Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

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

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

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

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

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

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

Friday, 31 July 2015

Approvals now declining

Approvals pull back

As expected Building Approvals declined in June, driven by a sizeable 20.4 per cent drop in the number of units and apartments approved.

On balance this is a good thing, since nearly 103,000 units and apartments have been approved over the past year, which means that this cycle is comfortably at an all-time high on that measure.

Total building approvals rose towards a record 218,000 on a rolling annual basis, but it looks as though the peak will now soon pass.


This tallies with what the Housing Industry Association has forecast, which is a record 215,000 dwelling commencements in 2014/2015, a figure which projected to pull back steadily over the next few years back to around 170,000 by 2017/18.

This data also adds some weight to the notion that while smaller developers might through necessity take a short termist approach to pushing through profitable projects, it is not in the longer term interests of the big players to create a glut of dwellings.

A number of indicators now suggest that the residential construction boom is pulling as hard as it can but can go little further than these historically elevated levels.


The most striking aspect of this cycle has how been economic activity has been so heavily skewed towards the construction of units and apartments, quashing claims that only detached houses can drive higher levels of economic activity.

Much of the economic activity is generated by the land remediation and site preparation on brownfield sites.


The economies of Melbourne, Sydney and Brisbane have respectively received a timely boost from this record level of construction activity and the associated multiplier.

Units, units...

Greater Melbourne continues to build the greatest number of houses.

But let's focus today on where these record number of units are set to be built.

Well, in short, Melbourne again, with annual approvals surpassing 33,000 for the first time ever.

However, we may have seen something of a "pull forward" in Victoria ahead of a new Metropolitan Planning Levy which took effect from July 1, so approvals may well tail back in due course.

Going forward developments of over $1 million in value will be hit with a 0.13 per cent levy on the value of the development.

Total unit approvals in Sydney for the past year rolled back a little to 28,261.

A Sydney unit oversupply?

In some areas such as around Parramatta, for example - where there is very little constraint on new high rise apartment supply - yes. 

Similarly the old urban wastelands of the inner south are busily being overbuilt through this construction cycle (and, to be blunt, these often aren't very attractive areas in which to live either).

But as BIS Shrapnel pointed out this week, Sydney is steadily running out of prime sites for apartment complexes.

And prime location suburbs such as Pyrmont already have "nowhere left" to develop, which portends ongoing capital growth in such developed and land-locked suburbs over the longer term.


We know that DAs fell sharply in Brisbane in the first quarter of 2015, yet for now unit and apartment approvals continue to hum along at record high levels.

Cost inflation

As an interesting aside, it is becoming increasingly questionable whether the industry even has the capacity to build this many apartments in a cost-effective manner.

For example, a massive shortage of tradies in New South Wales - particularly of bricklayers - has sent the cost of dwelling construction soaring skyward over the past six months.

This is a point correctly anticipated in advance by those smart people of the Reserve Bank liaison.

Site preparation costs have skyrocketed by 45 per cent in six months, while electrical trade costs are up by 30 per cent over the same period.

Bricklayers previously being offered $1 per brick are now demanding $1.80 per brick.

In short, we have reached the building cost inflation phase of the construction cycle as tradies and materials are in woefully short supply.

High rise glut

Nothing much new to add here except that prospective property investors need to know exactly what they are purchasing, where they are purchasing, and why.

At the state level Victoria has approved nearly 21,000 high rise units in 12 months, which will result in a glut of this property type.


It's a broadly similar story of four plus storey approvals in Queensland.



Brisbane is likely to the standout market in 2016 for mine, but self-evidently there are a number of "no go" zones, which will become oversupplied with new high density apartment developments.

Hopefully readers aren't taking unsolicited advice from a free blog page, but make sure you carry out detailed research into forthcoming dwelling supply at the suburb and regional level before you even think about buying anything.

---

Went to see Rubber Soul Revolver yesterday at QPAC and was totally blown away by the music.

Try to catch the tour as it now moves around Australia.

Check out the tour details here.

Thursday, 30 July 2015

Day off

An exceptionally rare day off for me today, so no proper blog posts till it be the morrow, I'm afraid.

Plus let's face it, in truth I've been rather pre-occupied with watching late-night cricket (I won't mention the score, hey...come on England!).

Here's a short vid instead. Hopefully you can't see any piles of ironing in the background.

video

NB: hadn't had my morning coffee - I'll try to inject a bit more "humour" next time.

---

While on the subject of leisure time and videos, if you're looking for something to do tonight why not pop down to QPAC in Brisbane to see Rubber Soul Revolver.

A taster here.

Box office opens at 7pm, looking forward to it!

