Pete Wargent blogspot


'Must-read, must-follow, one of the finest analysts in Australia' - Stephen Koukoulas, ex-Senior Economics Adviser to Prime Minister Gillard.

'One of Australia's brightest financial minds, must-follow for accurate & in-depth analysis' - David Scutt, Markets & Economics Editor, Business Insider.

'I've been investing 40 years & still learn new concepts from Pete; one of the finest commentators' - Michael Yardney, Amazon #1 bestseller.

'The most knowledgeable person on Aussie real estate & most comprehensive analyst I follow in Australia' - Jon Tepper, Variant Perception, 2 x NYT bestseller.

Wednesday, 17 October 2018

Devils & Details: Live and Unleashed!

Devils unplugged

Next month you will have the opportunity to see a handful of Australia's brightest financial and economic minds speaking at a live event at The Ivy in Sydney's financial district. 

I'll also be presenting, lol.

Click on the back of Colgo's head below for details!

Alongside Colgo and Scutty, here's some of the panel...

Awesome panellists - as well as Koukie, Whelan, and Michalakis - so it'll be a great event.

Come for the canap├ęs and adult beverages, stay for the bantz.

Tickets $50 - look forward to seeing you there!

Tourism is still booming, but not just from China

Swinging Irish

I recently saw another spurt of social media debate about whether Australia is economically speaking 'like Ireland'.

I must confess, I didn't read any of the content - in the two decades since I first came to Oz I've found that reading such bogus international parallels and fighting wars from a dozen years ago has done nothing worthwhile for me (but surely, to each their own!).

Instead, I prefer to look at and interpret the figures myself.

And here's what I note: the Aussie economy is presently growing at about 3½ per cent.

And the economy is expected by the Reserve Bank of Australia (RBA) to grow by another 3¼ per cent next year.

And growth is projected to be another 3 per cent the year after that.

So that's an economy that's growing at about 10 per cent in real terms over three years if the forecasts prove to be anywhere close to the mark.

Now, I've heard all these Armageddon scenarios over the years.

If the turd really did hit the fan - which according to money markets is priced as 'unlikely' - then Australia can cut its own interest rates close to zero, it can engage in its own quantitative easing, and it has its own free-floating currency, which acts as an automatic stabiliser.

Indeed, the Aussie dollar has already turned a neat trick in dropping back to ~71 US cents, which I believe is quietly leading us into a national income boom. 

We also have a budget that will be back in surplus in a matter of months (if it's not there already), so we have massive potential firepower in the form of fiscal stimulus if it's ever called upon for any reason. 

Another thing which will likely prove to be a furphy is the widely-spruiked massive oversupply of properties, which in my opinion outside a few pockets will prove only to be a temporary state of affairs (with most properties constructed in Australia being pre-sold rather than built speculatively). 

Record arrivals into Australia

The ABS released its latest arrivals and departures figures today, which showed annual permanent and long-term arrivals tearing higher again to 821,660, which is up by 6 per cent from a year earlier, and the highest figure on record.

In Australia, migrants tend to settle in three places: Greater Sydney, Greater Melbourne, and south-east Queensland, in that order.

So factor this chart into those dwelling oversupply calculations.

The good news is that both migrants and the incumbent population are finding jobs and unemployment has fallen very low in Sydney and New South Wales, and has recently been falling very fast Victoria and South Australia. 

The RBA's Debelle noted in a speech yesterday that job ads figures are losing their relevance because they don't pick up new recruitment websites, internet adverts on LinkedIn or other social media, or on large corporation websites.

According to more reliable business surveys, job vacancies are now at the highest level on record. 

So employment is expected to continue outpacing population growth, unemployment is expected to fall, and wages growth is now picking up again across the board. 

Tourism boom

The other demographic factor that is property-positive is the epic boom in tourism, with total seasonally adjusted short-term arrivals jumping to a record 794,400 in August 2018, well up from an upwardly-revised 774,100 in July.

Total annual short-term arrivals are at now a record 9.15 million, leading to a surge in Airbnb use and other short-term property portal lets. 

Queensland has rediscovered its mojo, with annual arrivals rising at a solid lick to 2 million and tourism having increased since the Commonwealth Games (however you choose to interpret that). 

