downside.

These things are easier to see in a picture:

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

Source: ABS

At last looking quite dramatic.

I've noted in various posts recently that ASX releases have telegraphed this coming for some time and sharp cutbacks in capex are to be expected.

The Aussie dollar dived to 89.2 cents. 

GDP will be impacted next week.

And you can basically forget interest rate hikes. 

First the RBA may need to reintroduce its easing bias, and then, if required, may need to cut interest rates again later in the year.

Market anticipate that the cash rate will remain stone dead flat for the next year.

Wednesday, 26 February 2014

UK mortgages spiralling (+57% y/y) to 2007 highs


Retail sales in the UK are at their fastest pace in 2 years.

Meanwhile, mortgage approvals are spiralling off the charts.

The British Bankers' Association reported 49,972 loans were approved for house purchase in January and increase of 57% y/y
The Government's Help to Buy Scheme has been partly responsible for driving demand.
Meanwhile, 22,972 approvals worth £3.6 billion were granted for re-mortgaging, up 51% y/y.
Mortgage approvals are at their highest rate of activity since boomtime in 2007, while prices have already leapt back to 2007 levels.
It's another property boom the UK. Make no mistake.

Futures markets are actually at long last pricing in an interest rate hike in early 2015.

When it eventually comes it will be the first time the official bank rate has been increased in Britain since 5 July 2007, when the bank rate was hiked to 5.75%.

SCC Demolition

Over the next 12 weeks, the Sydney Convention Centre will be demolished, to be replaced by...the ICC.

So, farewell, by May 2014, the SCC will just be one huge empty space. Oh wait...

Soft construction figures

Poor set of result reported today here by the ABS.

Given that residential construction is supposed to be picking up to fill the void left by the mining construction boom, a result of -1.7% seasonally adjusted for the quarter and -1.0% year-on-year, is decidedly poor.

Although dwelling approvals have picked up, little seems to have flowed through to construction figures as yet.

Hard to imagine any hike in interest rates until construction figures pick up.

To be fair, there does tend to be a lag between approvals and construction.

Also, of note, the engineering construction have not yet dropped off as feared, which buys the economy a little more time to rebalance.

Tomorrow's capital expenditure actual and expected figures will shed more light, in particular the Estimate 5 figures, which are expected to come in between $160 billion and $174 billion.

Towards the upper end of that range would be helpful.

Graph: Value of construction work done, Chain Volume Measures—Trend estimates

Source: ABS

The split between residential and non-residential building shows the soft response from resi construction to date and is as follows:

Graph: Value of building work done, Chain Volume Measures—Trend estimates

Source: ABS

Plenty more work for low interest rates to do yet.

Saturday, 22 February 2014

A glimpse into Sydney's future...Central Park

I thought today I'd take a wander across the road from my joint to see what's going down at the new Living Mall at Central Park Sydney.

Central Park is a $2 billion, 6 hectare mixed-use urban village, and new development will bring a couple of thousand new apartments to Chippendale when all is completed. 

Work began way back in early 2010, and the first three residential developments to come online are: One Central Park, Park Lane and The Mark.

For the purposes of comparison (if, like me, you don't know what a hectare actually is) Barangaroo is a 22 hectare site, of which around 6 hectares will be parkland.

It all seems a bit spooky at the moment, since much of the new residential development remains under construction. 

Many of the mall shops are now open - presumably paying peppercorn or introductory rents - but there are very few actual customers.

Chippendale is currently a popular student area, but the proximity to the city is likely to attract professional types as well over time.

A wander through the food court showed the choices on offer to be: Chinese, Indonesian, Thai, Indian, Japanese, Taiwanese...or more Indonesian or more Chinese (I opted for a Tandoori lunch, of course). 

You could easily be forgiven for thinking you were in a shopping centre in Singapore or Hong Kong, which, unfortunately for someone with extremely itchy feet, only gets me daydreaming about living in Asia again. 

This available culinary choices reflect the changing demographic of Sydney, as immigration policy increasingly now reflect where Australia is located in the world. 

The Central Park area is a classic example of a brownfield site (formerly a brewery) being regenerated for residential use.

Based on what I've seen, I like it, and it's definitely a major improvement for the formerly shabby Broadway strip.

Over the next few years, property market commentary is quite likely to shift to discussing "oversupply" - just as is now happening in Brisbane, Melbourne and Perth CBD areas.

It's worth noting, however, that any forthcoming oversupply is most likely to be localised, such as in the City itself and in areas where massive redevelopment will occur (for example, in the inner south). 

Wednesday, 19 February 2014

London property prices skyrocketing

Having a bit of fun this morning playing around with the UK Office of National Statistics release figures. 

UK inflation fell to below the 2% target for the first time in four years, which all but guarantees that interest rates will be stuck at rock bottom for months now, and possibly through the whole of 2014 and 2015.