Cost of living...improves!

It seems that the cost of living hasn't affected its popularity, as the old quip goes.

And, in fact, in some apparently rare good news on the cost of living in Australia, it has actually been improving for some time!

The ABS released its Cost of Living Indexes for the June 2015 quarter, which showed that the cost of living for most households has improved substantially since 2011.

The cost of living for employee households rose by 0.4 per cent in the June quarter to be just 0.9 per cent higher over the year.

By comparison wages have grown by 2.3 per cent over the same period.

Other types of household have also seen only a moderate increase in the cost of living over the past year.


Naturally enough falling interest rates have played their role here.

It's often argued that the Consumer Prices Index doesn't reflect the "true" increase in the cost of living.

However, this appears to be false.

Considered research by the Reserve Bank suggested that this sense that "the numbers must be wrong" is likely driven by a range of psychological biases.

These include loss aversion (meaning that we become agitated by rising prices, but fail to notice goods which become equivalently cheaper), our failure to recognise improvements in life quality, and often an undue focus on good which we purchase more regularly (such as fuel).


"The continued concern about living cost pressures might arise because the standard of living that can be sustainably afforded by households’ incomes remains lower than many would like."

Wednesday, 29 July 2015

New high for UK house prices

UK house prices rise

The UK Land Registry released its June 2015 House Price Index report yesterday, widely considered to be the most reliable of the indices.

House prices in England and Wales rose to new record highs, having recovered in full from the post-2007 correction.

However, disaggregating the data into its component parts shows that price growth since the financial crisis has really been all about London - and to some extent the Home Counties - versus the rest.

London prices are up by 9.2 per cent over the past year, taking the seasonally adjusted House Price Index soaring to 524.06 (1995 = 100).

The average London house price on this index is now £481,820, driven by record low interest rates and a chronic housing shortage.


The average UK house price rose by 1.1 per cent in June to £181,619 - an annual increase of 5.4 per cent - which even now is only just ahead of the May 2007 record of £180,893.

Within London, house price growth has cooled in the prestige areas such as Kensington and Chelsea and the City of Westminster, this moderation in growth following some extraordinary gains.

The best performing boroughs over the past year include somewhat more affordable boroughs such as Croydon (+14.6 per cent). 

Weight of world on Atlas' shoulders

Atlas raises

One of the curious things to observe over the past year or two has been the spate of "is it time to buy [insert iron ore miner]?" type articles doing the rounds from share market tipsters.

I won't link to any of them - bad karma! - but clearly the answer has been a resounding "no", despite a small rebound in the spot price over the past three weeks.

It's not as though the risks haven't been apparent.

The Reserve Bank itself has documented in some detail on more than one occasion its estimates of iron ore and coal cost curves

You'd think that it'd have been far too risky a business to tip any of the iron ore producers, let alone those not located at the very bottom of the cost curve!

After all commodity companies produce, well, commodities, and can only really compete on price.

Atlas Iron (IGO) closed at 3.3 cents yesterday, having been suspended from trading pending a capital raising.


AGO announced on Friday that it had raised $87 million at $0.05 per share with a free attaching option.

Tuesday, 28 July 2015

Lower north soar

Sydney's lower north shore property market obliterating all comers at the auction clearances.

The inner west continues to surprise.

Reports Domain:

Who wants to be a...?

Interesting piece from Kochie and Samantha on Sunrise this morning, discussing the new Tatts Lotto draw game.

Winners will secure a $20,000 per month prize, payable for 20 years.

As Kochie noted, at 3 per cent inflation, $20,000 per month would be worth closer to $11,000 per month in today's dollars by year 20.


Kochie calculated the odds of winning as being one in 19 million.

Evidently Tatts Lotto understands the role of compound interest well.

Prospective winners should be hoping for low inflation over the next two decades!

Investors to swamp Brisbane in 2016?

Fundamentals

I have been observing with interest for the past seven months the steady ramp-up in interstate and foreign investment in Brisbane's inner suburban property markets. 

Much of these observations are simply based upon what I see and hear at property inspections, at auctions, and from talking to buyers agents and selling agents.

See here for example. 

This is a contentious issue, and we do need to take careful account of macroprudential measures designed to slow investor lending. 

Economists would say with some justification that in many respects the fundamentals of the Brisbane economy and property markets aren't all that amazing.

But then again, economists are frequently wrong about the direction of property markets, largely because they spend too much time looking at charts and not enough time in the market.

In truth, over the short-to-medium term markets are far less predictable than we think.

Take a look no further than Sydney, where market economists have been predicting a slowdown for the past two years, whereas in fact the market has in fact accelerated over the past 12 months.

