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 Hmmm...one of the world's most popular & widely-read financial publications.

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

Monday, 20 November 2017

The car in front is an import

Shuttered

Automotive production continues to plummet, with annual volumes nearly 50 per cent below their December 2010 level, and falling fast, so the new car you buy next year will likely be made somewhere else. 


The Department of Employment projected that the factory closures at Elizabeth in Adelaide (Holden) and Altona in Melbourne (Toyota) could cost 27,500 jobs over the years ahead, leading some commentators to predict the end of days for Australia.

Indeed, some gloomy reports even speculated that the closures could snowball into hundreds of thousands of jobs losses, which always seemed a bit far-fetched given that the shutdowns have been discussed for years.

It was wise to be prudent and wait for the halting of operations to pass, which has now occurred, but if there were to be any earth-shaking initial impacts then they weren't yet in evidence in the October 2017 employment figures.

In the event, total employment exploded +355,700 higher over the year to October, sending the unemployment rate careering to a 4½ low, and with the ABS also now putting job openings at the highest level on record

Furthermore, the more timely SEEK job advertisements figures showed openings tearing 25 per cent higher in South Australia and 18 per cent higher in Victoria, so it's probably safe to say that the world hasn't ended for Adelaide or Melbourne. 

Interestingly some of the sectors creating tens of thousands of new job openings lately have included engineering, technicians, manufacturing, including machinery operators & drivers, trades & services, and transport & logistics.

Long term production employees at Holden and Toyota might have received a meaningful payout, potentially even providing a mini-boost to the local economies. 

"Pivot, pivot, pivot..."

There has been much criticism of the government for not propping up the loss-making auto assembly industry. 

Luci Ellis of the Reserve Bank of Australia rattled off the counter-arguments in a blazing speech on economic rationalism last week. 

There's no doubt that the auto industry is facing a fair amount of uncertainty and potential disruption over the years ahead. 

For example, a great deal has been made on the newswires this week of Tesla's forays into driverless trucks, electric vehicles, and "insane" roadsters.

Interesting stuff, though whether a company which has barely produced anything to date - let alone sustainable profits - will prove to justify a market cap north of US$50 billion (and an enterprise value of a baffling magnitude) can only be known in the fullness of time.

It's a good story, I'll grant it that!

Greatly exaggerated

For all the excitement of electric rigs and electric supercars that can accelerate ridiculously fast (albeit not on Australia's congested highways, lol), the death of the humble road vehicle has been somewhat exaggerated. 

Annual unit sales increased to 1,181,418 in October, marginally the highest result ever notched, powered by record Sports Utility Vehicle sales. 


At just under 99,000 the seasonally adjusted monthly sales were a little below the all-time monthly peak set last year, a fact which some have tried to claim represents stretched household budgets.

A more realistic narrative is that low interest rates and tax incentives pulled forward demand in New South Wales, where anyone and everyone considering purchasing a new vehicle must have done so in 2016. 


With more than 1.18 million sales recorded over the past year traffic congestion will get worse rather than better, adding to the urgency for the delivery of transport infrastructure projects, of which there are many now in the pipeline. 

A final observation, the trend in new motor vehicle sales in Western Australia has now been rising for 9 months consecutively. Western Australia saw 8,570 new motor vehicles sold on a seasonally adjusted basis in October, a solid increase of +8.2 per cent from a year earlier. 

While much commentary is focusing on more downside, a number of indicators are pointing towards brighter times ahead in the west. 

Sunday, 19 November 2017

Swiss cheesed

200,000 more Oz millionaires

2017 saw another large increase in global wealth, increasing by 6.4 per cent or (USD) $16.7 trillion to $280 trillion, driven by equity prices and non-financial assets, including housing.  

Global wealth is projected by Credit Suisse to hit $341 trillion by 2022, driven largely by rapid growth in countries such as China and India. 

The US continued an unbroken run of gains since the financial crisis in 2017. 

The Eurozone saw the creation of 620,000 new US dollar millionaires as the currency picked up, and Australia once again punched above its weight in adding a further 202,000 millionaires, taking the total up from 958,000 to 1.16 million. 

Switzerland's wealth per adult has increased by by a thunderous 130 per cent since the turn of the century in US dollar terms to $537,600, albeit largely due to shifts in the exchange rate, according to the Credit Suisse 2017 Global Wealth Report. 