It appears that the next two years or so are likely to see strong gains for property owners.

I've charted the average all-dwellings price data by the main regions below, although you can drill down further here if you're interested in certain specific regions. 

Source: Office of National Statistics

The key points of the release were that nationally the average house price increased by 5.5% in 2013, and by a much faster 12.3% in London.

Clearly house price growth is beginning to increase strongly across parts of the UK, with prices in London increasing at more than double the UK average.

House prices grew by 5.7% in England, 4.8% in Wales, 0.5% in Scotland...and even recorded 4.8% growth in Northern Ireland.

It's worth noting that despite the financial crisis (check out the Northern Ireland bubble and crash) the overwhelming majority of homeowners over the past decade have done pretty well.

That said, long-term readers will know that I've always suggested that from an investment point of view, you should be looking at the south-east where there is a property shortage and not look to chase higher yields in other regions

Excluding London and the South East, UK house prices only increased by 3.1% in the 12 months to December 2013.

Affordability remains high away from London, at least while borrowing rates remain incredibly cheap. First homebuyers have come roaring back into the market in recent months, accounting for a staggering 44% of home loans advanced to homebuyers in 2013 (up from 40% in 2012) according to the Council of Mortgage Lenders. 

The non-financial press will likely a field day questioning affordability for average income earners, but if you have even a basic understanding of statistics you will know that average and median give divergent results.

In 2013, more than 70% of homes sold transacted for less than the average price of £250,000.

Tuesday, 18 February 2014

Sydney property market "hotter than hot"

Readers from last year may recall I had a bit of fun observing the spectrum of heat analogies applied to Sydney's housing market in 2013.

We ran the whole hotness gamut in 2013, from the market running hot, to it being red hot, then we moved up to white hot...and then, confusingly, we were both red hot and white hot at the same time.

The good Doctor, APM's Andrew Wilson has recently flirted with a more cautious outlook through December and January, even suggesting last week that the unemployment rate in January rose to over 10% (not sure on which measures, unless this was a typo for 6%...?).

But after three very strong auction weekends to kick off 2014, the Doc appears to be back in the bull camp.

More excitingly, Sydney's property markets have moved up another notch on the heat spectrum to DEFCON 2, with this weekend's scorching result now registering as "hotter than hot", which by be definition must rank above "white hot" (I think, anyway?). 

I'm actually to doubt my heat ranking system now. Hmm.

Anyway, summarises the APM auction market wrap:

"Another scorching result this weekend from Sydney’s hotter than hot late summer auction market. The 81% clearance rate makes it three weekends in row with results over 80 percent which is unprecedented for February. And again Saturday’s strong result was achieved from extraordinarily high listing numbers.

This weekend’s result was again well ahead of the 71.6 percent recorded over the same weekend last year.
470 homes were scheduled to go under the hammer on Saturday which is over 200 more than the 259 listed over the same weekend a year ago.
Listing numbers will continue to surge over coming weekends as sellers continue to take advantage of the current fierce competition amongst buyers for property in Sydney. Next weekend 764 properties are set to go under the hammer which will provide the market with a summer super Saturday of auctions."
Unsurprisingly, strong sectors of the auction market included my long-time favourite the inner west and, my favoured sector for 2014, the lower north shore, each recording auction clearance rates in excess of 85%.
The city and east was even stronger still at 86%.
The APM wrap concludes:
"Sydney’s strong housing market is good news for home owners with high auction clearance rates signalling continued prices growth. Not so good news however for first home buyers who have been struggling to get into the market over the past year.
Better news however for New South Wales first home buyer numbers from the latest ABS December home loan data reporting another monthly rise - the third monthly increase in a row. First home buyer numbers in New South Wales are now at their highest level for a year, with their share of the home loan market also rising to 12 month highs.
Unsurprisingly the average first home buyer loan in New South Wales surged to $344,100 over December – an increase of nearly $50,000 since August.
Although numbers are still low, expect first home buyers to continue to increase over coming months motivated by rising prices and low interest rates.
In the meantime the frenzied Sydney housing market moves on to its biggest test of the year so far next weekend with a bonanza of auctions awaiting still hungry buyers."

Monday, 17 February 2014

"The only things certain in life are death and taxes"

Tax headaches

If there was one thing in all my years of study and exams which caused me really great headaches it was tax law. The British schedular tax system was truly a matter of wonder and confusion to me.

Later, as the Senior Accountant responsible for tax compliance for a couple of Australia's ASX listed companies, I discovered that Australia's tax system can at times be equally labyrinthine (especially after International Financial Reporting Standards turned deferred tax disclosures on their head in 2005...shudder).

You might think that raising taxes would be a relatively simple matter, but instead tax law legislation has evolved continuously over the centuries from the Domesday Book in 1086, to the imposition of the British land tax in the 17th century and the introduction of the dreaded income tax under William Pitt the Younger in the late 1700s.