As I noted back in June, far from a slowdown, in some inner city markets prices have been rising at a pace closer to 25 per cent per annum.

And in fact, I believe that some property prices indices have not yet "caught up" to fully reflect this.

Employment markets sketchy

After a tremendous surge in employment through the mining investment boom, the city of Brisbane has added a "so-so" 30,400 jobs on  a net basis over the past two years. 

Not too bad, but in truth employment growth and labour markets have been somewhat sketchy, with the resources sector looking particularly weak.

The monthly data at the capital city level is somewhat volatile and is not seasonally adjusted, but I've added a trend line below.


One heartening piece of news has been that while the first quarter of 2014 saw some wretchedly high unemployment readings, the latest month of data showed the unemployment rate in Brisbane to have declined to just 5.2 per cent.

This is partly a result of population growth in Queensland having slowed from 2 per cent per annum to 1.4 per cent per annum as net interstate migration has waned.

In reality the monthly data is once again neither seasonally adjusted nor reliable, and thus I've inserted another trend line below (12mMA).

The good news is that the unemployment rate has been trending down since October 2014 on this measure.


Users should note that it would pay to be wary about this headline information. 

A number of outer suburban regions of Brisbane have been recording double digit rates of unemployment in the quarterly labour market releases, and therefore it is vitally important to drill down to the local suburban level to gain a better understanding of market trends.

Interstate investors - the trend is your friend

But the real reason the Brisbane market is set to do well - APRA's tightening measures notwithstanding - is that the city has become seen as the city with best immediate prospects for capital growth.

MRD's Partners Property Investor Survey for June 2015 revealed that over the next 12 months Queensland will be the most popular destination of choice for investors - and not only for those living locally in the Sunshine State itself, but also for those based in New South Wales, the Australian Capital Territory and the Northern Territory.

Elsewhere, Sydney and Melbourne are now beginning to suffer from erosion of gross yields after seeing strong capital growth in recent years.

Meanwhile, Perth and Darwin are markets in decline as resources investment declines.

Adelaide should be set to benefit from interstate investor activity too, but the city of churches also has a "spire-a-lling" rates of unemployment - or at least, the highest capital city unemployment rate in the country - as well as facing the challenge of its manufacturing industries being in decline.

With its property markets having failed to perform well since 2008, almost by default Brisbane is increasingly becoming the focus of interstate investors.

Investment activity increasing

Sure, all very spruiky and a few "soft" indicators, but what about hard proof?

Well, according to CoreLogic-RP Data, this week's preliminary auction clearance rate in Brisbane was the highest recorded since 2009.


Note that total investor loans written in May 2015 in Australia were still tracking at more than $13 billion, which is a phenomenally high figure in historical terms.

We might expect that this colossal figure will soften in time as APRA's dampening measures take effect.

Below I have charted the long run Queensland investor loans data.

Historically, Queensland has never attracted more than $2.1 billion of investor loans in an individual month, but if ever the state has had a chance to do so, now is that time.

Again, the monthly data at the state tier is not seasonally adjusted but the 12mMA dollar value of investor loans written is now at its highest level since June 2008 and rising by the month.

The March "Original" data result of $1.78 billion was the highest individual monthly result recorded for Queensland investor loans since November 2007, while the seasonally weaker month of May also came in at a similarly strong $1.73 billion.


Note that the investor loans data pertains to Queensland, not only Brisbane.

However, the capital city of Brisbane appears likely to fare significantly better than many of the regional areas which are suffering the full force of the resources investment bust.

Vacancy rates are concerningly  high in some of the more populous regional cities of Queensland.


Meanwhile banks requiring substantial deposits on property purchases could make life difficult for a range of other cities and regional locations, including Gladstone, Roma, Miles, Chinchilla, Blackwater, Rolleston, Cracow and Dysart.

Asset selection

It is an obvious truism so say that investors need to pay close attention to the type of asset that they buy if they want to outperform the wider market.

However, this is uncommonly true in Brisbane, where in certain sub-regions developers are busily constructing a stonking oversupply of high-density dwelling stock in particular.


The trend line once again tells its own story. 

Caveat emptor.

Monday, 27 July 2015

Capital growth or cash flow?

Yield trap

One of the more interesting concepts of investment which I looked at in a little more detail here is the "yield trap".

Investors often like to focus on seemingly attractive high yield investments chasing instant returns, but herein lies a trap.

Take the example of Metcash (ASX: MTS).

Until recently, Metcash was delivering a double digit dividend.

When you see high yielding investments it pays to ask: "why?".

In the case of Metcash the superfically attractive high yield was due to the share price having collapsed from above $5.00 before the financial crisis to close to $1.00.