Among the countries in the world with available figures over the long term, Switzerland stands alone in seeing no decline in wealth inequality over the past century. 

Home to just 0.01 per cent of the global population, Switzerland alone accounts for some 1.7 per cent of the top 1 per cent of global wealth holders, with several thousand ultra-high net worth individuals with personal wealth in excess of $50 million. 

Lucky country

Switzerland is something of an exceptional case as a tax haven, but next in line comes Australia with a mean wealth per adult of $402,600, partly driven by "high property prices in the capital cities", somewhat perversely.

Australian household wealth gains have averaged 12 per cent per annum since the turn of the century, and the average debt to assets ratio is surprisingly low at only 20 per cent. 

68 per cent of Australian adults have a net worth of above $100,000, which is some eight times the world average. 

Meanwhile, New Zealand's wealth per adult moved ahead of Norway into fourth place in 2017. 


Wealth inequality is relatively low in Australia, with a far smaller share of the population having a net worth of under $10,000 than the United Kingdom or US. 

Indeed, when measured in median terms Australia's wealth per adult of $195,417 is not too far off the highest in the world, with only Switzerland edging us out at $229,059. 

There are now 36 million high-net worth individuals in the world with a net worth of $10 to $50 million.  

Some 2 million of them are located in China - nearly 40 times as many as at the turn of the century - with a further 6.3 million in India and other Asia-Pacific countries.  

Perhaps not unrelated to this, Australia is projected to be home to 1.7 US dollar millionaires by 2022, up from 1.16 million today. 

Saturday, 18 November 2017

Drain the swamp

Swamp thing

Since the hiring freeze was lifted, Canberra has seen by far and way the strongest household income growth, with gross income per capita in the ACT up from $101,600 to above $110,000 over the past two financial years.

Nice work if you can get it!

At the other end of the scale household income per capita declined in Western Australia in FY2017, back to below the level seen in the 2014 financial year in nominal terms. 


Disposable incomes followed a very similar pattern, with Canberra absolutely miles ahead of the rest, by a magnitude of almost 50 per cent. 

Surprisingly the Northern Territory has been the strongest performer over the past five years in per capita terms, with disposable incomes rising by +24 per cent. 


Queensland incomes have really struggled since the peak of the resources construction boom in 2012, and income growth has been relatively modest elsewhere.

These numbers are derived from the state accounts, and as ever some household are faring better than others. 

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Heads up

Inward bound

As the economy and especially hiring have picked up, so too has immigration, with long term arrivals into Australia hitting a record high 777,440 over the year to September, for a year-on-year increase of +5.5 per cent. 


Lots of Aussies head overseas too, of course, though ABS research has found that long term departees commonly end up back in Australia pretty quickly. 

Short-term arrivals also hit a record high of 8.72 million over the year to September.

Although the pace of growth here appears to be slowing, the Aussie dollar is now declining again after a brief interlude, which should spur tourism faster, higher, and stronger in 2018.


Oh, and there's the Commonwealth Games boost to come next year too.

Uni corn

Drilling deeper into the figures, unsurprisingly education arrivals are at an all-time high.

The next big international student intake won't show up until the February 2018 figures, but 2017 has been a record year for enrolments, and no doubt a lucrative one.

If you've felt that the inner city centres have become busier in recent years, then you'd be right, with the international student phenomenon being largely an urban trend. 


The Reserve Bank's Luci Ellis highlighted in a barnstorming speech on economic rationalism this week how so many recent migrants arrive on student visas and then end up staying Down Under.

This is a boon for education exports, and then later represents a demographic dividend by providing a stream of qualified workers of a young age. 

The Ellis speech was an absolute corker and essential reading, showing how immigration can raise participation and average living standards, as well as explaining where future growth in the economy will come from.

Finally, annual short-term visitors from China boomed to 1,347,400, which is +13 per cent higher than a year earlier. 


Very strong numbers all round, and the next few years should now be characterised by a welcome surge in transport and infrastructure projects. 

Friday, 17 November 2017

Wanna be startin' somethin'

Northern Powerhouse

We all know that employment growth since the peak of the resources construction boom in 2012 has been all about Sydney and Melbourne.

Until now!