The outcome has been a phenomenally complex series of laws, cases, schedules, rulings and loopholes that are never quite possible to get one's head round in full. Tax legislation is a delicately weighted series of balances and counter-balances, and positive reform can be a tremendously complicated mechanism to implement.


Britain has had an uncomfortable history with regards to high rates of taxation. Theoretically, the post-war years were supposed to offer Britons a “peace dividend” of prosperity and lower taxes whereas in fact, the UK persisted with unbelievably high rates of tax right through until the mid-1970s (in 1974, for example, an 83% top rate of income tax and an incredible 98% rate for unearned income) before Prime Minister Thatcher finally wielded the tax axe.

The basic idea of the Laffer Curve (as legend has it, sketched out on the back of a napkin) was that as tax rates move closer to 100%, incentive to work falls and therefore so do government tax revenues. Naturally, if tax rates are too low then revenues also decline and this leaves the government with a shortfall to pay for social security costs, infrastructure, education, defence and so on.

The trick is to find the optimum rate of tax on Laffer’s bell curve to keep workers incentivised and tax revenues sufficiently robust. It is now well accepted that excessive tax is counter-productive and hinders growth. As a result, only three countries in the world have a top rate of tax of 60% or above.
Traditionally, it was set that as top tax brackets head towards 60% and above, then tax revenues may begin to fall to due to a lower incentive to work, but I wonder whether in the modern era, people will simply vote with their feet and migrate overseas when taxes become too high.
Top rate
I recall that I had the dubious pleasure of becoming a higher rate or top bracket taxpayer in only the fifth year of my professional career. The top bracket tax rate then was 40%, but Britain has since once again dabbled with a 50% higher rate. 
While progressive tax systems whereby tax rates increase for higher income earners are generally agreed upon to be a good thing for society, Britain may well be in the process of pushing the boundaries of attempting to squeeze too much tax out of the wealthy few. In 2013/14 the top one percent of income earners will pay almost one third of all income tax...and income tax is only the beginning of the fun.
I know that with my English peers approaching their peak-earning years, plenty of them are opting to bail out of Britain and head to countries with less demanding tax regimes, while other higher rate taxpayers I know talk about the idea frequently.
Celebrity after celebrity cops untold grief in the press for turning their backs on the country which educated them and provided them with their opportunities, but in truth, this is simply homo economicus at work: people tend to be rational and self-interested, and if you tax them too highly, in today's more fluid world, eventually they become increasingly likely to adjust their tax domicile accordingly. 
Property taxes

It's common to hear that our tax system is Australian is unfairly skewed. Contrary to popular belief, the main tax-related driver of prices growth is the lack of capital gains tax on the family home, but Australia is in no way unique in this regard. Increasing prices are as much to do with our geography, lack of adequately responsive supply and very high home ownership rates as anything else.

Take the example of Britain. As you can see, above property is no longer taxed favourably in Britain, and prices are increasingly rapidly again there. There are no negative gearing benefits for investors and Mortgage Relief at Source was totally abolished years ago.


The stamp duty land tax (SDLT) in Britain is another progressive tax, as no such tax is charged for those buying properties valued at under £125,000, while the top bracket is an outlandish 15%. 

Fortunately most buyers are not taxed at 15%, but those buying properties valued at over £2 million will still be captured by a rasping 7% stamp duty land tax on the full purchase price, which explains why Prime Central London accounts for comfortably fewer than 1% of Britain's property transactions but 14% of the stamp duty tax take.

There is a reasonably robust argument for the introduction of a progressive land value tax in Britain (and indeed, Australia), the key point in favour being that those who own expensive properties don't pay more than the rest on an annual basis (athough they do on stamp duty).

However, a high land value tax would also be extremely unpopular with salary-earning taxpayers who already pay significant rates of income tax, VAT on goods at 20%, extortionate taxes on petrol, capital gains taxes, stamp duty on property purchases, inheritance tax at 40%, and so on.


As noted above, the government also needs to be wary of over-taxing the wealthy.

Take the example of the £90 million property that went up for for sale in Mayfair recently. A progressive land tax might be one way to go, but how much tax can you reasonably levy on one household?

I'm no soothsayer but I'd be more than willing to take a punt that the Mayfair property won't be bought for £90 million by any British resident or tax domiciled buyer. Quite apart from the £6.3 million of SDLT payable on acquisition, even if the property never appreciated in value by one pound the estate would later become liable for a preposterous £36 million in inheritance tax.

High levies

History has shown over and over again, that if you levy too heavily, the proposed system will fail to achieve its objectives.