Share market experts or tipsters have been recommending Metcash for years as the share price has continued to tank.

And the dividend yield kind of looked attractive until it didn't...when the dividend was cancelled.

It is worth considering that high yields on investments are often due to:

(a) real or perceived risk; or

(b) poor capital growth (historic or prospective); or

(c) all of the above.

Hometrack data

The latest Hometrack UK property data was released over the weekend for the month of June 2015.

If you've followed my blog for a while you'll know that I invest for the very long haul in high capital growth cities such as London and Cambridge.

In Australia, I've held a portfolio of properties for the long term in Sydney too, based on very similar principles.

If you aren't familiar with Britain and its geography, London is the capital city of England, with a population of around 8.3 million.

Cambridge is actually a small city in its own right, though commutable to London Kings Cross by train in around 45 minutes - and thus as an extension of London has its own reasons for being a high capital growth city.

The Hometrack data showed that over the past year Cambridge (+11.6 per cent) and London (+9.8 per cent) have yet again been the standout performers.

Another University city with proximity to London, Oxford, has also had a very strong period of capital growth.


Sure, it's true that some other regional cities did reasonably OK this year, and new buyers do get tempted to the regions for the stronger yields.

They can do well too, if they invest counter-cyclically: "buy in gloom and sell in boom". as the old mantra goes.

But in most cases regional property prices have only been rebounding over the past half decade from an awful correction through the financial crisis and recession.

In fact, Hometrack illustrated this beautifully in one diagram below which shows that since 2007 London and the extensions of London have outperformed incredibly, but regional cities have performed dismally.


These seemingly small difference in capital growth rates add up to become an an enormous - an absolutely colossal - difference in price performance over time. 

Compare below for example the long term "trough to peak" figures for Cambridge (+433 per cent) and London (+441 per cent) to any of the other large or small regional cities.

That is, double the growth recorded in the next largest cities in Great Britain & Northern Ireland: Birmingham, Leeds, Manchester, Sheffield, Liverpool, Newcastle, Edinburgh, Glasgow, Belfast, Cardiff etc. etc.



Growth first, cash flow follows

The real kicker is that while rental yields ebb and flow through the cycles, in order to keep pace with rising demand actual dollar rents rise faster in the high capital growth cities too.

So over the long term, it's really been a no-brainer which have been the best performing property types - high capital growth areas in the capital city of London have blown the regional results out of the water.

The same holds true in Australia over the longer term, as we will discover in particular when Australia finally experiences its next recession after a record 23 years of uninterrupted economic growth.

As a general rule, proximity to large capital cities will serve regional cities well. More remote areas can be more prone to downturns.

Cranewatch

A quick scan around the Darling Harbour skyline from the weekend.

Lend Lease (LLC) is making some progress on the ICC Sydney Hotel, a luxury 5 star affair due to open in December 2016.

This forms part of the massive Darling Harbour Live project, which will also incorporate a new convention centre and a residential and commercial urban village at the Darling Square end of the harbour.


The daytime view:


View from the Pyrmont Bridge (it's also the Sydney International Boat Show this week):


Across to the left of shot below, at the city side of the harbour, the new suburb of Barangaroo is now also emerging apace.

Another Lend Lease development, this will be based around a range of 6 star office suites as part of 320,000 square metres of harbourfront office space.

The development will also incorporate retail space, a hotel and some luxury residential apartments.


Towers 2 and 3 have been awarded 6 star status, now up to Level 39 and counting. Note that the suburb is primarily commercial in nature, rather than residential.


View from the harbour side:


Rapidly escalating land values in Pyrmont and its surrounds was something I anticipated years ago, much discussed on this blog and in my first book.

Plenty disagreed with me, based on some theory or other related to population growth per square me...no, hang on, it was the density of population to land val...something or other, anyway.

Meanwhile, new apartments at Barangaroo are being priced at $1 million per bedroom, while escalating commercial resales have pointed towards values rising at a pace of close to 25 per cent per annum.

Property prices in Pyrmont have been some of the fastest growing in Sydney since the 2000 Sydney Olympics, particularly those which have a point of difference.

And this is only set to continue as Lend Lease completes its amazing transformation of the harbour area over the next couple of years. 

Sunday, 26 July 2015

Hammer time for auctions

Strong auction results again this weekend, according to CoreLogic-RP Data.



For Sydney the preliminary clearance rate across the city this week increased, rising to 82.7 per cent from 79.7 per cent last week and 75.4 per cent at the same time last year. 

Sydney's reported clearance rate remains stronger than that of any other capital city.

There remain sub-regions across Sydney where the clearance rate remains above the 90 per cent mark.