Queensland is suddenly off to the races, with trend employment growth blazing +4.62 per cent higher across the year to October, by far its strongest annual result since before the financial crisis. 


Of course, it's harder for the most populous states to record such a large percentage increase, but even so, this has suddenly become too big a move to ignore. 

Some questions we've not had to ponder too often in Queensland since 2007 include: where, why, & what are the new jobs? And will it continue?

Where? Pretty much all around the state, as I've looked at here previously (Queensland is the one mainland state where employment is not excessively capital city focused). 

Queensland is also coming from a relatively low base, after a rough trot, and much of the hiring has been part time in nature. 

The likely drivers of the upturn might range from a surge of Chinese visitors and the dollar-driven tourism industry, the commodity price rebound creating jobs upstate, a slew of public sector and NDIS hiring, and perhaps some late spillover or multiplier from the now-fading residential construction bonanza.

Agriculture exports have been strong, so that's another possible bright spot, plus some increased aggregate demand creating services jobs as interstate migration has picked up.

Just from driving around various parts of SEQ, there are evidently an awful lot of roads being built right now, while there are several significant infrastructure projects underway or about to commence in Brisbane.

SEEK...& ye may find

We'll get more detailed numbers in due course on the historic hiring.

But what of next year, will Queensland jobs growth be sustained or sustainable as we count down to the Commonwealth Games? 

The answer looks to be a qualified "yes".

SEEK's job advertisements data for October 2017 just showed Queensland ads pumping 19 per cent higher than a year earlier, which tends to be a decent leading indicator for hiring.

Notably, some of the most improved industries nationally included those which Queensland is heavily exposed to.


Early days, of course, but every good upswing had to start somewhere!

Thursday, 16 November 2017

This is how we do

Lucky 13

Another pretty good result for the Aussie economy, with total employment notching a 13th consecutive gain, the best stretch in 23 years. 

Headline employment growth was pretty modest, but there was another significant swing towards full time positions - with the economy adding +236,000 full time jobs since the beginning of the calendar year - and the previous month's result was also revised up, keeping the strong trend intact.


In fact, total employment was a massive +355,700 higher over the year to October 2017 for an increase of +3 per cent, way ahead of the growth in the working age population. 


The annual trend in hours worked was a solid +3.1 per cent growth, the strongest in 7 years.


And the unemployment rate continues to fall, down to a 57-month low of 5.4 per cent.


Hard to argue with those numbers. 

Magnetic north

Queensland added another +12,600 jobs in the month to see total employment lead the nation at +90,500 over the year, just ahead of New South Wales at +88,500. 

After several years of stagnation Queensland has recorded enormous employment gains in percentage terms, a huge synchronised upswing across the state taking the trend in annual employment growth up to a colossal +4.62 per cent. 

Many of the new jobs have been part time positions on a net basis, but Queensland was the only state to see its participation rate jump in October (from 65.5 per cent to 65.8 per cent), and unlike other states employment growth has not only been focused on the capital city. 

South Australia's unemployment rate has improved from around 8 per cent in 2015 to under 6 per cent. Jobs growth has been solid if relatively modest in the state, while declining participation and interstate migration to Melbourne and elsewhere have likely helped to pull down the unemployment rate a little.

In New South Wales the unemployment rate continues to trend down, now to a post-financial crisis low of only 4.71 per cent (and just 4.6 per cent in seasonally adjusted terms). 


Despite this, wages growth in New South Wales is still only tracking at +2.1 per cent.

Sco-Mo crows

This was a modest headline result, but with quite a few snippets of good news in the underlying figures.

If experiences overseas are a worthy indicator, then it'll take a while for unemployment to fall enough to see meaningful wages growth returning, but clearly things have been moving in the right direction. 

After a series of dire polling, Treasury's Scott Morrison was lightning quick to put out an upbeat announcement to note that upbeat jobs figures, um, do not need to be announced:

"Talking about jobs is not something we have to announce. It is just what we do."

Way to go, Sco-Mo...Katy Perry would be proud!

Of borrowers & buffers

Panel beater

I've been busy at the 1,600-strong UBS European Conference 2017, held at the Landmark London in Marylebone, and have learned a tremendous amount from a range of experts, while the Rt Hon David Davis MP also aimed to reassure the City about the forthcoming Brexit. 