After World War I, it was decided in the Versailles Treaty 'war guilt clause' to make Germany pay reparations to the tune of more than 130 billion gold marks. Less than a sixth of the total reparations figure was ever paid, the German government collapsed in 1930, and tragically the stage was set for fascism and, ultimately, the road to another World War.

Succession duties, inheritance taxes, death duties and probate duties have over the years been closely linked to the sad decline and destruction of Britain's once wonderful country houses. When death duties were raised from 50% to 65% during World War II, this was justified by the war effort and the need for everyone to pull together for the common good.

But instead of dropping duties to a more reasonable rate after the war, duties were raised again...and then again in the post-war years. The fate of country estate owners was quickly sealed and in the inevitable demolition of country houses that followed - more than 1,200 such estates in the 20th century - Britain lost even more precious history than in 1538 when Henry VIII decided that it was a good idea to annihilate the monasteries. What a waste.

It is really any wonder that today Brits instead frequently elect to buy qualifying farmland (inheritance tax free) or domicile themselves overseas when the inheritance tax free threshold is almost comically low and the rate of tax is set at 40%?

The market distortion at the premium end of the UK property market can only realistically be tackled in other ways, including amending rules related to foreign purchasers of property, which notably the government is now beginning to approach via the introduction of a capital gains tax for foreign owners.

Conflicting goals

Any proposed land value tax, like other tax reform, would be something a delicate balancing act. Properly implemented in countries like Britain (and Australia) a moderate land value tax would likely bring real property prices down over time.

However, set the tax rate too high and property ownership (if you can even call it 'ownership' when the government keeps taxing you annually until you drop off...before kindly stopping by to collect further 40% taxes on the value of the estate) would become an unattractive choice and Britain's high rate of home ownership would fall.

Tax legislation is about balances and counter-balances and finding the right middle ground is the challenge. Whether or not a UK land value tax gets a run, one of the greatest challenges facing Britain is that the property markets are wildly out of equilibrium.

There is chronic a shortage of housing developing in the south-east of England which is leading to higher dwelling prices, yet a near 6-year housing market slump in other regions has left thousands of owners drowning in a sea of negative equity. The government clearly doesn't want to see prices fall further in these areas - calls for higher taxes in Stoke or Sunderland or Wolverhampton could lead to...well, who dares to think what?

In an attempt to tackle the supply issue the UK government unrolled the first phase of its Help-to-Buy scheme back in April which has seen first homebuyers come roaring back into the market, now accounting for almost half of mortgage activity.

Critics say that this will likely raise prices (true) as much as it is likely to stimulate new supply. Residential dwelling construction increased b~10% in Britain last year, which was heartening to see, but there is still long, hard road ahead to meet the demands of the fastest growing population in the EU.

As we've noted many times before, UK property market sectors are behaving in markedly different manners, and thus there is a perennial challenge to meet conflicting needs. Who'd be a Prime Minister?

AFR: Sydney homes on track for 20% growth in 2014

No particular surprise.

From the Australian Financial Review here:

"Sydney house prices have gained 14.2 per cent in the past year. Melbourne had added 11.0 per cent. SQM Research managing director Louis Christopher said Sydney’s ­market had clearly made a strong start for the year."

Sunday, 16 February 2014

Darling Harbour coming to life!

Darling Harbour redevelopment

In my first book Get a Financial Grip, I noted the reasons why many years ago I bought harbourside property at Darling Harbour. 

Sure, it wasn't exactly cheap when I bought there, but my reasoning was clear enough: at more than 20 years old now, the harbour has long been set for a massive redevelopment, and prices have responded accordingly over the last 4-5 years.

Not only is there a tremendous change afoot with building of a new city-side suburb at Barangaroo on the old ferry terminal site, as I noted here, and not only has the top side of Sydney's CBD undergone a huge reawakening...there is simply a vast amount of redevelopment set to take place at Darling Harbour itself.

What's in the pipeline

Amongst other changes in the area - including a major facelift down at the fish markets - Darling Harbour itself will benefit from world-class exhibition, entertainment and convention facilities at the new International Convention Centre, an Entertainment Theatre, a new 650 room hotel, a revitalised public space and new urban neighbourhood.

The work is underway now, and when it is finished by 2016, Darling Harbour and Barangaroo will join Sydney Harbour as putting Sydney right at the forefront of world-class global locations to visit.

Darling Harbour is already home to the National Australian Maritime Museum, IMAX, Darling Park, the Darling Quarter, Harbourside shopping centre and Merlin Entertainment (Sea Life Sydney Aquarium, Wild Life Sydney, Madame Tussauds).

Darling Harbour is also well-recognised for its high-quality family events - including Santa Fest, New Year's Eve, Australia Day, Hoopla, Fiesta and the many cultural festivals held throughout the year.

Today, by the way, is the Serbian Festival - I just went for a snoop around earlier. 

How it will all look

I've copied a few photos below from the Darling Harbour Live website. 