These include Ryde, the Eastern Suburbs, the Inner West, and the City and Inner South.

Meanwhile, the Brisbane market continues to recover.

This week the Brisbane preliminary auction clearance rate was 66.0 per cent, compared to 60.2 per cent the previous week and just 44.7 per cent last year.

It's has been a long, slow recovery since 2010/11.


Saturday, 25 July 2015

Where millionaires want to move to

According to Time Magazine, second citizenships are very popular among the wealthy of the world.

But where do they choose to move to?

Net inflow of millionaires 2000 to 2014

UK - 125,000

US - 52,000

Singapore - 46,000

Australia - 35,000

Hong Kong - 29.000

UAE - 18,000

Source; Time Magazine

Some of these locations will remain popular due to their favourable tax legislation.

Others will become more sought after due to them being desirable places to live.

I expect to see Australia moving up this list, particularly becoming a country of choice for with the wealthy of Asia. 

We even have a visa system which encourages this. 

Where would you move to, if you could live anywhere?

Weekend Reads

Summarised in one place for you here over at Property Update (or click image).

Friday, 24 July 2015

One Direction?

"1D"

If you were hoping for a blog post on boy band bubblegum pop, sadly I'm afraid you may be somewhat disappointed.

Alas, I was actually making reference to the fact that interest rates do not always only move in...well...you know.


From tonight's 6.30pm SBS News (see if you can spot the "1D" reference...)

“Australia's property price boom is being driven by record low interest rates and investors are taking advantage of cheap money in droves.
The Australian Bureau of Statistics says around $13 billion was lent to borrowers for investment property purchases in May.
The Reserve Bank is worried that sort of lending may be overstimulating the housing market and has worked with the banking regulator to limit what the banks can lend to investors.
As a result the country's largest financial institutions have been asked to keep total investor lending to 10 per cent.
One way they're doing that is by lifting variable interest rates on investment property loans.
ANZ was first on Thursday followed by the Commonwealth Bank on Friday.
The increase is basically the equivalent of a typical official interest rate move upwards by the Reserve Bank.
Macquarie Research said the move by ANZ will see earnings rise by as much as 1.6 per cent, but Westpac would stand to gain more, if it too followed suit.
For the banks and their shareholders, Macquarie Private Wealth Analyst James Rosenberg said it is good news.
"There'll be a small increase in earnings estimates for the big four banks, he said.
"Investment loans are only a small part of the overall loan book for these banks. I think we'll see small upgrades in the market and a slightly positive share price reaction but I would expect it to be significant."
For borrowers however, property buyer and agent Peter Wargent says, it's a nasty shock.
"I think it will come as a surprise to existing investors in the market, partly because we need to remember there is a new generation of investors since 2010 which have only ever seen interest rates go one direction, this comes in conjunction with rental growth slowing to its slowest pace in nearly two decades so it's a double hit to some existing investors in the market."
Lifting investment property loan rates is just one way the banks can limit borrowing. 
Another is by making borrowers pay a larger deposit for their investment loan, which is also happening.
Peter Wargent says these strategies should help to meet APRA's requirements.
"That is the intention from the regulator. The market has become unbalanced between investor mortgages tracking at nearly half of all approvals, what APRA wants to see is the market becoming more balanced between owner occupier lending and investor lending," he said.
As for property investors James Rosenburg says it is a warning that rates can rise even when the Reserve Bank Board sits on its hands.
"I think investors taking up these types of loans need to be careful, they need to remember that interest rates are at record lows anyway and need to build in plenty of buffer into their calculations for any sort of loan," he said.
Interest rates on owner- occupier loans haven't been negatively impacted although some fixed rates have fallen slightly.”
With these hikes set to add a few per cent to bank earnings we can expect the retail banks to follow suit in due course.
That said, there may well be offsetting cuts to owner-occupier mortgage rates in order to make these loan product types comparatively more attractive,

Watch the video here (at 21 minutes 50 seconds)...

Thursday, 23 July 2015

Employment growth outpaces population growth

Statistics fatigue

I've been suffering from quite heavily from a case of DSF recently - Demographic Statistics Fatigue.

After putting the data series on hold for months, the statistics bureau has been releasing monthly data in rapid-fire succession in recent weeks. 

A bit like London buses, you wait seemingly ages for one to come along, and then...

Anyway, we're nearly up to speed now with the May 2015 Overseas Arrivals and Departures figures having been released.

Rather than re-cap on old ground too much, I'll just make four short observations here, starting with...

1 - Migration slowing

Firstly, net overseas migration on a rolling annual basis has continued to slow through 2015. 

