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).

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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"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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Tuesday, 18 November 2014

Car Sales Point to Slowing Mining States (as NSW Thrives)

Mining Boom Unwinds

Later this week the ABS will release its State Accounts for 2013/14, which will reveal some interesting trends related to gross and disposable household incomes. The State Accounts will also begin to show the first real impacts of the unwinding of the mining construction boom on mining state economies.

We expect to see exporting states such as South Australia, Western Australia and Queensland (in addition to the languishing Australian Capital Territory economy) recording relatively flat or negative readings for annualised State Final Demand (SFD), a measure of economic activity which does not take into account export sales or sales which lead to an accumulation of inventories.

The general concern is that mining construction activity by the end of FY2014 had barely begun its much anticipated decline, which also accounts for why we don't see interest rates reverting higher any time soon.

In this context, today’s Sales of New Motor Vehicles release from the ABS, particularly in a week where Commsec reported that car affordability had hit its best level in 38 years (i.e. ever), was instructive.


New Motor Sales Moderate Decline

On a national basis, new motor vehicle sales of a seasonally adjusted 92,741 in the month of October represented a moderate decline from the previous month, and also a slight decline on the 93,191 seen in the same month last year. The trend now looks soft.


NSW Thriving...but Mining States Slowing

Mirroring what we have seen happening lately in interstate migration figures and the state’s own strong economic performance, New South Wales saw new motor vehicle sales surge higher to a seasonally adjusted 30,564 in the month of October, and more than 179,000 on a rolling 6 monthly basis. That's big.

On the flip side, new motor vehicle sales have been declining in the exporting states as interstate migration gradually shifts away from resources industries.

Notable declines in new motor vehicle sales were recorded in Western Australia, Queensland, South Australia and the Northern Territory, while sales were also particularly soft in Tasmania this month to be down by more than 14 percent year-on-year in the "Natural State", perhaps fittingly.


Congestion!

If there is one thing which the above chart should tell you from a real estate perspective it is that capital city properties located close to key transport links for employment centres will perform better over the long run than the average dwelling price growth.

The capital cities are getting more congested by the year - consider the sheer scale of the numbers!

The population of New South Wales may now be growing at a rollicking pace of around 110,000 per annum, but this figure pales into insignificance when compared to the appetite for new motor vehicles, with more than 356,000 new units shifted in the state over the past year. Wowsers.

Our experiences in London over the years have continually shown us that properties located within a 500 metre radius of a functioning Tube station can command a very significant premium of around 10.5 percent, or £42,000, which is significant. Importantly, they typically remain tenanted and prices hold their own robustly, even during the cyclical downturns.

As such, at AllenWargent we always focus on purchasing investment properties for clients in Australia’s capital cities which will benefit the most from direct train line or light rail access to their respective Central Business Districts and employment centres.

The Rise and Rise of the Sports Utility Vehicle (SUV)

Unsurprisingly, while passenger vehicle sales continue their gradual decline on a rolling annual basis, the rise and rise of the popularity of the SUV continues to put pedal to the metal, accelerating into top gear and recording yet another new record high. 


Summarily, today's release is a further indication of the challenges facing the economies of those states and regions which have benefited so greatly from the mining construction boom.

Sydney continues to benefit from its strong dwelling and infrastructure construction economy, which is also attracting significantly stronger population growth than many had expected.

Yet elsewhere, weaker economies and ongoing declines in engineering construction are set to act as a material drag on GDP growth over the coming 2-3 years.

Regional Unemployment

There were plenty of interesting reactions to my piece on Property Observer, which discussed the alarming and growing gulf between capital city employment growth in Australia and that being seen (or rather, that not being seen) across the regions.

The Age has now got on the case too, highlighting rapidly rising rates of regional unemployment in Victoria in an article of its own today.

It should go without saying that, while unemployment is rising in aggregate and in many regional locations, this is by no means the case across all regional centres and ex-capital city locations.

The Gold Coast, for example, is obviously not a capital city, but does not have a particularly high rate of unemployment. Nor does Toowoomba have an elevated unemployment rate, by way of another example.

However, some regions clearly do face some serious problems and challenges.

While thriving Greater Sydney has an unemployment rate of just 5.1 percent, parts of the NSW South Coast have hit the headlines over the past year or so due to significantly elevated levels of unemployment

Unemployment rates are also running uncomfortably high in some coal mining regions such as the Hunter Valley and Newcastle/Lack Macquarie, where unemployment rates are tracking up towards ~8 percent and rising, even when smoothed on a 4 month moving average (4mMA) basis.


In Victoria, cities such as Bendigo, Ballarat, Shepparton and Geelong all have unemployment rates that are way too high for comfort, with monthly average rates of unemployment materially higher than they were in 2013 and trending up.


Quite a number of regional locations across Queensland also have rates of unemployment that are too high. Monthly data at the regional level tends to be somewhat volatile and thus we do smooth figures on a 4mMA basis, but the uptrend over the past six years since 2008 is clearly evident, and is of concern.


The same is also true in Tasmania where elevated rates of regional unemployment are evident...and so on the pattern goes. 

The Wrap

Both commentators and casual observers for my money are far too complacent with regards to how certain economic factors, particularly employment, affect property markets, largely one assumes because the great majority of regions and cities around Australia have had such a long and strong run without a material correction.

There seems to be a fairly widely held viewpoint that unemployment always exists to a greater or lesser extent, and therefore isn't even particularly all that important for property markets. Very foolish.

The key point to remember is that while high interest rates are not going to be a factor which causes a property market correction any time in the near future, rising unemployment - which, trust me, can take a proverbial wrecking ball through property market sentiment and in turn dwelling prices - could be. 

We are also now seeing migration away from some mining regions, which is another risk entirely.

Personally, I will never underestimate what a faltering industry or the combination of economic malaise and double digit unemployment rates across a region is capable of doing to a property market, and that is for one simple reason - I'm British.