I'd normally apologise for lifting their photos, but what the heck, we all paid for this as taxpayers anyway.

In terms of payback? Well, Darling Harbour already attracts more than 25 million visitors per annum even before the redevelopment.

To put that number in perspective that's more than the entire population of Australia, so it's taxpayer money well spent.

The only downside is that we're currently in the middle of 30 consecutive nights of fireworks as part of the "month of love"...or something like that. 

There are fireworks every weekend at Darling Harbour even outside of the 'month of love - feels like we're living through the London Blitz sometimes. 

Source: Darling Harbour Live

Friday, 14 February 2014

Shares have best week in 2 years

ASX 200 (XJO) jumped up by a sizeable 3.7% this week.

Shows how useful share market predictions are given all the "this is just the beginning of the crash" calls last week!

Source: ASX

Quite a few more real estate auctions this weekend.

More than 470 in Sydney (a huge leap of nearly 75% on last year) and around 700 or so in Melbourne - around a third more than this time last year.

Thursday, 13 February 2014

Australian unemployment rate hits 6%


Another weak labour force report sees Australia's unemployment rate up to 6%, a fact which breathed some life and excitement into the bearish circles.

I'll never understand how people can see job losses as something to get excited about. 

I just can't help that, I'm a natural born optimist who prefers to try to see the best in people and look for positivity in situations whenever and wherever I can.

Investment personality types

Your personality type is actually quite an important thing to know when it comes to investing. It might sound like an ephemeral point but it isn't, for it pervades my entire approach to investment. 

I've never sold a property, since, as an optimist, I believe that over the long-term well-bought and well-located properties will appreciate. I don't short-sell shares since I like to back winners. I didn't even short the gold miners when valuations were in an outlandish bubble.

I don't go so far as to say that short-selling is unethical - in fact, shorters can help to control asset price bubbles and keep markets in equilibrium, so shorting does have its role to play - it just doesn't feel right to me.

What is your personality type? Are you easily excited? Do you make snap decisions? Are you afraid to invest in anything? Risk averse or do you like to gamble? 

Your investment personality type doesn't necessarily matter. But it does matter that you understand and recognise it, so you can build a plan which suits you.

There are essentially four main investment personality types, which are: the cautious investor, spontaneous investors, methodical investors (that's me!) and individualists. 

Generally speaking, methodical optimists like me like to keep accumulating investments and hold on to them for as long as possible. I look for success stories and generally aim to repeat the investment process over and over and over again.

If, you are a cautious investor, then that may be no bad thing, provided that you recognise that fact. Caution is good - it's what stops people getting burned. But you should also recognise that inaction has its own risks. The value of cash in a bank account tends to be eroded by 2-3% per annum, interest rates are low, and interest income is taxed less favourably than franked dividend income.

Spontaneous investors would be wise not to put too much of their capital into one ill thought-out venture, individualists may be drawn towards trading or niche investments, and so on.

Unemployment ticks up

I don't pay much heed to monthly employment data. The samples are too small and the non-response rates too high for it to carry too much meaning. 

However, looking at the number of employed persons since January 2013 shows a disappointingly flat line.

Graph: Employed Persons

Source: ABS

Given that Australia's population is growing, this equates to a soft labour market, and the net result is that the unemployment rate has risen to 6%. Although not yet high, this is the highest rate of unemployment we've seen in a decade.

Normally I put the unemployment rates and jobs growth figures by state into charts but I really can't be bothered today, since there isn't a lot new of note to point out. 

On the face of it, South Australia looked a tad better with 6.6% unemployment but the state is still shedding jobs on a year-on-year basis and given the car industry news, the outlook looks pretty average. I keep reading articles about a forthcoming property boom, but for mine, I don't see it. Adelaide has continued to be the worst performer of the major capital cities.

Victoria (6.4% unemployment) seemingly faces a few labour market headwinds too. Things in New South Wales (5.8%) look solid enough to date. 

But by and large, well, things just all look a bit flat.

What does this mean?

Rising unemployment should put the inflation fears back in their box, and there is no way we'll see interest rate rises at least until we see a month or three of much stronger employment data than this.

Interestingly, the dollar fell, but cash rate futures markets didn't really change a lot, suggesting that the market doesn't see much new here. Perhaps we'll see better employment prints ahead following on from other decent economic data.

Those calling for hikes will be forced to push out their hike forecasts until the second half of 2014 at the earliest.

Last week Steve Keen was even calling for a cash rate of 3.50% (it's currently at 2.50%) by June (?!).

You have to chuckle, and can only conclude that Keen has taken to making these predictions to gee people up or get a rise out of them  - or perhaps a headline - since there is more chance of Elvis stopping by Martin Place to chair the next Board Meeting than the RBA electing to hike rates for the next four months in a row. (uh-huh-huh).