With the economy moving through something of a sticky patch, population growth in Australia slowed from a massive 396,200 in calendar year 2013 to a somewhat more sedate 330,200 in 2014.

The latest figures suggest that net overseas migration into Australia will be slower again in 2015.


While property observers in particular seem to love to see rampant headcount growth at any cost, the reduced population growth rate of 1.4 per cent that we have seen through 2014 has had one major benefit in particular.

And that benefit is that over past year the economy has been stacking on new jobs faster - much faster - than the rate of population growth - with an employment growth rate of 1.9 per cent, or just shy of 225,000 new jobs.

Indeed, since October alone the economy has added more than 205,000 new jobs, which in turn has seen the rate of total employment growth over recent months romping along at nearly twice the rate of the growth in population.

Perhaps unsurprisingly, therefore, the unemployment rate has fallen from 6.3 per cent at the beginning of the year to 6.0 per cent.

The latest Reserve Bank Board Meeting Minutes suggested that we may even see the unemployment rate falling further from this point, thereby contradicting earlier forecasts which had expected unemployment to run up to a peak of 6.5 per cent in this cycle.

And long may this particular dynamic continue.

You can read more about employment growth and where it is (and isn't) taking place in Australia here

2 - Rebalancing underway

The Australian dollar has now declined from a mining-boom-inspired peak of around 110 US cents to below 74 cents.

It seems likely that the Aussie dollar will need to fall further too, in order to help the rebalancing of the economy.

This depreciation of the currency will have a major impact on demographic trends.

In short, fewer and fewer Aussies will be inclined to travel and holiday overseas, while more and more folk from foreign fields will see Australia as an attractive destination for a visit.

Indeed, this enormous benefit to the tourism services industry is already well underway.

While it may sound like jargon, the ratio of short term departures to short term arrivals has declined to its lowest level in years. 

In plain English, more tourists are now coming to Oz, and fewer Aussies are taking overseas trips.


Looked at another way, the number of short term arrivals into Australia has blazed well past 7 million for the first time on record.

And while the tide has only turned slowly to date, fewer Aussies are now electing to take overseas trips. 

The two lines representing these trends on the chart will meet again, possibly sooner than we think, and in time Australia will once again see a net inflow of short term demographic movements.


3 - Chinese...and Kiwi visitors!

The most notable of all demographic trends has been the incredible explosion in Chinese visitors to Australia, an obvious precursor to what lies ahead in terms of permanent migration.

Over the last year there have been 1.25 million visitors from China, Hong Kong and Taiwan, and the latest data suggests that these extraordinary figures are set to accelerate plenty higher still in due course.


Chinese migrants are settling in Australia too, with 18,550 settlers in the year to May - essentially as high a figure as we have seen to date - while there were also a record 19,930 settlers hailing from India over the same 12 month period.

Watch this space, as these numbers are growing apace.

Indeed, the number of settlers hailing from Asia is now overwhelming compared to the numbers from all other continents - outnumbering European migrants by a ratio of five to one, for example.

Much has been made of the rapidly diminishing numbers of settlers from Oceania (essentially New Zealand), with permanent migrants effectively having halved since 2012. 

There are also ever fewer Britons emigrating to Australia at present as the UK economy has become an "incredible job-creating machine" over the past few years.

For all that, it's worth noting that there were well over 1.25 million short-term arrivals from New Zealand over the past year - a record high - so it's hardly all one way traffic, bro.



At the same time there were also a record 567,100 American visitors enjoying the turnaround in exchange rate in Australia over the past year...the delayed Oprah effect.

4 - Record foreign students

Recent data from Reserve Bank of Australia (RBA) liaison projects a huge ramp up in the number of foreign students in Australia over the years ahead, one of Australia's fast-growing "export" industries.

In fact, this is already happening, with Chinese students playing a major role here too. 

The first quarter of 2015 witnessed record enrolments of foreign students in Australia.


The RBA data also confirmed that most foreign students are overwhelmingly bound for Sydney and Melbourne.

The wrap

The main themes here are that we can expect population growth in 2015 again to be slower than it has been in recent years.

This slowdon has clearly had a positive effect on the unemployment rate to date, and it is hoped that if the economy continues to add jobs at the pace it has been since October the unemployment rate may fall into a range with a "5 handle".

The other obvious theme here which stands out is the sheer dominance of migration from Asia, a story which is only set to grow in Australia over the decades ahead.

The role of Chinese investment in Australia in particular is set to be very material over the next five years.

Phoenix from the ashes (China stocks rise again)

Seemingly against all the odds, interventionary measures seem to have arrested the great decline and Chinese stock markets are firing up once again.


More detailed analysis here from Business Insider.