I was thrilled to partake in a panel presentation on consumer indebtedness in Anglo-Saxon countries.

On the panel with me were the Chief US Economist of UBS, and the legendary one-time Sydneysider James Aitken, who's been over in the Smoke for some 18 years now. 

Completing the panel was Mathias Drehmann from the Bank for International Settlements (BIS) in Basel, which was a tremendous privilege for me. 

The BIS and Drehmann have produced some terrific research papers over the past decade and more, some of which continue to be discussed regularly in Australian financial circles today. Drehmann's extensive work has shown how the impacts of new mortgage borrowing are often felt 4 to 5 years after the loans are initially taken out.


Exceptionally different here...

It was especially enlightening for me to spend some time later chatting with the personable Drehmann, who originally hails from Stuttgart, a city where I studied in the Oberstufe back in the 1990s. 

Australia has been something of a puzzle for Drehmann and the BIS, for its models on debt service ratios (DSRs) have implied that Australia should have experienced financial instability or banking crises since 1980. 

It was fascinating to discuss why this has not proven to be the case. At least part of the answer comes down to semantics, and how exactly one defines a 'systemic crisis'. After all, in 1989 two of Australia's banks experienced stress and received capital injections from the government. 

And then in late 2008, while Australia avoided a technical recession, authorities were forced to take a number of measures to shore up the banking system, such as enhancing deposit insurance, introducing debt guarantees, and intervening in the capital markets through the purchase of mortgage-backed securities.

Even so, Australia has maintained a gross level of household debt since at least 2006 that is higher than many other developed countries have been able to sustain. 

At your service

Population growth, and Australia's highly urbanised demographics are two factors which are regularly mentioned in explaining high household debt, although we also know from international experience that population growth tends to be pro-cyclical.

The Reserve Bank of Australia (RBA) has found some merit in larger cities being able to cope with more leverage. The BIS itself found that Korea has been able to sustain exceptionally high debt service ratios compared to other countries, and its largest city Seoul has a population more than double that of Sydney. 

In Drehmann's relatively decentralised home country of Germany, on the other hand, debt service ratios have typically been much lower, and home ownership rates have been lower too.

The BIS acknowledges the limitations of its approach in using aggregate numbers for countries, and necessarily adopts a macro or helicopter view (Drehmann was intrigued to learn more about the very Australian concept of loss-making investment loans, for example). 

While debt service ratios can serve as useful early-earning indicator for crises, history doesn't always rhyme or act as a reliable guide to financial stability, since the relevant data typically only stretches back to 1980, there is more debt around today, and the distribution of debt has changed. 

Of borrowers & buffers

The RBA has dedicated a good deal of time analysing Australia's household debt, and has highlighted a wide range of factors in both causing the run-up and then sustaining consumer indebtedness.

If you had to distil their arguments down to just two points, then you'd probably highlight borrowers and buffers.

Since 2002, the increase in household debt in Australia has been overwhelmingly attributable to households in the fourth and fifth income quintiles, typically the borrowers with the most ability to service the debt.

And, secondly, a factor specific to Australia is the popularity of offset accounts: in aggregate households have buffers with some 2½ years of scheduled repayments at current interest rates. 

A challenge for Australia is that the growth in household disposable incomes was absolutely hammering along at about 7 per cent per annum through the 2000s, but since 2012 annual growth has been tracking at closer to only 3 per cent, with few signs of improvement to date.  

To end on another cautionary note, Aitken presented some fascinating statistics on loan defaults and historic crises, showing that non-performing loans at the margin can trigger significant stress.

Even in some of the most acute of downturns, most borrowers kept up their repayments. 

Image result for ubs european conference 2017

Wednesday, 15 November 2017

Snail's pace

Australian crawl

Ah, mate.

Wages grew by just +0.48 per cent in the September 2017 quarter, to be +2.01 per cent higher over the year.

Superficially this looks like a bit of an improvement, and at least it can be said that wages are growing a bit ahead of the rate of inflation. Just. 


And including bonuses the annual increase was a slightly more upbeat +0.7 per cent for the quarter, and +2.2 per cent for the year. 

However, the result this quarter was pumped up by the minimum wage increase, and you can see in the chart below that a number of industries (such as accommodation & food) how this inflated the quarterly numbers. 

