Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), & 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's 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 & charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, author of the New York Times bestsellers 'End Game' & '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 Hmmm, one of the world's most popular & widely-read financial publications.

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

Thursday, 30 June 2016

End of financial year - tips & traps

EOFY

It's the end of financial year!

It was a really strong finish to the year for share markets today, closing up by 1.8 per cent. However, the Aussie stock markets finished the financial year down by an underwhelming 4.1 per cent.

With the tax year now having come to an end, it will soon be time to lodge those tax returns. 

I had a yarn about it on last tonight's SBS News here (or click image)...


Holiday homes under scrutiny this year

Last year, the Australian Taxation Office (ATO) designed and implemented new compliance strategies for foreign investors in Australian property, including stakeholder engagement (with advisers, agents, and associations), improved data matching, and a broad investigation strategy into illegal foreign purchases.

This year - as well as those claiming excessive work-related expenses such as travel expenses, self-education, uniform, mobile phone, and internet costs – it is resident Australians with rental properties that are more likely to be under scrutiny from the ATO at tax time - in particular those will holiday homes.

During the past year ATO Commissioners have advised Farifax Media and SBS News that they have been in contact with thousands of owners of rental properties in order to clarify their entitlements or request clarification about claims that they've made.

The ATO has further reportedly sent correspondence to some holiday home owners recommending that they "review the nature of their claims" before dropping in their next returns...oops!

With well over 2 million Australians lodging tax returns declaring ownership of a rental property - spread widely across all income brackets – the landlord sector is substantial, and there are potentially significant liabilities to be raised by the ATO.

 

Owners of holiday homes should take a good deal of care not to make claims for net rental losses for periods when their property has not actually been made available for rent.

In particular owners of holiday homes claiming deductions for a full year when the property has been vacant for long periods might expect to get a tap on the shoulder from the tax office.

According to ATO legislation the principles that apply to a rental property also apply to a holiday home if it is rented out - if you rent out your holiday home, you can claim expenses for the property based on the proportion of the income year it was rented out or was genuinely available for rent.

However, if a holiday home is advertised in ways that limit its exposure to potential tenants, then the property may not be deemed “genuinely available” for rent – for example, if the property is not widely advertised, or if the advertised rents are set at unrealistically high levels.

Since the ATO’s interest was flagged some months ago, net rental losses declared or claimed on holiday homes could be lower this year as this loophole is sewn up...

Airbnb and online networks

There may also be some confusion relating to the rise of online networks such as Airbnb, with more Australians than ever before choosing to rent out their own homes, or a part of their homes. 

Remember, rental income is assessable and therefore you may have tax to pay at year end - don't try to be sneaky and under-report rental income it or you may be penalised! 

For Airbnb hosts there are two types of allowable deductions. Firstly, there are costs directly associated with generating rental income or with the rental area (for eaxample, photography, commercial cleaning costs, food for tenants, Airbnb fees and commissions, or food made available to tenants). 

And secondly there are costs which may be apportioned, often based upon the applicable floor area, including your mortgage or rent, utilities, internet and phone costs, insurance, and so on.

Keep records and receipts through the financial year and make sure you set aside some money for the tax liability!

Also, be aware of the potential legal and liability risks or short term tenancies and other tax implications thereof, such as capital gains tax (the principal place of residence is normally exempt, but generating rental income from the home may trigger a change in this status).  

Repairs and maintenance

There is also often genuine confusion for some property investors over what deductions can be claimed.

Perhaps the most common mistake made by landlords on lodged tax returns is claiming deductions for repairs and maintenance for expenses which are actually capital costs.

Property investors are not allowed to claim repairs and maintenance deductions for defects or pre-existing damage that was in evidence at the time they acquired the property. Such improvements are considered to be capital in nature.

Where investors are unsure they would be well advised to check the rules relating to deductions made available by the ATO for free online, or to engage a tax agent or property specialist tax accountant that is familiar with the rules.