Sydney house prices pass $1 million

Sydney boom accelerates

Low interest rates have helped to spark one of the biggest housing booms Sydney has seen.

Sydney's median house price was up 22.9 per cent or approximately $200,000 in the year to June 2015, following a massive 8.4 per cent rise in the second quarter of the year.

Domain Group's data:



SMH reports a few viewpoints:

Wilso:

"The double-whammy of the lowest interest rates since the 1960s and an investor frenzy has seen Sydney's median house price smash through the magic $1 million mark for the first time.

Domain's senior economist, Dr Andrew Wilson, says house prices leapt an extraordinary 8.4 per cent over the June quarter to $1,000,616.
"It's the highest rate of growth since the late 1980s," Dr Wilson said.
"And it's because of low interest rates and they're going lower, lower and lower."
The median house price has increased by almost $200,000 in a year or 22.9 per cent, which is one of the highest annual growth rates ever recorded by the city. 

Dr Wilson said it exceeded the boom time results of 2001 and 2002.
He attributed the huge growth to the high level of investor activity, with the $6.4 billion in loans approved over May – a record. 

"Sixty-two per cent of the housing market loan share is now investors – another record – and an increase of 27 per cent over the first five months of this year compared with the first five months of last year."
Will Hampson...
"Auctioneer Will Hampson has presided at auctions going $200,000, $300,000 and even $500,000 over reserve this year with suburb records often being smashed.
But even he described the $1 million median house price and the rate of growth as "incredible".
"Each year for the past three years the auction market has been so strong," Mr Hampson said.
He says auction listings are up 50 per cent up on last year for August and he's also tipping a strong spring.
"Conditions are perfect because interest rates are at record lows and there's a shortage of supply in many pockets," Mr Hampson said.
"A lot of buyers want to buy in a particular suburb – so perhaps Balmain, Mosman or Double Bay ... if they want to buy in those suburbs they are going to have to pay the price."
The rate of growth is sure to spark fresh suggestions that the market is overheating but Mr Hampson hosed down such talk. "The market is not going to collapse ... even if it does adjust slightly, there's a massive amount of both local and foreign investment."
...& McGrath:
"McGrath chief executive John McGrath said Sydney had proven itself to be one of the most resilient property markets in the world, with long-term fundamentals underpinning the market.
"The boom will end at some point, but that doesn't mean price growth will end, but rather continue in a more moderate fashion," Mr McGrath said."

Wednesday, 22 July 2015

Slowest rental growth since 1995

Rental growth remains slow

Delving a little further into the inflation data, we can see that on a national level rents increased by just 0.4 per cent for the quarter and 1.9 per cent over the year to June 2015, which is the slowest rate of rental growth since September 1995.

There are a number of different drivers of this trend as often documented here previously.

These include new dwelling supply coming online, the mining capital expenditure boom going into reverse gear, and in some areas simply more investors buying property than tenants requiring housing.

This is particularly so given the number of first-time investors NAB's Q2 survey found that 27.5 per cent of new properties were bought by first-time buyers rising from 24.8 per cent in Q1 (so much for an entire generation being "priced out") but close to half of them in the capacity of investor.

It's a trend which will reverse in time, but for now some markets are top-heavy with investors, so while prices may be rising, rents are soft.


Mind you, headline inflation is only tracking at 1.5 per cent - and since commentators so love to adjust for inflation, it's worth noting that rents have been rising in real terms, particularly in Sydney.

Mining downturn

The resources-influenced cities are the major drivers of the decline.

While rental inflation was positive in the year to June in Sydney (+2.6 per cent), Melbourne (+2.5 per cent), Brisbane (+1.4 per cent) and Adelaide (+1.6 per cent), rents in Perth were down by 0.4 per cent. 


In the smaller capitals rental growth remains soft in Hobart (+1.1 per cent) and have declined fairly sharply in Canberra (-2.7 per cent).

While rents over the past year in Darwin are still up (+0.9 per cent) it is only a matter of time before this figure too turns sharply negative, after some hella wild boom times over the past decade!


Rental index numbers

Looking at the long run index figures shows how rents by capital city have tended to track each other fairly closely over time. 

Perth rents are now due to correct in real terms after a very strong decade through the mining boom. 

Elsewhere, in the major capital cities rents are still rising, although more moderately than has previously been the case.


In such a climate, investors in rental property would be wise to select assets with great care - with a focus on land-locked capital city locations where demand is strong and growing, but supply is restricted - and particularly to take a longer term outlook on their investments.

Those buying new or off-the-plan properties in today's low inflation environment should not be expectant of capital gains in nominal terms, perhaps for some years.