Chinese visitors are now tracking at ~125,000 per month (or ~150,000 per month inclusive of Hong Kong), but the growth in visitors is now coming from other sources, such as India and south-east Asia. 

And finally, student movements also hit a record high in August.

The wrap

For all the negativity within Australia, globally it's still seen as a place to be.

And, in fact, this is now proving to be the case more so than ever before, not less. 

Of course, it's clear that in some second-rate areas there might be an overhang of undesirable apartments, which you'll get at the peak of a construction cycle.

It's worth remembering that migration into Australia is highly seasonal, and the next busy months won't be until January and February 2019. 

But the supply of well-located land remains unchanged.



Henry Sherrell, formerly a policy analyst at the Migration Council and of the Department of Immigration, a Research Officer into Labour Mobility and Migration at the ANU, later of the Lowy Institute, and most recently of the Parliamentary Library - I think that's roughly right, anyway...basically he's written a lot of submissions and knows a LOT about migration trends - out of interest requested an overlay of estimated net overseas migration (which slowed towards the end of 2017) and long-term arrivals (which have blown higher in 2018).

As you can see below, up until the end of 2017 the patterns were very similar.

And since the end of 2017 long-term arrivals has taken off.

The net overseas migration figures lag significantly and haven't been released yet beyond March 2018 yet. 

My reading of this is that it may imply an acceleration in net overseas migration is happening right now in 2018. 

Down, down...share prices are down

Shareholders blowing their groceries

But for a dime for each time I'd heard that if Buffett invested in Aussie stocks he'd own Woolies.

I'd be almost as rich as the big fella himself!

I haven't much followed that logic.

After all, Wazza could buy Australian shares if he wanted to, and...ah, never mind.

On a personal note, I must confess that I've never liked Coles and would choose Woolies as a place to shop in preference any day of the week. 

But as a Brit raised on Waitrose, Sainsbury's, and M&S I was never particularly enamoured with either of the main Australian brands.

They've generally offered ordinary choice and quality, at not very ordinary prices. 

It's been a long past 11 years for Woolies shareholders with the share price down from around $35 to $27.80 or so at the last count. 

The widely-spruiked 'Buffett stock' meme gathered a serious head of steam in 2014, before the price crashed by 45 per cent as the company ran into trouble.

The journey has been far from a total washout, with dividends arcing steadily higher over the years. 

But then in 2016 Woolies posted its first loss as a listed company of $1.2 billion, leading to the final dividend to long-suffering shareholders for that year being cut by 54 per cent (and the annual dividend slashed almost in half), with a recovery since underway. 

Amazon cometh

The reason this is now of interest - to me at at any rate - is that Amazon Australia is now launching itself forth into grocery sales, which is set to put further pressure on to the margins of Coles and Woolies.

And with Amazon fresh food to follow in due course, there will also be the value chain model in the form of Aldi to contend with.

To date, the product range offered by Amazon isn't large, but their broader expansion into Australia to date has been both aggressive and impressive.

This also appears likely to maintain downward pressure on the rate of consumer price inflation. 

As an aside, Buffett did invest in a supermarket chain some years ago - Tesco - and lost a motza as he 'thumb-sucked' while the company was exposed for its accounting scandals.

The all-too-comfortably profitable British supermarket businesses were taken apart by Lidl, Aldi, and other disruptions.

Discl: indirect holder. 

Canberra/Hobart turning into rental disaster zones

Rentals evaporating in some cities

Despite a record investor boom since 2013 vacancy rates are now falling as investment loans are squeezed harder, with the national rental vacancy rate down from 2.3 per cent to 2.1 per cent over the year to September 2018 according to SQM's latest release. 

In absolute terms, that represents a decrease from 72,955 to 70,172 rentals. 

Every month I'm bombarded with theoretical constructs about how Canberra's land tax experiment won't impact the rental market...and every month the rental vacancy rate falls further, now down from about 2½ per cent to just 0.6 per cent since taxes were initially all but doubled. 

I guess the idea was that people in the ACT earn high incomes so homeowners can afford to pay exorbitant taxes, but unfortunately ludicrously high taxes don't discriminate and it's turning out to be a disaster (especially for asset-rich but income-poor homeowners, and now for renters too). 