I strongly suspect he was just stirring the pot a little.

Risk asset classes

Share markets could either have interpreted today's data as good (low rates for longer) or bad (weak labour market) so they stayed absolutely stone dead flat.

ANZ Bank was out today forecasting a 15-20% uplift in housing prices by the end of 2015.

I'm not so sure about the quantum on a nationwide basis given that various high-profile companies are shedding jobs and scaling back plans, but it does seem that the cash rate will be stuck where it is for quite a while to come yet, which may keep potential property buyers happy enough.

This easing cycle is approaching 40 months old, and for some years now I've held the opinion that the Reserve Bank will be practically forced to wear a Sydney property boom since it only has one interest rate lever to control a wide range of economic factors, while real estate investors are running wild in the harbour city.

In the spirit of Keynes, when the facts change I'll gladly change my mind, but to date I haven't seen anything to contradict Louis Christopher's (SQM Research) prediction that Sydney's housing market is in for a corker of a 12 months. 

China data confounds

Some odd news.

If you've been following lately, you'll know that there has been a lot of talk about a China slowdown and how this might impact Australia.

China released its trade data yesterday, with the markets expecting exports to rise by around 0.1% and imports about 4%.

Instead exports rose by an unbelievable 10.6% and imports by 10%!

The net result of this was a staggering trade surplus of $32 billion, miles ahead of market expectations.

In fact, markets treated the data as almost literally unbelievable. 

Stock markets and the dollar rose, but the slightly guarded response suggested that people are more than a little sceptical about data coming out of China.

The Aussie dollar is now back up at 90.3 cents.

(Disc: I am completely out of USD now, finally closing out at 89.5 cents, so will be an interested observer only henceforth - I comfortably missed the recent low of below 87 cents, but still a good gain on 106 cents where I came in, so happy enough with that). 

Hard to see how data like this will equate to a material slowdown in China though.

Wednesday, 12 February 2014

ABS confirms property bull market (as biz confidence hits 3 year high)

Confidence upbeat

More heartening news yesterday as (NAB survey) business confidence rose close to a 3 year high and (Roy Morgan) consumer confidence rose too.

Since different data providers use different methodologies, sometimes commentators like to say that they will "let the ABS numbers do the talking", for the Australian Bureau of Statistics is an independent body. The ABS has at last made a few changes to its own residential property price index methodology. In that context, it was good to see the figures for the final quarter of 2013.

Source: ABS

Sydney continues to lead the way with a 4.7% jump in the December quarter and a 13.8% increase over the calendar year. As regular readers will know, since this was always likely to be an investor-led boom (and still is), I've been predicting this for some years. 

It takes balls to buy properties when others are warning of demographic headwinds, a pending bust or crash (cf. 2004, 2008, 2010), but that's also generally when you may be able to source good deals, when fear abounds.

Gains elsewhere were solid but less dramatic, with Perth (+8.7% y/y) Melbourne (+7.9% y/y) and Brisbane (+5.7% y/y) the stand-outs. Darwin (+5.0% y/y) and surprisingly even Hobart (+4.9% y/y) also recorded solid gains in 2013.

That just leaves Adelaide (+3.4% y/y) and Canberra - where house prices actually fell (-0.3%) in nominal terms in 2013 - as the laggards. 

Total value of dwellings passes $5 trillion

The ABS also provides an estimated total value of dwellings now, which is only really a point of interest as much as anything else. Australia's dwellings are estimated to be worth approximately $5,017,041,400,000. That's a smidge over $5 trillion (well, what's a few billion between friends?).

Given that Australia has around 9,300,700 dwellings this equates to a mean dwelling price of $539,400.

In truth, a mean figure often isn't a lot of use, since it is too easily distorted by high-priced stock. After all the lowest a dwelling can be worth is close to $1, but in Sydney, dwellings can fetch $50 million or more. 

The median home value across Australia's capital cities is higher than this at above $600,000 but significantly lower in cities like Brisbane or Adelaide, and of course, lower in regional areas. I suppose all this really tells us is that there is no one property market in Australia, and that prices are quite a bit higher than they were a year ago.

Investors lead the way

The ABS also released its housing finance figures for December yesterday. The monthly figures showed a slight fall for owner-occupier finance (-1.5%) and another increase for (+2.9%) investment loans. Monthly figures can be confusing, but the annual chart for total value of dwelling commitments isn't:

Graph: Value of dwelling commitments, Total dwellings

Source: ABS

When it comes to housing finance, a picture often tells a thousands words, and in this context RP Data's Cameron Kusher is a fine storyteller. Here's a chart he drew up yesterday:

Source: RP Data

The reason I felt that this boom would be a Sydney story (and not so much in the less popular capital cities or regions) is that low interest rates have made it an investor-led market. Cameron's chart shows the higher-than-usual proportion of finance commitments which relate to investor loans (black) as compared to owner occupier commitments (red). Consequently, it's no surprise that Sydney will be the city with the strongest gains.

