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.

Wednesday, 22 October 2014

All-important inflation figures - two things to look out for today!

Interesting figures out today

At 11.30am today, the ABS will reveal its latest round of inflation data, in the form of its Consumer Price Index release.

The cost of living impacts all of us from clothing to transport, communication, education services, healthcare, recreation, and so on, so we should all be interested in what the figures have to say, at least to some extent!

We expect today's figures to show that the cost of food, tobacco and housing have all risen strongly in the third quarter, but this should be offset by softer numbers elsewhere, including falling fuel prices as the crude oil price declines, resulting a relatively low reading overall

Which would be very good news for borrowers and correspondingly bad news for net savers. In particular, here are two possible outcomes to watch out for...

Thing #1 - A low inflation print!

The current headline rate of inflation sits at 3 percent, which is right at the top of the 2 to 3 percent target band as set by the Reserve Bank of Australia (click charts to expand):


While this historic data suggest that interest rates could soon be heading up in order to quell inflation, there could be a very different implication after today's data for a forward-looking central bank. 

After all, a central bank should read the economy from what it squints at through the windscreen, not what it sees whizzing past when glancing queasily out of the side window.

The possible outcome alluded to above is that the next move in interest rates is down to just 2.25 percent rather than up from the historically low cash rate of just 2.50 percent, and this is why today's data release should be of particular interest to everyone from savers to share market and property market investors, homeowners and would-be homeowners.

The RBA's preferred "underlying" measures of inflation are tracking at 2.7 percent and 2.9 percent respectively on an annual basis, which are neatly within the target band. 


Meanwhile the inflationary impacts of the Carbon Tax and more latterly the decline in the Australian dollar (the exchange rate) have now washed through into the rear-view mirror, and with the labour market and wages growth remaining relatively soft, inflationary pressures are generally now expected to ease.

Economist forecasts for the September 2014 figures today range all the way from zero up to 0.6 percent for the quarter, with the consensus being 0.4 percent. The repeal of the Carbon Tax is expected to act as a "drag" on what is normally a strong quarter for headline inflation, and this could see headline inflation dipping into the lower half of the 2 to 3 percent target band.

As for the "core" measures, based upon what we have seen reported in other gauges we might expect to see a reading of ~0.5 percent which would bring the annualised reading down nicely to the middle of the band (the effect of the Carbon Tax will be pretty much trimmed out of the core readings, so the impact here of its removal should in theory therefore be minimal).


As you can see from the four purple spikes in the chart above, the surprisingly strong 0.9 percent readings across the suite of inflation measures recorded for the December 2013 quarter will have flowed out of the annualised figure by the time we get to the next quarter's data.

Therefore back-to-back readings of around ~0.5 percent today and something similar for the December 2014 quarter could leave the door open for an interest rate cut in H1 2015.

Thus if you want to see higher asset valuations - that is, appreciating property prices and rising share markets - you should be hoping to see a core inflation reading of 0.5 percent or below this morning.

On the flip side, if you are a net saver or you want property prices and share market price/earnings multiples to get cheaper in the near term (i.e. you are a "net buyer" in the future) you should be hoping for a core inflation reading of 0.6 percent or above.

Analysts have spent many hours over the past year poring over the RBA's Minutes for real or imaginary indications that there will be a housing market intervention in the form of a rate hike or macro-prudential measures to slow lending. 

But while references to credit growth and investor activity in the housing market do remain in the Board Minutes, there has appeared to be a reluctance to get excited about what has basically only been a boom in the Sydney property market, and not a whole lot else of any note.

Thing #2 - Easing rental growth!

With property prices rising since the middle of 2012 and building activity climbing to a 20 year high, we would also expect to see property rental growth sliding back at this stage in the cycle.

It's arguable whether the ABS figures are the most accurate data series for this measurement, but the trend in rental growth nationally has been quite clearly down now since the beginning of 2009.


A lot of water has flowed under the bridge since the quarantining of negative gearing tax legislation back in July 1985 saw rental growth first in Perth and then Sydney balloon to 17 percent from below 6 percent and 8 percent respectively.

Rental growth in the major capital cities since 1988 has been much more sedate as inflation has fallen, although notably Perth did experience a spike in rents during a pressing dwelling shortage or tight rental market in the midst of the mining construction boom in 2008/9.


A few capital cities in particular could pull rental growth figures down sharply this quarter including Darwin, where rents may now be falling significantly (or not, depending on your favoured index!) and Canberra, where rental 'growth' has now turned turned quite dramatically negative according to most indicators.


The 5 year chart for the major capitals below shows that things have calmed down significantly in Perth, and to some extent Sydney.

Indeed, the ABS June 2014 figures for Perth still showed rental growth holding up at 2.9 percent, so if what other data providers recorded are a good indicator, there is a significant downside risk to today's ABS reading for Perth.


For reasons that are not altogether clear, the ABS shows Sydney's rental growth as being some way weaker than the specialist property data providers.

RP Data, Residex and Australian Property Monitors all show apartment rents in Sydney, for example, growing at a 4.2 to 5.3 percent pace, while SQM Research and the ABS show a more sedate 3 percent growth rate.

In any case, will supply coming onto the market over the next year, expect rental growth to be softer , particularly in those locations where ample construction is underway.

Summary

If the inflation reading is soft, future markets will begin to price in another interest rate cut in 2015 as an each-way bet. As things stand, markets are only seeing about one chance in three that there will be a cut by the end of Q2 2015 and most economists have stuck to their view that the next move in rates will eventually up.

As things stand the outlook appears dire for savers while mortgage holders are set to enjoy exceptionally cheap loans, with even March 2016 ASX 30 Day Interbank Cash Rate futures contracts trading comfortably above 97.50, thus implying no interest rate hikes for one heck of a long time to come.


This morning's release will form a key piece of this puzzle!