Net rental losses declining

Declared net rental losses have declined sharply in recent times, falling by more than half over the last two tax years for which data is available, largely due to lower interest rates.


The average net loss claimed by investors has fallen by 64 per cent since 2008 as mortgage repayments have become cheaper. These figures will continue to decline in 2015 and 2016 with interest rates having fallen.


While the ATO will doubtless generally be looking for expenses claimed in error as part of their investigative reviews or audits, it is worth noting that many investors also fail to claim deductions which they are entitled to.

In particular, not all owners of rental properties are aware of the potentially generous capital allowances and tax depreciation deductions for plant and equipment which are available under the tax legislation.

If you are in doubt, a property specialist tax accountant can help you to avoid making costly mistakes!

Sydney light rail and infrastructure boom underway

Engineering work meanders lower

The Engineering Construction Activity figures for Q1 2016 released by the ABS showed a further 3.3 per cent seasonally adjusted decline in work done for the private sector, for a significant decline of 17.9 per cent over the past year. 

A point which has recently come to pass is that some public sector expenditure is starting to wash into the economy, and this was reflected in a solid 11.4 per cent year on year rise in engineering construction work done for the public sector.

Totting that up, engineering construction activity declined in the first quarter, but only by 1.4 per cent to a total of $23.7 billion. 

Activity has now reverted 31.5 per cent lower since the peak in the third quarter of 2012. 


Although it was suggested at that time that Australia was "leaping off of a resources cliff" which could lead us into a recession, the good news is that this hasn't happened at the national level, nearly four full years since peak construction. 

In fact the economy grew by 3.1 per cent in the year to March 2016.

This is not to downplay the impacts of the downturn on resources regions, which have been brutal in some cases. 

The Wall Street Journal took a look yesterday at the mining community of Emerald by way of an example. 

Certainly the property market there has been yet another mining "hotspot" disaster with rents imploding. 


Source: SQM Research

State dynamics

The slither of good news for regional Queensland is that with construction activity having declined by more than 60 per cent from its peak, at least some of the associated pain is now in the rear-view mirror and the healing can begin. 

Construction activity is still humming along in Western Australia - for the time being at least - with $41.8 billion of work done in the past 12 months.

This number will inevitably decline in due course. 

You may note from the chart below, that activity in New South Wales and Victoria has actually been on the increase for the past six quarters, as Sydney and to a somewhat lesser extent Melbourne begin to enjoy the spoils of a housing and infrastructure boom. 


Indeed, the rolling annual value of engineering work commenced has been consistently increasing for the past year, driven by Sydney's infrastructure boom.


Sydney's CBD & South East Light Rail extension is one part of this phenomenon, as well as other railways work, roads, highways, subdivisions, telecommunications, bridges, electricity transmission, water supply, sewerage, and recreation facilities. 

Good times for the Sydney economy.


The wrap

In trend terms private sector engineering construction was 9 per cent lower in the first quarter of 2016 and some 23.1 per cent lower over the year, which continues to torpedo many regional economies.

The good news for the capital cities is that activity is increasing and the "resources cliff" hasn't been enough to turn growth in the economy negative after four years of declines.

Long live the infrastructure boom. 

Wednesday, 29 June 2016

Brexit through the gift shop!

And now we're living with "Bregret" (thanks to headline writer Dr. Chris Caton).

Ah, so many puns, so little time.

But what does it all actually mean for global financial markets and for Australia?

I have a discussion with Michael Yardney and Kevin Turner about it here (or click image).


Buyers spending millions on Brisbane's worst houses

I had a yarn with Domain about it here (or click image).


Market myth #8: GDP and property prices...relevant?

Dwelling stock to GDP

Some years ago there were doomsday predictions of a property correction in Australia since dwelling prices had reached three times the value of our Gross Domestic Product (the exact relevance of the three times figure was never adequately explained).

Today, the ratio is just over 3.6 times, having ticked down slightly over the past six months of publicly available official figures.