Over the year the industries with the most robust wage price growth included healthcare & social assistance (+2.7 per cent), arts & recreation services (+2.7 per cent), and education & training (+2.4 per cent).

On the other hand wages growth in the mining sector (+1.2 per cent) remains very low, as it does in professional, scientific, & tech services (+1.5 per cent). 


Annual wage price growth in the private sector remains super-low at just +1.86 per cent, with wage price growth in the public sector some way higher at +2.37 per cent. 

The public sector index has outpaced the private sector since the peak of the resources construction boom. 


Resources states slow

At the state level Queensland, Victoria, and Tasmania each recorded wages growth of +2.2 per cent, while New South Wales (+2.1 per cent) also recorded reasonable growth. 

However, there were considerably weaker results in Western Australia (+1.3 per cent) and the Northern Territory (+1.4 per cent). 


Western Australia recorded the fastest pace of wages growth through the mining boom, but is now coming back to the pack. 


The wrap

Overall, while it's positive to note annual wages growth moving a bit higher and ahead of the rate inflation, in reality this was a very soft result which missed expectations, having been puffed up by the minimum wage increase.

Not much in the way of pre-Xmas cheer to be found here! 

Tuesday, 14 November 2017

Hurts so good

Good times roll

"You've never had it so good", in terms of Australian business conditions at least, suggests the National Australia Bank. 

Business conditions soared from +14 to +21 in October, the highest ever reading according to NAB's Business Survey. 


Trading conditions and profitability were positively through the roof.

"An extremely strong result" reported NAB's Alan Oster.

Hobart plumbs lowest vacancies on record

Hobart stretched to break point

Hobart notched the lowest vacancy rate on record for any capital city at just 0.3 per cent in October 2017. 

With just 75 listings meeting the criteria for an a vacancy (of being advertised online for three weeks or more) it's not surprising that rents have been taking off.

And while there's been talk of land release to ease the pressure in Hobart, there's no imminent sign of matters improving for tenants.

Meanwhile the previously stagnant Adelaide market is also beginning to look at a bit tight, with the vacancy rate declining to just 1.4 per cent in October, and the vacancy rate in Canberra ticked down to 0.8 per cent.

In Sydney and Melbourne the rental markets look to be in relative equilibrium, with some sub-regional variations. 


The resources capital cities look to have turned the corner now.

In Perth the vacancy rate of 4.1 per cent was well down from 4.9 per cent a year earlier, while Darwin (2.5 per cent) also saw a much tighter result than a year ago (3.2 per cent). 

Even Brisbane appears to have entered a bit of a downtrend despite its inner city apartment glut, although there does tend to be a seasonal spike over the Christmas period. 

Overall the national vacancy rate of 2.1 per cent or 67,781 vacancies was lower than a year earlier at 2.3 per cent or 74,368 vacancies, with dwelling starts now set to decline and strong population growth having absorbed most of the increase in rental stock to date. 

Nevertheless, rental price growth remains quite modest at the national level. 

The latest squeeze

Healthy investment

Total lending finance suffered its sharpest contraction in 9 months in September 2017, declining by 5.3 per cent to $67.9 billion in seasonally adjusted terms. 


A key driver of the result was the squeeze on investment mortgages, although in trend terms there has been solid offsetting growth in the larger owner-occupier sector, to the extent that housing finance remains only just off record highs, at least for now. 

The trend in personal finance commitments has been creeping higher again over the past few months, albeit only from the levels seen nearly a decade-and-a-half ago, while the average credit card balance has also bounced a little of decade-lows. 


Healthy investment? The glass half...

At the industry level, a few observers would've been surprised by the rebound in commercial finance extended to the mining sector. Meanwhile construction has been an associated bright spot, and agriculture and a number of other services industries have also fared relatively well. 

The weakness in retail trade, however, which first became apparent in the second quarter of calendar year 2016, is now starting to look suspiciously like a rout. With Amazon just taking guard at the crease, 2018 may prove to mark the beginning of a worrying time for Australian retailers. 


Overall, levels of investment look to be relatively healthy, with solid annual growth across many of the services industries. But equally there appears to be plenty of downside risk in the mushrooming construction sector.