The ABS rental CPI index has more lag than my nanna's boiler, but more timely industry asking rents indices are now pointing to double-digit rental price increases for the nation's capital. 

Indeed, SQM Research's asking rents index shows the median asking rent for houses increasing by 31½ per cent over the past three years.

Plotted below are the capital city vacancy rates reported by SQM Research on a 6mMA basis so that you can see the trends (click to expand):


Hobart rentals evaporate

Hobart has increased in popularity over the past few years, but with banks either dithering or knocking back investor loans the rental stock has now totally evaporated.

With median asking rents in in the Tasmania capital city already up by 29 per cent over the past 3 years new rental supply should be abounding.

But instead it has completely crashed to sit close to the lowest level on record for any Australian capital city at just 0.4 per cent. 

Asking rents for houses in Hobart were up by more than 6½ per cent over the past quarter alone. 

With only 108 (!) rental vacancies now remaining - please see the definition of a rental vacancy before emailing me - Hobart rents are now destined to increase by more than 50 per cent through this cycle.

Meanwhile kamikaze commentators continue to call for tighter lending criteria for investors and scrapping negative gearing.

Before you pile in to Hobart real estate too late in the cycle remember that small markets can be more volatile and building approvals in Hobart are just coming off 99-month highs

I suppose a supply shock is one way to get consumer price inflation somewhere closer to the target range, with some forecasters already anticipating another dismal 1¾ per cent CPI print next time around. 

Adelaide is heading in a similar direction, with the vacancy rate now down to just 1.1 per cent. 

Brisbane has considerably more breathing space following its preceding record apartment construction boom, with the vacancy rate down far more comfortably from 3½ per cent to 2.9 per cent over the past year. 

As an interesting aside, check out how seasonal Melbourne's rental market these days as population flows become more fluid, partly due to more international students.

Christmas could be interesting this year.

Sydney elevated

The only major city that's seen a meaningful increase in rental vacancies over the past year is Sydney at 19,469 or 2.8 per cent (largely due to investors that bought off the plan a couple of years ago). 

Unfortunately for these investors that bought new at inflated prices they'll probably be in negative equity as they settle. 

While most of the city doesn't have especially high vacancy rates - for example, the Canterbury-Bankstown region sits only at 2.2 per cent - some parts are experiencing a surge of completions, and thus very high rates of vacancy, including most notably the Hills District.

19,469 sounds like a lot for Sydney vacancies, and it sort of is - arguably about 16,000 would be a rental market in balance - but let's face it, at the present rate of population growth this could turn around into a rental shortage on a dime if investors pull up stumps.

The summer months tend to be much busier in Sydney and Melbourne these days, so let's see what happens over the festive period.

Finally, the coal price bust and subsequent super-boom has seen the vacancy rate in the Hunter Valley tumble from sky-high levels in 2015 to just 1.3 per cent.

There could be an interesting twist in the tail for the coal-mining towns that took such a hit in the aftermath of the resources construction boom.

The coking coal price has burned up into the stratosphere at $215/tonne (or about A$300/tonne) which is huge for Queensland. 

6 rules for wealth creation (podcast)

And here they are.


Monday, 15 October 2018

Times are changing

Wages growth returning

Employment growth has continued at a rapid 2½ per cent pace over the year to August 2018.

So fast, in fact, the Federal Budget seems set to be back in surplus imminently. 

Quite a shock.

The jobs data will likely be the most interesting news of the week ahead.

The market median forecast sees +15,000 new jobs created on a net basis, and a seasonally adjusted unemployment rate steady at 5.3 per cent.

TD has gone in with a 5.1 per cent forecast, while the high range forecast is for +30,000 jobs created.

Source: Bloomie

Punchy indeed.

Such a result would really set the cat among the pigeons. 

The unemployment rate in New South Wales already plunged to just 4.7 per cent in August, while in Victoria the rate dived to only 4.8 per cent.

The participation rate in New South Wales has been pushing out the highest ever levels, driven by pulsating trends in female employment. 

The labour force figures are due for release on Thursday morning.


After a 'lost decade', UK wages growth is finally accelerating again, with the growth in regular pay excluding bonuses up to 2.9 per cent for the three months to July. 

The jobless rate in the UK is down to just 4 per cent - it hasn't been lower since 1974-5.