Is there a link between the two measures? Kind of, but it's not very strong.

In fact, as a predictor of property prices the ratio has been useless in recent years. Actually, no, it's been worse than useless - it has been a contra-indicator!

One problem with GDP is that it's historic in nature, so at best it tells you what was happening in the economy months ago - thus as an indicator of future outcomes it's not necessarily all that useful.

More pertinently this ratio doesn't make a lot of logical sense since it compares a stock value at a fixed point in time with a flow, being the value of goods and services produced over a specified period of time (in the example in the chart below, one year).   


Furthermore, some types of property in thinner markets fare much better in times of boom, and worse in times of bust. And some types of property in some inner suburban locations tend to outperform the averages over time, while properties in lower demand generally fail to keep pace with the averages.

Key national accounts aggregates

In today's electronically connected world, hordes have wanted to be the person to 'call' the next Australian recession. But the economy has proved to be surprisingly robust, with the annualised rate of GDP growth for the past six months accelerating to 3.6 per cent. 

The riposte has been that GDP is the "wrong" measure - we should ignore GDP and look at national income. 

It is indeed true that real (i.e. adjusted for inflation) gross national income has stalled, but then again Australia's commodity prices could not and did not grow to the sky, so this isn't necessarily that surprising. 

Another way to look at this is that national income has more than doubled over the past twenty years, even after accounting for inflation.


Moreover, if GDP is an unreliable measure of the performance of the economy, how can it be a good measure of dwelling prices? Can't have it both ways! 

National accounts

The national accounts provide us with a range of figures relating to the property markets, but as implied by the name of the data release the figures are national and backward-looking in nature, and therefore don't really tell us much of interest about what sub-regional property markets are up to or will be up to.

As noted, the national accounts lag a bit, but broadly home owners owe about $1 trillion in mortgage debt, and investors about $550 billion. What is not so well shown by these figures is that mortgage buffers and offset accounts are also at record high levels. 


With dwelling price growth having outpaced the growth in household debt, gearing ratios have declined in recent years.


None of which tells of much of any predictive value. We can all think of housing markets in Australia that are overvalued; but equally we can all name others where prices are getting walloped or have already crashed. 

If there is one ratio from the national accounts which is useful in predicting where to next for dwelling prices - and I'm not saying that there necessarily is - it's the ratio of housing interest payable to income. 

The actual quoted percentage figure is skewed lower since so many households have no mortgage debt at all, but has declined from a peak of 16.4 per cent in June 2008 to 9.7 per cent by December 2015. 

On this measure, mortgage repayments are more than 40 per cent cheaper than they were at their 2008 peak.


Rates heading lower?

It would be fair to say that if mortgage rates head back to where they were at their most recent peak of about 8 to 9 per cent, then many of Australia's housing markets are heading into severe correction territory. 

It's an interesting bet if you want to take it on. But money markets are begging to differ, with yields grinding out new lows in anticipation of possible Brexit turmoil. 

Yesterday Australia's 10 year government bond yield fell to its lowest ever level at well below 2 per cent.


Meanwhile, OIS rates are on a seek and destroy mission to crunch out new record lows, and they are winning that particular battle. We are now just one benign inflation print from seeing a new record low cash rate of 1.50 per cent in August.



The wrap

GDP is a useful measure of the strength or otherwise of the economy. And over the long term stronger economic growth may be reflected in higher dwelling prices - but not necessarily so, since there are so many other contributory factors, such as tax settings or the supply of new dwellings, for example. 

It's true that property prices can fall during recessions. But then again they can fall when GDP is positive such as they did in 2011 and early 2012.

And what about China, where real GDP growth has slowed from above 13 per cent in 2007 to just 6.7 per cent (if you can call 6.7 per cent slow), yet house prices in Shenzhen have skyrocketed by more than 50 per cent within the past year?

Obviously there are many other factors at play than purely economic growth.  And if there is a correlation between GDP and dwelling stock valuations, it's a tenuous one. 