The chart also shows that the moderate slumps of 2008 and 2011 will be fully erased in 2014, despite years of warning to the contrary (an inevitable crash...a slow decline in real terms...a decade of flat prices...a bull trap...etc). With the cash rate stuck at 2.50%, the next downturn appears to be some way down the track yet.

First homebuyer malaise

The latest angle is that first homebuyers are being locked out of ownership, but if I've been around the traps through a few cycles now (n Britain and Down Under), and am beginning to wonder if the risks aren't increasingly becoming skewed in the opposite direction. 

I note that adverts for 100% loans or even 105% loans with parental guarantee are surfacing on free-to-air television. Sure, it may still be early days, but lending standards - like market sentiment - tend to be cyclical. I also note that low-doc loans are fairly widely available again. And traditionally, it's said that first homebuyers have a tendency to buy into a rising market for fear of missing out. 

All of the pieces could therefore falling into place for a flurry of first homebuyers to jump aboard, but while existing owners might cheer on the frenzy should it causes prices to rise further, caution should be exercised by lenders. Interest rates are at ultra-low levels and are likely to revert upwards. it's true that futures markets are having a hard time wrapping their head around 2014 cash rate rises, but they will come eventually. 

Remember only in 2012 in Britain all the reports were of "Generation Rent" and an "entire generation being locked out", yet as lending standards have dived, a massive 44% of mortgage activity is now for first homebuyers. 

That's great to see! But banks need to be careful about peddling debt to younger people with no track record of saving without also highlighting the risks of a higher cost of borrowing down the the track. It's unfair on all parties, and great caution should be exercised.

Dow +212 points

Big overnight trade in the US as the new Federal Reserve Chairman Janet Yellen addressed Washington.

It looks as though the 'taper' of quantitative easing may continue, but interest rates will stay very low while the "labor" market completes its recovery.

Stock markets got optimistic adding 1.3%.

Over in Britain retail sales grew at 5.4% y/y, the fastest rate of growth in 4 years (perhaps distorted by a bit of food hoarding - I think it snowed in January over there?), once again confirming the link between rising house prices and consumer confidence.

The British economy has become hooked on this credit-fuelled dynamic in recent decades, and here we go again.

Monday, 10 February 2014

Stocks bounce

Banks set to report some big profits and dividends, which is welcome news to long-term investors.

Stock valuations are back to where they were 5 months ago.

Source: ASX

Sunday, 9 February 2014

Auctions ramping up

Still early days in the 2014 major property auction markets of Melbourne and Sydney.

The preliminary or 'flash' auction percentage clearance rates can only really be seen as indicative and not much more than that.

Percentage clearance rates will surely be revised down as more results come through during the week.

Melbourne recorded a 76% clearance rate (2013: 67%) and Sydney a strong 84% (2013: 67%).

In Sydney's case, however, only 205 results were reported out of 296 listings, so it's a fair bet that the final clearance rate will be closer to 80%, and possibly even in the 70%-80% range.

Fairfax was quick to leap on a couple of record sales in Sydney's inner suburbs.

There clearly remains a healthy level of activity in the market as we move into 2014.

The auction numbers will increase fairly sharply in the coming weeks, so you might expect auction clearance rates to pull back.

2014 property markets

In a previous post I expressed some predictions for what might (or might not happen to dwelling prices in 2014).

In nearly every instance, my estimates were lower than you'll see elsewhere, with prices essentially now at nominal highs in Melbourne, Perth and Sydney (Brisbane and Adelaide remain a little way below previous peaks), depending upon which index you follow most closely.

I felt that Sydney will continue to lead the way, and with stock on market levels falling to levels not seen since the index began, as we move in to February, there's been nothing to change my viewpoint on that...yet.

More will become clear as auction listing numbers begin to increase in coming weeks.

Dropping RP Data's Daily Home Values back index into a chart gives a reasonable picture of price action over the past 12 months.

The Adelaide worm continues to snake along in flatline mode, with perhaps some indicators of better times ahead being reported.

Sydney continues to power along. I predicted last year that the median price would soon hit closer to $800k than $700k, and we're now very close to that point.

The harbour city needs more stock on the market to meet the demand.

Source: RP Data

Sharing it around

Meanwhile, stock market projections for 2014 seem a little confused.

On the one hand, consensus seems to suggest that low interest rates and reasonable PE valuations could see 2014 being a decent year.

On the other, there is much talk of significant event risk, most pertinently from the suspect of quality of loan books in China's banks and non-banks (aka 'shadow banks').

Long-term investors would be wise to continue to focus on dividend rich portfolios.

It's one of a number of topics I'll be debating this week, so stay tuned. 