The Reserve Bank's Guy Debelle adopted a customary "glass half full stance" in his speech at the 2017 UBS Australasia Conference in Sydney, highlighting the growth in health, information, media, & telecommunications services investment.

I'll be speaking this afternoon myself at the counterpart 2017 UBS European Conference in London, mainly on the subjects of consumer indebtedness and financial stability in Australia (wherein I expect my fellow panellist from the BIS will assess the Antipodean glass as being somewhat unsteady; I'm very much looking forward the debate). 

Investors squeezed

Property investor loans - plotted here on a rolling annual basis but not adjusted for population growth or inflation - are now clearly in decline. 

It's been interesting to note that the states and territories which did not experience a sharp run-up in investor lending have been at least as significantly impacted by macroprudential constraints.


Offsetting the downturn in investor loans to a large extent, lending to homebuyers in Victoria appears to be imperiously strong, with demand for housing credit in New South Wales not too far behind. 

The same can't be said of the Northern Territory apartment market, which is hurting badly, although granted we may just be seeing the first signs of stabilisation in Darwin's detached housing market. 


The wrap

Summarily, lending to homebuyers remains relatively strong, with lending to purchase land scaling record highs. Finance commitments for renovations and dwelling construction also seem to remain solid. 

Growth in lending to investors, on the other hand, has been extinguished, and interest-only products have been absolutely torched by the wrath of APRA.

As most immigrants into Australia head to Sydney and Melbourne, any apparent tightening in rental markets should be monitored closely. 

Sunday, 12 November 2017

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Boing, boing, splat

57 varieties of mishap

Like all parents, I adore my daughter, but as a 3-year-old, blinkin' heck she can be hard work at times. 

We often like to make home-made jams, preserves, and sauces together over the summer, as a way to minimise her time in front of the television, if nothing else. 

For this week's mishap, my darling toddler managed to deposit a tsunami of tomato ketchup all over her lap, the dining room table, the floor, and then left a red trail of destruction across most of the house between her seat and the kitchen. 

I'm sure you can imagine the drill. She was hammering fruitlessly on the end of the bottom of the bottle with absolutely nothing coming out, until suddenly...well, I'm sure you can guess the rest. 

Nothing, nothing, nothing...splat!

After the event, we dutifully wasted no time in admonishing her. 

It was hardly her fault, of course, she's only just turned three, and she'd never tried home-made tomato sauce before, or indeed, any brand of runny ketchup from a glass bottle. 

But, still, surely she should have just known? Argh!

Bottled up

It's been intriguing to reflect on the past decade, as the financial crisis recedes into the rear view mirror.

When governing bodies and central banks began their unconventional 'money printing' policies, QE programmes, and monetising debt, everyone appeared to be certain that this would inevitably lead to inflation, and quite possibly uncontrolled hyperinflation. 

Everyone just knew it. 

There was even a funny guy from the US called Jordan something or other - who as far as most could tell was but a teenager, or not far from it - lecturing us on runaway inflation, hoarding gold, and predicting a 60 per cent fall in Australian home values.

The thing that's captivating is how swiftly and dramatically the prevailing narrative on inflation has about-faced.

Everyone now seems to be convinced that today's comparatively high levels of household debt are disinflationary, and that the inflation genie has become subdued, perhaps forever. 

When you think about it, it's certainly a remarkable shift in narrative in a relatively short period of time, but everyone seems to just know it now. 

This week's forecasts from the central bank appeared to show Australia's rate of inflation meandering back towards the 2.5 per cent target over a period of about half a decade.

Surprises in store

The problem with forecasts, however, is that they are necessarily based upon a short history of outcomes, and by their very nature can't adequately make allowances for unforeseen shocks or unprecedented events. 

In any case, even the 90 per cent confidence intervals take in a remarkably broad range of scenarios. 

Something to ponder, though, is that perhaps central banks around the world have been hammering on the monetary sauce bottle, and the inflationary ketchup is about to come flying out all in a rush, splattering its blood red influence everywhere. 

Nothing, nothing, nothing...splat!

Maybe we'll even see uncontrolled hyperinflation in parts of the world? This is by no means a forecast, just a weekend thought for you to chew on!

Anyway, back to cleaning the floor for me.

Saturday, 11 November 2017

For the wings of a dove

Shot down in flames

Everyone has already said pretty much everything there is to say about the Reserve Bank of Australia (RBA) revising down its inflation forecasts. 