Tuesday, 28 June 2016

Industries: Where are the new jobs being created?

Here come the robots!

My first job for a year after I left school involved inserting pieces of wood and MDF through a moulding machine in a somewhat repetitive fashion - i.e. for up to 12 hours per day - and a bloke called Hughie at the other end taking them out again. 

The cynical older fellas in the Essex factory used to say that one day my job would be replaced by robots, with improving technology meaning that some time in the future a single operative would be able to oversee a dozen such machines.

They were probably about half right. Like many such manufacturing companies in developed countries, the business struggled to remain competitive and eventually closed (the warehouse was later used as an illegal cannabis plantation - creative destruction at work, one might say! - but that's another story).

These days similar such work is probably done either by more technologically advanced factories in Germany, or by operatives being paid comparatively lower salaries in Asia (the timber and MDF mouldings, I mean, not the illicit cultivation of skunk plants under sophisticated hydroponic equipment). 

The older guys in the factory have now long since retired. The younger ones? Mainly working in services industries or in more specialised factory roles that didn't exist back then.

Such is the nature of capitalism.

People sometimes worry that there will be no work in the future due to mechanisation and automation, but an optimist would tell you that capitalism has always been this way, going on to create new opportunities as old ones fade away.

Although I'm still (just) in my thirties, it's actually quite amazing to think what has changed since I left school.

Technically the internet did exist back then, but hardly anyone used it. Email was just about beginning to be used on Uni campuses, but most people hadn't heard of it.

There were no online newspapers, so everyone read The Sun. Small business accountants wrote in pencil in leather-bound nominal ledgers instead of using spreadsheets. There was no Facebook, and no Twitter...and better still, no bloggers. Imagine how productive people must have been! 

In the future there will be new roles, new products, new types of employment, and new industries. And many of these will be industries and roles that most of us can't yet imagine, or have not yet even been imagined.

However, the creation of such new roles often requires business investment, and we're not seeing so much of that in Australia right now.

Industries

The quarterly Detailed Labour Force figures showed that annual employment growth slowed a little to +229,300 in the year to May 2016.

Annual employment growth remains some way higher than its long run average, but then so too does population growth in absolute terms. 


The industry level figures suggest that although Australia has continued to generate a decent number of jobs, it would benefit from more investment and innovation.

One piece of good news is that the lower dollar has helped the manufacturing industry to arrest its long sweeping downtrend in employment over the past six months, even recording a bit of a rebound.

The greatest employment gains were again seen in healthcare and social assistance, wherein total employment has really boomed over the past couple of decades. 


The light blue line at the bottom of the chart above shows that the number of persons employed in mining has declined by about 18 per cent or about 50,000 to 225,000 since peaking in November 2013.

Although mining is not one of the biggest employers in terms of headcount, analysts believe that this figure has some way to fall yet, and this will have continuing repercussions for resources regions.

Annual change in employment

Looking at the annual change in employment by industry, after healthcare and social assistance (+85,600) comes construction as a leading sector in creating +48,300 jobs over the year to May. 

Construction jobs created reflect the transition from mining construction in the regions to residential property construction, mainly in the capital cities. 

Financial, insurance and real estate services has been another big winner, adding +47,400 net employment. 



The wrap

Overall, this was not a bad result in annual terms, with the economy adding well over a quarter of a million new jobs year-on-year on a net basis, albeit with many of the new positions being part time in nature. 

However, the industry level data presents challenges, given that mining employment is expected to keep falling for some time yet, and given that eventually the residential construction boom will pass its peak too (resulting in a likely decline in construction employment).

Unfortunately the most up-to-date capex figures were lacklustre, and do not indicate a surge in investment. 

In fact after the turmoil of the recent Brexit vote, analysts are lining up their bets for interest rates to be cut in August, after the next round of inflation data is released. 

The inflation figures for the first quarter caught analysts on the hop, being much weaker than market estimates. 