The 5 and 10 year growth in rents by capital city chart shows that the cumulative effect of seemingly insignificant annual rental increases have added up to be substantial over time.

Inflationary pressures remain soft

CPI undershoot

The ABS released its Consumer Price Index (CPI) figures for the June 2015 quarter.

The headline result was softer than expected by the market at 0.7 per cent for the quarter, to be up by just 1.5 per cent over the year.

As had been anticipated by the market, a major driver of inflation in this quarter was the rebound in auto fuel costs following on from a record decline in the year to March.

The headline inflation result of 1.5 per cent remains well below the 2 to 3 per cent target band, which in turn will likely result in speculation over further interest rate cuts.


The more important underlying figures which effectively strip out the effect of outlying readings showed the trimmed mean reading to be up by 0.56 per cent for the quarter and just 2.19 per cent for the year in seasonally adjusted terms.

The weighted median result for the quarter was just 0.5 per cent, although up by 2.4 per cent for the year.


The wrap

Despite the dollar having declined substantially over recent times, inflationary pressures are not much in evidence, although the forward-looking Reserve Bank will be more interested in the period ahead than what has gone before.


Wage price pressures have been very muted of late, consistent with a fair level of spare capacity in the labour market.

Futures markets have been pricing a further interest rate cut in this cycle over the next 12 months as more likely than not.

In a speech in Sydney today the Reserve Bank Governor Glenn Stevens suggested that further easing of interest rates is still on the table, although he also hinted that such an approach would also bring its own risks to financial stability.

Stevens was quick to highlight that the latest data shows that households have some $90 billion socked into mortgage offsets, suggesting that after accounting for such deposits credit "growth" is somewhat lower than published. 

But that in itself might imply that household spending is likely to be lower than expected, which may hamper the rebalancing of the economy.

All in all it rather sounds like a central bank which is in "wait and see" mode for the time being with regards to interest rate policy.

Tuesday, 21 July 2015

Unemployment to fall below 6 per cent?

Reserve Bank Minutes

An interesting set of Board Minutes from the Reserve Bank for the month of July 2015.

Previously Reserve Bank forecasts had expected the unemployment rate to inch up to 6.5 per cent through this cycle.

However, since January 2015 the unemployment rate has declined from 6.3 per cent to 6.0 per cent.


And with employment growth (+1.9 per cent) now comfortably outpacing population growth (+1.4 per cent) over the past year, the Reserve Bank notes that the unemployment rate could even be set to fall further still:

"Labour force data indicated further signs of improvement in May. Employment growth had picked up over the year to exceed the rate of population growth. 

As a result, the unemployment rate had been relatively stable since the latter part of 2014 and had fallen slightly in May to 6 per cent. 

Members observed that employment growth had been strongest in household services and that employment and vacancies had been growing for business services but had remained little changed in the goods sector. 

As with other state-based indicators, employment growth and job vacancies had been strongest in New South Wales and Victoria. 

Forward-looking labour market indicators had been somewhat mixed over recent months. 

The ABS measure of firms' job vacancies overall suggested that demand for labour could be sufficient to maintain a stable or even falling unemployment rate in the near term, while other forward-looking indicators suggested only modest growth in employment in coming months."

Despite strong headline employment growth figures, there remains a fair degree of spare capacity in the labour market and inflation expectations remain contained.

Inflation report due tomorrow

On this very note the all-important CPI (inflation) figures for the second quarter of calendar year 2015 will be released tomorrow.

With a sizeable rebound in the price of fuel at the bowser in the June quarter - together with an expected increase in fruit and vegetable prices and medical services - the headline inflation result is forecast to be stronger in Q2, but core inflation is still expected to remain well within the target range.

Market forecasts for the headline quarterly result vary wildly from 0.3 per cent all the way up to 1.0 per cent.

Casting our minds back to the March quarter a huge deflationary contribution came from fuel costs which declined by a massive 12.2 per cent in the quarter and a record 22.5 per cent over the year to March 2015.


We might expect much of that deflationary impact to be reversed tomorrow.

On the preferred core measures, the weighted median (0.64 per cent) and trimmed mean (0.62 percent) prints led to an underlying inflation reading of 0.63 per cent for the March 2015 quarter. 

After amendments to previous quarters the preferred core measures showed underlying inflation tracking at 2.3 per cent and 2.4 per cent respectively, comfortably within the target 2 to 3 per cent range.


The market expects to the core measures to come in at an average of 0.5 per cent for the June quarter and 2.2 per cent for the year, thereby still tracking at the lower end of the target range. 

A result of this nature tomorrow would evidently leave no barrier to a further interest rate cut if one is deemed to be required later in the year.