Pete Wargent blogspot

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

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

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

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

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

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

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

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

Monday, 16 September 2013

Australia's miracle economy: a 3 minute update

Since we came out of Keating's famous "recession we had to have" and slow growth returned to Australia in September 1991, our economy has posted an amazing 22 consecutive years of growth. Although we experienced a slowdown around the turn of the century as the tech stock bubble burst, and again during the financial crisis, on both occasions interest rates were dropped and monetary policy helped Australia to avoid recession.

GDP Growth graph

The most recent National Accounts from the Australian Bureau of Statistics showed the Australian economy growing at 0.6% q/q and 2.6% y/y, which is some way below the long-term trend as you can see in the chart above. The official cash rate has again been dropped, this time to a new low of just 2.50%. The full effect of interest rate cuts can take up to two years to flow through in full.

Australian Cash Rate graph

As inflation remains benign and comfortably within the Reserve Bank's 2-3% target range, it appears likely that interest rates will remain relatively low for the near-term future.

Underlying Inflation graph

Inflation is forecast to remain fairly benign, largely due to a soft labour market.

Graph 6.4: Trimmed Mean Inflation Forecast


Consequently, there is not yet an expectation of higher interest rates in the coming six months.

Graph 4.1: Cash Rate Expectations

Low interest rates have impacted net savers and some pensioners adversely. Bank accounts and fixed-interest products are yielding very low returns.

Some residential property market prices have benefited from the lower rates, particularly those in Sydney, Perth and Melbourne. There was a lot of market commentary suggesting that the response to low interest rates by the property market would be weak. As recently as June, there was talk of falling prices in spite of multiple indications to the contrary.

This has been shown to be incorrect. The response has in fact been strong and is strengthening by the month, causing a rapid about-face in commentary. If this trend continues as implied by recent housing finance data from the ABS then it may cause a stop lever to be applied in 2014.

Graph 3.6: Housing Market

Is the property recovery being led by real estate investors or owner-occupiers? Actually, it's both. 

Graph 4.14: Value of Housing Loan Approvals

Vacancy rates have remained low now for some years, and rents continue to rise.

Graph 3.7: Rental Market

Are new dwellings attracting buyers? Yes, with a steady increase over the last three years.

Graph 3.8: Indicators of Dwelling Investment

Both dwelling approvals and dwelling construction are trending steadily upwards in response to monetary policy.

Graph 3.9: Residential Building Approvals

After the stock market crash, investors have also returned to share markets seeking yields and prospects for capital growth, pushing up stock valuations and price-earnings ratios.

Australian Share Price Indices graph


With asset prices increasing, we're getting wealthier again after the financial crisis destroyed much of the value of superannuation funds through 2008-9.

Graph 3.3: Household Wealth and Liabilities

It's notable, however, that share market gains have been found largely in the non-resources sectors: the industrials and financials. Resources companies have performed less favourably as commodity prices have tailed off. 

RBA Index of Commodity Prices graph

Iron ore export spot prices have not remained dramatically lower as feared (although it's likely that we'll see a seasonal dip in the coming months), but it's been a rough ride for other bulk commodity prices.

Bulk Commodity Prices graph

The brighter news is that recent data out of China suggests that it can achieve and perhaps subsequently maintain its growth target of 7.5%.

Graph 1.3: China – GDP Growth

Resources export volumes from Australia continue to ramp up and the major players forecast this to continue through 2014.

Graph 3.17: Export Volumes

However, from a risk perspective, keep a close eye on what happens to China's overheating property markets.

Graph 1.6: China – Residential Property Market

The red line signifies a weakening Aussie dollar against the USD, which is welcome news for exporters.

Graph 2.22: Australian Dollar

Unemployment continues to increase steadily in Australia as the mining investment boom is set to decline over coming quarters. The participation rate is also sliding.

Graph 3.18: Unemployment and Participation Rates

Wages growth has also fallen away.

Graph 5.5: Wage Price Index Growth

Note below the disparity in employment growth between states as the population booms. The major states are cumulatively employing tens of thousands more heads. Tasmania, South Australia and the territories, however, are not.

Graph 3.20: Employment by State

Labour sentiment indicators point to an ongoing weakness.

Graph 3.21: Labour Market Indicators

There has been a notable pick-up in consumer sentiment of late, and we're certainly buying a lot of cars, but any such confidence has yet to be translated into stronger retail sales.

Graph 3.4: Consumption Indicators

Summary

All in all, the RBA's Statement of Monetary Policy and Economic Outlook shows that the economy has slowed, and with the labour market remaining soft, we can expect this to continue for some time.

There is a significant community of voices which is hoping that the economy sinks into recession, in the misguided hope or belief that this will somehow 'make things better'. And indeed the labour market remains weak and the mining construction phase will begin to unwind in the coming years.

Does this mean that Australia is headed for recession? In a word, the RBA's team of economists says: no. The Reserve Bank maintains confidence that stimulatory monetary policy will work and stronger growth will return. 

Graph 6.3: GDP Growth Forecast