Monday, 27 June 2016

Kiwi migration fizzles out

NZ migration from Oz pulls up

It's been suggested that trends in migration from Australia towards Australia might bode ill for our economy, a kind of pseudo-recession indicator if you will.

Certainly, there had been a significant increase in those migrating permanently of for the long term across the Tasman - many of whom were originally Kiwis returning home.


It's not too hard to see why these trends developed.

New Zealand had been running a much higher unemployment rate than Australia while we were still enjoying the spoils of a heady resources construction boom.

But then as the mining construction boom passed its peak in Australia, opportunities for employment here declined, and the unemployment rate ticked higher - just as NZ was being anointed with its "rock star economy" status.



Unfortunately New Zealand's one-time rock star economy rather seems to have rocked itself out.

In fact, NZ now has a higher unemployment rate than Australia, after an odd-looking blip last in the quarter before last.

Now there isn't all that much to pick between either economy.

Both have indicators of under-employment, under-utilisation and weakened commodity prices (here it's mainly bulk commodities, over there, dairy).

And both countries are looking to tourism and international student migration to paper over the cracks.

It looks as though the trend in net migration having tilted sharply in favour of New Zealand has now reached something approaching equilibrium. 

In fact in April there was a small seasonally adjusted net flow back in favour Australia. 


In truth, whether 100 or so people decide to head this way or that will have little bearing on the health or otherwise of Australia's economy going forward.

About 60 per cent of permanent migrants to Australia now hail from Asia.

And with our international student visa rules to be relaxed significantly from 1 July this trend will be reinforced, with a high share of the new applicants expected to be from China and India.

Sunday, 26 June 2016

Jobs and growth?

Jobs!

The ABS released its Detailed Labour Force figures for May 2016 which showed that regional New South Wales has picked up the mantle from Greater Sydney in creating employment over the past 12 months.  

Regional New South Wales (+79,300) outpaced Sydney (+63,700) for the first time in a long old while. 

Jobs have been created in the Illawarra, Hunter Valley, and Newcastle, although nearly two thirds of jobs created in the state in the year to May were part time in nature, suggesting that plenty of slack remains in the labour force.



Greater Melbourne created +57,200 net new jobs, and Brisbane +20,000, but there's not been much doing elsewhere.



Looking at the national picture shows that NSW is the only state creating meaningful employment growth in its regional areas, at least in aggregate - some parts of regional Queensland are thriving, most notably Gold Coast. 



One of the reasons that these regions of New South Wales have fared better through the mining downturn than, say, some parts of regional Queensland, may be that they are contiguous with the Greater Sydney region.

Infrastructure Australia notes that the capital cities and a number of nearby peri-urban locations are likely to benefit from the bulk of investment over the next few decades.

House price correction

Housing markets is some less well connected regional towns and cities are struggling.

It's almost impossible to get a read on what is happening to dwelling prices in Roma given that barely anything is transacting, but when rents crash by well over half this typically does not bode well. 


Source: All data from SQM Research

House prices in Chinchilla are down sharply over the last three years too.


Dalby is another thin market, but rents are down sharply here.


Whyalla a similar story, both for rents and dwelling prices.


And so on...

Unemployment rates

Looking at the main capital cities, plotted in rolling annual terms, Greater Sydney (5.03 per cent) and Brisbane (5.72 per cent) have reasonably low unemployment rates, while Adelaide is tracking at a somewhat elevated 7.43 per cent.


Townsville doing it tough

The ABS also releases figures across a range of sub-regions. At the present time Townsville is doing things tough, with consecutive unemployment rate readings of above 13 per cent.


History shows that sub-regions rarely record such high unemployment rates for long periods of time. 

Either the economy recovers, or workers become discouraged, or workers relocate elsewhere for employment. 

It's too early to say for certain which route Townsville is heading down - the total size of the labour force has shrunk by nearly 20 per cent since 2011, but the city and region does have diversity of employment, which helps. 

