Pete Wargent blogspot

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

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

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

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"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'.

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Thursday, 29 August 2013

It's a capex report of two halves...

Source: ABS

Another fascinating capital expenditure report from the ABS today.  First, the actuals. As above, seasonally adjusted capital expenditure actually increased by 4% in the quarter, easily crunching expectations. So, far from Australia falling off a mining cliff, total capex actually jumped as the grey line below shows. 

As noted previously - and as I remember only too well from when I used to prepare the wretched things for the ABS myself - such capex reports rarely show a smooth result as expenditure often falls into periods that one might not previously have anticipated as projects can be mothballed, shelved, delayed, incur unexpected overruns or are brought 'live' again.

Graph: Total asset, total industry

Source: ABS

So, there was still a very high level of construction activity in the June quarter. However, these reports are of significantly more interest for what is expected for the future, and the capex surveys delivered less promising news:

"Estimate 3 for 2013-14 is $159,236m. This is 11.2% lower than Estimate 3 for 2012-13."

To look at this graphically, you can see that the shaded bars show that total capital expenditure is still very strong and remains higher than in previous years. But as the non-shaded bars show, next year is not going to look anything like so strong. Capex is probably going to fall and not insubstantially.

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

As for the 'mining only' element of capex:

"Estimate 3 for Mining for 2013-14 is $102,843 million. This is 13.6% lower than the corresponding estimate for 2012-13."

And to show this graphically:

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

Source: ABS's a capex report of two halves, as the old footie clich√© goes.

On the face of it, we haven't fallen off a mining cliff and this gives Australia valuable more months in order to rebalance away from the mining construction boom. The good news is that mining production volumes look set to increase strongly over the coming year.

Export Volumes graph
Bulk Commodity Exports graph

The bad news is that there is very little sign of residential construction picking up strongly - in fact, there is close to no discernible sign of it picking up to date, with high land prices clearly representing a sticky prospect for developers.

Recession risk?

Overall then, this is actually a capex report for the bears and the recession cheerleaders in Australia, of which there are a great many.

The RBA had forecast annual growth which suggests GDP for the June quarter of 0.6%, but some now believe that the number may come in at a weaker print next Wednesday given that there has been no change in retail growth and employment growth has been slow. After all, over the year to July unemployment has increased from 5.2% to 5.7%, a trend typically associated with slowing GDP growth.

Why would anyone cheer for a recession? A number of reasons. If you are busy shorting the Aussie stock indices, you'd definitely want things to go badly. If you promote blogs and websites which make money from selling doom and gloom via online advertising and newsletters, then you must continue to pray for rising unemployment and a faltering economy, and we do indeed see this every month in the online fraternity.

By far the most common reason people hope for a recession, of course, is that renters hope that a forthcoming economic malaise will result in a collapse in housing prices. 

This capex report is something of a mixed bag for them.

Interest rates

While we won't see any movement in interest rates in the coming election month, this weak capex outlook and likely slowing in GDP growth now means that it is more likely than not that we will see another rate cut to just 2.25% by November, which, if we haven't already seen the 'tipping point', will continue to fuel dwelling prices a little way higher. This will be particularly so in Sydney, one assumes, goaded along by an approving Reserve Bank and very tight stock levels on the market.

Future markets price in one further full interest rate cut at this juncture.

On the plus side for the housing bears, while I personally still remain hopeful of the economy being stimulated, you'd have to say that this report and some recent economic data - on balance - makes a recession appear more likely than it was. The mainstream media tends to flag significantly higher iron ore prices (roaring all the way up to $154/tonne in A$ terms - a huge leap of more than a third), an apparent stabilisation in China's growth and a falling dollar as valuable plus signs for the economy - and there is some merit in each of these points. 

But you'd have to say that even the better case scenarios see economic growth probably floundering over the next year.

Be careful...

A word of caution for the housing bears, though: housing market corrections don't always work out as planned. 

Over in Britain during the financial crisis, many were wildly excited by the prospect of falling house prices, but, in the event, the lifeblood which first homebuyers had previously assumed was their God-given entitlement - the 100% mortgage - was immediately snatched away by increasingly jittery banks.

Lenders instead began insisting upon vast deposits as unemployment and mortgage defaults jumped, and thus the main beneficiaries in Britain were greedy buy-to-let landlords who scooped up properties at a discount as defaulters were evicted.

First homebuyers lamented that it was "impossible" to save 20-25% deposits and instead began to speak of "Generation Rent" despite mortgage repayments falling to previously unthinkably low levels. By the time 100% mortgages are seen widely again, UK property prices will be significantly higher than previous peaks - and in London and many parts of the south-east, they already have comfortably blasted past record new highs.

Meanwhile, in Australia, thanks to record low interest rates property prices have increased in all capital cities over the past 12 months - although Adelaide continues to resemble something of a damp squib - and look likely to show moderate gains in the months ahead as the mainstream media begins to recognise the headwinds in the offing.

Source: RP Data

In the words of the old Paul Kelly song: "Be careful what you pray just might get it!".

Interesting times ahead.