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

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

Wednesday, 23 July 2014

Interest rates fall to record lows

Headline inflation 3%

Today's headline CPI print came in at 0.5% for the quarter or 3.0% for the past year.

This takes annualised headline inflation to the top of the 2-3% target band, which is sure to arouse some talk of interest rates not having further to fall (click chart):

One of the big drivers of rising prices this quarter was medical and healthcare costs (+4.6%).

I still don't think there's much to get excited about here from a macro perspective. 

Next quarter, the big 1.2% spike in September 2013 inflation will drop off the y/y figures, bringing the annual headline inflation rate back into line.

Core inflation

The core inflation figures, considered to be more important for monetary policy settings, came in fairly strong this quarter at 0.6% for weighted median and 0.8% for trimmed mean.

On a combined basis, this takes core inflation to 0.7% q/q and 2.8% y/y.

This is sneaking up towards the upper end of the target 2-3% range (click chart):

Interest rate implications?

There will be some debate as to whether this puts the kybosh on further rate cuts.

On balance, there doesn't seem to be too much for the RBA to get excited about here and its tone is likely to remain neutral for the next quarter as more data is absorbed.

For the reasons I discussed here and elsewhere on this blog, this could yet prove to be the high tide for core inflation readings in this cycle.

Rents easing nationally

The ABS series showed rents rising strongly in the June quarter by +0.9% in Sydney, but this was offset by weaker prints in cities such as Melbourne (+0.3%) and Adelaide (+0.5%).

Nationally, rents rose by 0.6% q/q and 2.5% y/y (click chart):

For a number of different reasons, rental growth is relatively soft and easing at this stage in the cycle.

Stock on market has increased, vacancy rates are increasing nationally and with mortgage rates at record lows there is very little requirement by landlords to demand more rent from tenants - borrowing rates are falling to unheard of levels in Australia.

On a related note, the Reserve Bank put out a release this week discussing the merits of renting versus buying property.

As someone who has rented over the long term, I can attest to the benefits of renting and investing, but it's a good time to be wary of some of the BS analysis which tries to argue that owning property has been a dud choice over the long haul.

As the chart above shows, rents have continued to rise relentlessly for 40 years without skipping a beat and dwelling prices in capital cities have surged consistently higher too, so it would be some feat of data manipulation to argue the anti-home ownership case.

Sure, it's always possible to torture figures until they confess, but generally homeowners have done very well.

With interest rates stuck at record lows, there is likely to be strong demand for property from investors and homeowners putting upwards pressure on dwelling prices. 

On the flip side, I wouldn't expect to see rents rising too strongly outside of certain parts of inner Sydney at this stage in the cycle.

Rates dropping further?

The Aussie dollar got itself a little bit excited by the inflation release today and skipped up to 94.35 US cents, while longer dated bond yields followed suit.

Accordingly, a further interest rate cut in this cycle may appear to be a little less likely than it was.

After the dust settles, we'll likely see the odds of a further rate cut as closer to a 1 in 3 shot than the each way bet which interbank futures had priced in previously (click chart):

I think it's most likely a case of "let's wait and see" on that.

Annualised wages growth is still quite anaemic at +2.6%, and the pass through effects of the lower dollar will soon fade, a twin dynamic not associated with rising inflation.

A final point of note here is that mortgage rates are actually falling independently of the Reserve Bank.

Today, Commonwealth Bank cut its 5 year fixed rate to an unprecedented 4.99%, the lowest level we have ever seen in Australia.

That alone should keep the property market buoyant and the RBA will be watchful.

Perhaps this is the twist in the tail here: the Reserve Bank may not cut rates further, but the banks are doing so regardless as funding costs fall and competition for customers heats up.