The number of persons employed in the Townsville region has shrunk by more than a quarter since the end of 2010. The monthly data is unreliable so the moving average line takes out the noise - hopefully we'll see a rebound here soon.

Gasworks

Newstead

Had a snout around Newstead gasworks yesterday, a pleasant area which is seeing a lot of new apartment development. 

Newstead Towers are photographed below. 

Very hard to gauge from ground level, but if I had to guess, I reckon these are about one third inhabited now. 


Shops and eateries are generally quite busy, both during the day and in the evenings.


Sales and marketing teams are out in force. The interest in these new apartments generally appears skewed to buyers of Asian heritage from what I've experienced, though anecdotal evidence can mislead, of course.


It's been fairly well documented that new apartment market is in for a rough ride.

Aussies do love a whinge - as recently as less than three years ago, there was endless complaint about us building too few dwellings - fast forward three years and now it's too many! 

Such is the nature of a cycle. 

Net overseas migration is way down in Queensland since the heady days through the peak of the mining boom.

Some compensating good news for Queensland is that interstate migration jumped to its fastest rate in 8 years in the December quarter and is surging higher, helping annual population growth to lift from +55,200 in the year to September 2015 to +59,700 in the year to December. 

Still completions are running ahead of demand for new housing in the state, with a shade over 38,000 new dwelling completions in 2015.

As far as I can observe, it doesn't seem that there won't be much problem filling these new apartments over time once the construction cycle passes its peak, due to their proximity to the city and entertainment precincts.

Effective 1 July Australia's student visa rules will also be relaxed, allowing primary school students from Asia and their guardians (and possibly families) to come to live in Australia, which will further help to take up the slack. 

The most pressing challenge is settlement risk, with banks having pulled up the ladder on writing loans to non-resident buyers. 

A huge challenge given how many of these developments are reliant on foreign purchases. 

Saturday, 25 June 2016

Auf Wiedersehen, Pet!

Brexit stage left

Well, well. It's all aboard the Brexit flotilla!

Britons stunned pollsters and financial markets by voting a decisive 51.9 per cent (17.4 million votes) to 48.1 per cent (16.1 million votes) to leave the European Union (EU) leading to instant currency carnage, the British pound experiencing unprecedented declines to hit its lowest level in three decades. 

The vote started surprisingly badly for the "Bremain" campaign, with the Geordies voting to remain, but unconvincingly so, and then the Mackems voting to leave by an enormous margin before gannin' on the hoy (or whatever it is they do in Sunderland these days).

In truth, nobody would have been that surprised to see some of the more deprived areas voting to leave the EU.

But once South Buckinghamshire - which is, like, Beaconsfield! - voted to leave you just knew it was all over red rover. 

In the event Northern Ireland, Scotland, Gibraltar, and London voted to remain, but much of the remainder of England and Wales voted to leg it.

The Scots will in all likelihood demand a second referendum now, and maybe there will be calls for unification in Ireland.

And who knows what might follow?

What a shemozzle!

Polls suggested that generally it was the more privileged, higher educated, and younger folk - the ones who will have to live with the decision - voting to remain, but older types and lower socio-demographic classes voted to do one.

Outstanding analysis from the Guardian here shows how a sense of disenfranchisement and real or perceived lack of opportunity and wages growth may have led folk to vote out.

Immigration was doubtless also a major driver of votes for an exit.

Perhaps this will prove to be harsh on the younger generations who will no longer have the right to live and work in 27 other European countries.

Markets react

Down Under the Aussie dollar got absolutely walloped, down to a 73 handle before rebounding quite strongly, while bond yields fell to record lows.

Commodity prices generally sold off, although gold spiked. 

Aussie shares initially took a bit of a thrashing, eventually closing down by 3.17 per cent. Not that big a hit in the grand scheme of things. 


There were also predictions of the UK FTSE 100 losing the will to live, but in the event the market closed down only 3.15 per cent to be back where it was just a few days ago at 6,138.69. 

Potentially a momentous decision, though, with Britain set to lose its Prime Minister.