Saturday, 8 February 2014

US jobless rate falls to lowest rate in 5 years

In terms of the global economy, it is always so important to keep track of what is happening in the US - if the US sneezes, the rest of the world catches a cold as the old saying goes.

The payrolls data from the Bureau of Labor Statistics showed nonfarm payroll employment to have increased by 118,000 in January.

Employment grew in construction (+48,000), manufacturing (+21,000), mining (+7,000) and wholesale trade (+14,000).

This was a little less than expected, and was a bit of a disappointment to the market, for the median forecast of economists had anticipated around 180,000.

Interestingly, the unemployment rate fell to 6.6%, which is the lowest rate of unemployment seen in the US since all the way back in October 2008. 

The economy has come a long way from the double digit levels of employment seen a few years ago.

The Dow Jones added 165 points or more than 1% to 15,793.

Source: Bureau of Labor Statistics

Friday, 7 February 2014

UK house prices to the moon

Capital Economics periodically produces these charts

This one shows the RICS survey of expectations running to levels not seen in the last 15 years.

Meanwhile the black like shows quarterly house price growth.

Note the historical correlation.

UK house prices are set to rocket based on this evidence.

Source: Capital Economics

Reserve Bank sees economy growing

The Reserve Bank of Australia release its Statement of Monetary Policy today, and the key points included an upgrade in expected economic growth.

Source: RBA

The revised growth forecasts show GDP growth of 2.25%-3.25% for December 2014, rising to 3.00-4.00% by December 2015 and 3.00-4.50% by June 2016.

All very welcome news.

Meanwhile there were also changes to outlook for inflation, with underlying inflation creeping up towards the top of the target band by the end of this year, but perhaps remaining benign through 2015/16, with insufficient levels of employment to drive the CPI reading higher.

Source: RBA

The RBA appears all set to keep interest rates at generational lows of 2.50% for the foreseeable future.

A few commentators raised an eyebrow at the RBA's non-acknowledgement of housing affordability as an issue.

While the SOMP made numerous references to the housing sector, renovation activity and an uplift in construction, there didn't appear to be any reference to any attempts to cool the established market.

RBA Housing market report

For those who are really interested in the nitty gritty, the RBA went to the extra trouble this quarter of producing a special report on the state of the housing market here.

If you don't have the time or inclination to read it - and who can blame you? - suffice to say that the language used to remarkably relaxed and assured (phrases like "broadly consistent.." featured prominently). 

The basic theme is that housing markets are sensitive to interest rates, and the slightly delayed uplift in prices is broadly what might well have been expected in response to easier monetary policy.

No references to Self-Managed Super Funds, speculative activity or foreign capital are to be seen.

The RBA then wades through a raft of data to show that housing loan approvals are up, so are dwelling prices and building approvals, but debt levels appear to have essentially levelled out since 2006. 

It will certainly be interesting to see whether the debt line of this chart starts to push on to new highs as it moves into 2014.


There may or may not be some kidology at play here, I'm not sure. 

Perhaps the RBA doesn't want to make reference to tightening monetary conditions for fear of sending the Aussie dollar back into the 90 cent range?

In any case, it's wonderful to see steadily increasing growth forecast for the Aussie economy over the next few years, and the share markets have enjoyed that fact too. 

Meanwhile, most capital city housing markets continue to tick higher. 

Thursday, 6 February 2014

UK house prices keep rising in January

The latest Halifax house price index showed UK house prices increase by 1.1% in January.

Prices in the three months to January were 7.3% higher than in the same three months a year earlier, mortgage approvals are up by 30% on a year ago and demand is easily outstripping supply/buyer listings.

From Lloyds Banking Group:

"Activity is on an upward trend with housing transactions in 2013 exceeding one million for the first time since 2007. Home sales rose for the ninth successive month in December to 103,040; 30% higher than in December 2012.

The number of mortgage approvals for house purchases – a leading indicator of completed house sales – was 9% higher in the three months to December than in the previous quarter and 30% higher than in the same three months of 2012."

No prizes for guessing what problems are on the horizon (undersupply):

"Lack of supply coming on to the market adding upward pressure on prices. The number of homeowners providing instructions to put their property on the market for sale increased only marginally at the end of 2013. However, this increase is still some way short of the number of new buyer enquiries.

Commenting, Martin Ellis, housing economist, said:

"House prices in the three months to January were 1.9% higher than in the previous three months. The annual growth in prices fell slightly compared with last month with prices in the three months to January 7.3% higher than in the same period last year.

"With the supply of properties being slow to respond to more buoyant market conditions, stronger demand has resulted in continued upward pressure on house prices. 

Demand has increased against a background of low interest rates and higher consumer confidence underpinned by signs that the economy is recovering and unemployment falling faster than expected. Official schemes, such as Help to Buy, also appear to have boosted housing demand."