But the outlook is of such significance, I feel I should just mention it in passing, if nothing else. 

Paul Dales of Capital Economics thinks the RBA might end up missing its 2 to 3 per cent inflation target for fully five years in a row, and it's hard to disagree with him on this evidence. 

The RBA's own forecasts now suggest that inflation will remain below target for the entirety of its forecast horizon.

In fact, the trimmed mean inflation chart suggests that inflation possibly won't get back to target for years, and not to the mid-point of the target range for...what, about half a decade?! 


Not much else to add, except these are not the forecasts of an institution setting itself to hike interest rates!

Bill Evans of Westpac thinks that rates will be on hold throughout 2018 and 2019. 

And that's before we've mentioned the downside risks, such as the oil price, while retail prices are already falling, even before Amazon Australia hits its straps. 

Friday, 10 November 2017

First homebuyers maintain the rage

Investor loans easing

The trend in housing finance eased a bit, to a total of around $33 billion in September.

The value of investor loans was possibly pumped up a little in the preceding month by refinancing activity, but the monthly trend remains steadily down to about $12 billion, as tweaks to lending standards continue to lean against activity. 

The $33 billion result and the related easing in investor loans were variously described as a "walloping fall", "down the gurgler", a "staggering drop", and even plain old "grim".

A grim $33 billion it is!

Recall that this result comes precisely one month after investor loans had "bounced back", "spiked", "staged a comeback", and all the rest of it. 

I guess that goes with the territory when you have to find something new and exciting to say every month. Anyhoo, here's the chart, in all of its walloping grimness!


Owner-occupiers continue to settle on the near-record levels of new stock, with commitments for new dwellings continuing to surge to the highest level since 1978. 


Homebuyer demand still looks to be strongest in Victoria, mirroring demographic trends.


The trend number of owner-occupier commitments in Western Australia has been edging slightly higher for the past 5 months, suggesting moderately improving conditions. 

First homebuyers return

September is a shorter month than August, as well as playing host to a public holiday and a Grand Final.  

Not surprisingly, then, in original terms the number of first homebuyer loans pulled back slightly from a 93-month high.


As a share of housing finance commitments, however, first homebuyer loans rose again, now levitating from 17.2 per cent to 17.4 per cent, to notch a 4½-year high. 

The return of the first homebuyer has largely been driven by incentives in New South Wales and Victoria.  

Despite the reported monthly decline, in truth first homebuyer numbers were markedly higher over the third quarter in both NSW (58 per cent) and VIC (32 per cent) - it all depends on the preferred narrative, though the figures should be watched closely for revisions.


On average, first homebuyers are borrowing a little less than a year earlier, perhaps implying that, at the margin, the incentives have encouraged more wavering buyers onto the ladder.

For non-first homebuyers loan sizes are now rising again, however, as they are wont to do once markets get to grips with new lending rules. 


Centralising demand

Nothing particularly unexpected to see here, with investor loans declining in response to tighter lending criteria, trending down to sit about 8 per cent lower than at the end of last year, in turn leading to a fairly steady result overall. 

The headline numbers suggest housing finance is flattening, as demanded by market commentators and regulators alike. 

This suggests it will become more challenging over the next few years for investors to find outperforming markets, following a very easy ride over the past decade, when simply buying properties in Sydney resulted in jackpot returns. 

Where to look?

Outstanding 2016 Census research from Terry Rawnsley at SGE Economics & Planning showed that the capital cities created 900,000 new jobs over the five years to 2016, while the whole of regional Australia combined created close to zero. Zip.

Sydney alone created nearly 500,000 jobs jet over the past decade, with the inner suburbs accounting for a disproportionately high share of the employment growth.

Between 2011 and 2016, total Sydney employment boomed by 342,000, while employment in regional New South Wales went backwards, falling by 17,000. 

Drilling down a level, Rawnsley found that employment growth has become more heavily focused on the inner cities of the largest metropolises, especially Sydney and Melbourne. 

It's worth remembering that these figures comprise a period where resources construction declined, so the contrast over the next five years may not be quite so stark. 

Still, with employment growth exploding in the inner cities and investor loans being tightened, upwards pressure returning on rents seems likely in 2018.