In keeping with true British tradition, this so-termed class war revolt will in all likelihood see one Etonian replaced by another. 

Nobody really seems to know the implications of what this might all mean for Britain over the next few years.

A contraction of economic growth, certainly. A recession, maybe.

But it will be a good long while before anyone really knows...

Weekend reads: must see articles of the week

Find the must read articles of the week summarised at Property Update here (or click image).


You can subscribe for the free Property Update daily commentary here.

Friday, 24 June 2016

Population absorbing new dwelling supply

Absorbed

We've all heard about the glut of new building in Sydney, and particularly Melbourne.

But the return of strong population growth figures confirmed yesterday suggest that in 2015 the rate of actual dwelling completions didn't get out of whack.

Yes, there was a record high level of dwelling approvals, but actual completions weren't quite so high.

In total 115,328 new houses were completed in 2015, and 74,871 "other" dwellings (townhouses, units, and apartments). 

Victoria, which everyone knows has been overbuilding, completed an impressive 56,816 new dwellings last year.

Yet annual population growth accelerated to a massive 109,800, for a population growth to completions ratio of 1.93. 

This is actually above the long run ratio (don't forget these figures don't include demolitions or stock obsolescence) suggesting that last year the dwelling stock was likely still being well absorbed.


And, as I noted here, net interstate migration to Victoria has now rushed to an all-time record high.

Vacancy rates have therefore tightened in Melbourne.

New South Wales completed 45,799 dwellings, but here too population growth was exceptionally strong at 106,100.

The equates to a ratio of 2.32, also well above the long run average.


Perhaps no wonder that inner Sydney vacancy rates are so tight, and have been tracking at a two year low.

Strong population growth in Melbourne and Sydney

Interstate migration picks up

Drilling into the latest ABS Demographic Statistics a little further reveals some very notable trends.

In particular there has been an unprecedented flow of relocation towards Melbourne as folk follow the jobs, with a massive net interstate migration of 4,849 to Victoria in the fourth quarter of 2015, easily the highest such figure on record. 

Population growth in Victoria has overwhelmingly flowed to Greater Melbourne and Geelong, with regional population growth in the state having otherwise all but ground to a halt. 

The cyclical flow of interstate migration from New South Wales to Queensland has also begun in earnest, with a net increase of some +8,326 in Aussies now calling Queensland home in 2015.

You wouldn't need a chart to tell you this if you live in Queensland, with every second person you bump into seemingly having "just moved up" to maroons territory - while Brisbane was positively teeming with hopeful folk in blue wigs the night before last (not all of them can have flown up especially for State of Origin).

There was net interstate migration to Queensland of +3,158 in the final quarter alone, the highest figure since 2008. 


Net interstate migration in the fourth quarter away from Western Australia increased to 2,039, while South Australia lost 1,769 to pastures new, its weakest result in well over two decades. 

Annual population growth in South Australia has continued to slow from a 2009 quarterly peak of  +6,222 to only +1,272 in the fourth quarter of - just 530 men and 742 women.

Population growth in the state could conceivably slow towards zero in the not too distance future on this evidence, should the economy not begin to improve and create jobs. Annual population growth in South Australia declined to +0.7 per cent. 

Net overseas migration ticks higher

Nationally net overseas migration of 177,100 was by and large the same in 2015 as it was in 2015 at 178,000, with a moderate upwards revision to recently reported numbers. 

In recent years, population growth has become more and more capital city focused, at about 83 per cent and rising, a trend that is forecast to continue for decades to come.

Some two thirds of population growth happened in the two most populous states in 2015, the highest share on record. 

The deleterious impact of the mining slowdown on net overseas migration seems to have more or less run its course as mining employment has stopped declining (at least for now), with the Northern Territory increasing its population by only 800 in calendar year 2015. 


The population of Tasmania increased by +119 in the fourth quarter.

Largest cities lead growth

Piecing it all together, Victoria (+109,800) and New South Wales (+106,100) recorded enormous population growth in the last calendar year, while the strong pick-up in interstate migration to Queensland helped the state to notch total population growth of +59,700. 


Notably, almost nine tenths of the population growth in Victoria took place in only Greater Melbourne and Geelong. Similarly, Greater Sydney mopped up around 85,000 of the population growth in New South Wales. 

Population growth in the ACT, Tasmania and the Northern Territory totaled a combined +8,200 in 2015. 



New South Wales remains by far the most heavily populated state at 7,670,000, but Victoria is inching closer, passing 6 million for the first time in January. 


The wrap

Overall, it looks as though the Department of Immigration and Border Protection (DIBP) was right all along, and stronger population growth is set to return, which has been one of my key arguments on this blog this year. 

My latest figures show that although the popular narrative continues to talk about an oversupply of dwelling approvals and units under construction, at the end of 2015 the ratio of population growth to actual dwelling completions was still well above its long run average in New South Wales and Victoria.

Not everyone likes immigration of course, but overall the demographic dividend is huge.

The latest Intergenerational Report, which projected that Australia's population will expand to nearly 40 million by 2055, also noted that:
  • lower immigration would lead to slower economic growth
  • lower immigration would lead to an ageing population
  • lower immigration would lead to lower participation rates (with an adverse consequences the tax take)
Considering these points, does it seem to you that immigration might be a heck of a lot stronger than the long, slow decline to just 0.5 percent of the population per annum used in the projections? It does to me. 

The anti-immigration lobby also neglects to mention that the Productivity Commission undertook a detailed investigation into the migrant intake - the monster report found that net migration into Australia can far better preserve the current demographic profile, but with a considerably larger population.

The key reason for this is that immigrants have a younger age distribution when compared to the Australian population as a whole, with the most significant age group of immigrants on arrival being the 25-34 year old cohort.

Tellingly, the Commission concluded that prime age migrants pay the most tax, while at the same time government spending on health, aged care, and the aged pension tends to ramp up sharply in relation to the part of the population that is aged 65 and over.

Net migration is of course projected to increase the level of Australia's GDP, but with labour productivity increasing at a slower rate than output. 

Perhaps more significantly, modelling concluded a favourable impact of net migration on GDP per capita by 2060 as compared to the scenario without immigration.

Furthermore, without immigration Australia's real income per capita is projected to increase less impressively than with it. In purely economic terms the implication of this is abundantly clear: immigration will make us better off. 

In the words of Peter Martin of The Age: "The benefits of freeing up immigration dwarf those of anything else imaginable". 

Thursday, 23 June 2016

Population growth is accelerating again

On the up

The ABS reported it Demographic Statistics for the final quarter of 2015, which showed population growth accelerating again. 

There had previously been a glitch or backlog in the recording of births in New South Wales and Victoria, but this has now been fixed up. 

Annual "departures" reached a fresh but expected high of 156,500. 



There was a quarterly population increase of +71,300, which was a very strong result for a fourth quarter of the year, and a substantial increase from a revised +66,000 in the prior year.  


Previous preliminary estimates for net overseas migration were revised up a little, taking annual net overseas migration up to +177,000, the strongest result in a year.


As a result, annual population growth accelerated again to +326,100 (up from a revised =319,400 in March 2015). 


Man shortage

Australia's population was 23,940,300 by the end of 2015, having long since surged well past 24 million. 

The female population passed 12 million, but men still have a way to go, needing another 96,300 heads to meet this milestone. 


With new relaxed visa rules set to kick from 1 July, it's little surprise that the Department for Immigration and Border Protection (DIBP) forecasts net overseas migration to continue accelerating all the way through to the end of its projected time horizon in 2020. 

The wrap

Overall, the population growth figures at the national level were a bit stronger than expected.

For the really interesting trends you need to drill down a level, with the internal migration statistics showing an enormous record surge of interstate migration towards Melbourne, and to a secondary extent Brisbane. 

I'll take a look at those sub-trends next.