Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Thursday, 4 December 2014

GDP, Incomes, Housing & All That...

Weak GDP Result

Well, well, what a palaver after a surprisingly weak set of results from the National Accounts! Let's take a look, and since there are limitless angles one might choose to follow, particularly in the context of what the results may mean for our housing markets, in 5 short parts...

Part 1 - Headline GDP Miss

The market expected a seasonally adjusted GDP result of 0.7 percent for the third quarter, but in the event we got a headline figure of 0.3 percent and 2,7 percent for the year to September 2014.

The key "misses" against expectations were declining mining investment, which perhaps not that surprisingly undershot expectations (-0.2ppts), and public investment (-0.2ppts).

Significantly the terms of trade index got smoked again by another 3.5 percent in Q3 after diving by 3.7 percent in Q2, mainly thanks to the iron ore price decline as well as other commodities, though the ToT are still miles above the long run average.

Real net national disposable income, a so-termed "measure of national well-being" which adjusts the volume measure of Australia's GDP for the terms of trade effect, has grown by just 0.8 percent over the past year as compared to GDP of 2.7 percent.

If my mental arithmetic is correct the headline result of 0.3 percent GDP growth for the third quarter, while weaker than expected, now completes an incredible 92 quarters without a recession in Australia.

Consumption held up pretty well - especially in NSW, growing by 1 percent - as the household savings ratio declines from an elevated level, while the consumption figure was pulled back by an "odd-looking" seasonally adjusted decline in the volume of food consumed (pretty weird for a growing population which has been getting heavier! Probably a glitch in the data one might hazard...). 

The difficult to predict result was met with very predictable hysteria even though the economy - which is measured by output rather than solely by the ups and downs in the price of iron ore and coal - has grown by 2.7 percent over the past year, although less in per capita terms.

The terms of trade may stabilise from here or they may fall further towards their longer term average. My years in the resources industry taught me not to predict, but the trend is clearly down at present and terms of trade booms have a tendency to repeat their irrational behaviours on the downside too.

Low interest rates are having some effect within Australia, with credit growth approaching a 6 year high and consumption likely to do well in some cities (especially Sydney), but some economists have revised their opinion to expect 50bps of further interest rate cuts in the year ahead, perhaps beginning as early as March 2015.

Part 2 - Dwelling Investment

A stinker of a result here in Q3! New dwelling investment fell by 1.1 percent and renovations work declined by 0.7 percent, thus dwelling investment contracted by 0.9 percent. Not exactly what was hoped for from the residential construction boom!

Our state level chart packs tell us that major renovations work has been driven almost entirely by Sydney to date.

A poor non-contribution from housing to the national accounts this quarter then! However with capital city building approvals hitting their highest ever level in October, the future looks brighter here.

Some surveys have shown that renovation intentions have hit a multi-year high, but we're not seeing much evidence of it in the data yet outside Sydney.

Part 3 - Household Accounts

A quick spin through the household accounts, which are very crude measures and not adjusted for changes in the population, but interesting to look through nonetheless.

Total gross incomes increased by 4.1 percent over the past year, with compensation of employees increasing by 3.1 percent over the year and a seasonally adjusted 0.8 percent over the past quarter (or 0.6 percent per employee, which is in line with the wages price index).

Gross disposable incomes increased by 3.9 percent over the past year.

It is worth noting here that for all the spooky "recession" headlines and buzzwords about "falling incomes", "income shocks", "personal income recessions", "technical income recessions" and goodness knows what else, of course Australia at the national level is not actually in recession and nor are wages falling at all, continuing to rise throughout the history of the data series in every state and territory.

That said, as pointed out on this blog many times, there are a great many parts of regional Australia which already are effectively experiencing recession-like conditions. 

The wages price index is currently tracking at 2.6 percent per annum growth, significantly weaker than the long run average, and appearing likely to run as low as 2.4 percent in the near future. The wages price index has risen by about 80 percent since 1997.

Part 4 - Interest Rate Impacts

Interest repayments on dwellings increased a marginally by 1.7 percent over the past year but remain some 19.5 percent lower than their September 2008 peak.

In other words mortgage serviceability for existing homeowners on variable rate mortgages has improved dramatically over the past six years (which, of course, is no consolation at all for would-be first homebuyers).

This accounts for why the Reserve Bank's Chart Packs show interest paid as a percentage of household disposable income plummeting from nearly 14 percent to just 9 percent since the 2008 peak.

It's likely to improve further for homeowners in this regard, too, since inflation now appears to be quite flat and trending back towards just 2 percent on an annualised basis...and futures markets are now pricing in an interest rate cut in 2015. Some economists think interest rates could go significantly lower too.

Part 5 - States & Regions

In terms of State Final Demand (SFD), a measure which excludes exports, it was another smashing result for New South Wales in Q3, but not so much to write home about elsewhere. Excluding the wildly volatile Northern Territory, the mining states are ramping up their export volumes, but final demand is contracting as the construction boom unwinds.

Over the year, the strength of the Sydney economy is evident, with SFD continuing to track at above 4 percent. With 50,000 dwelling starts expected for the calendar year ahead and retail trade booming off the charts, 2015 could be yet stronger again in NSW (read: Sydney).

South Australia on the other hand has been teetering on the brink of decline for half a decade now, with employment growth moribund for years and the shuttering of the car manufacturing industry set to cost thousands more jobs in the state.

In this context the decline in public investment seems rather concerning, since some of these struggling areas of the economy would clearly benefit from a less restrictive fiscal policy and some concerted and well-planned infrastructure investment! 

The budget appears to have misread the economic outlook in this regard with mining investment set to keep falling in the years ahead.

With a Greater Sydney unemployment rate of just 5.1 percent, retail trade in Sydney continuing to shoot the lights out at double digit levels of growth and house prices continuing to rise at a 10-15 percent per annum pace, interest rates at their current setting are too low for Sydney.

Yet we are not going to get a rate hike - instead, with many regional areas and cities across Australia struggling, instead rate cuts now appear more likely.

It's a point that has been raised on this blog many times in recent years, but the gap between jobs growth in the main capital cities and the regions (and Adelaide, and lately Canberra) has become a veritable gulf. 

We've plucked out just a few regions below where headline unemployment rates are uncomfortably high and have been rising, although there are others. Note that these are 4 month moving average figures and not one-off results or spikes in the data.

There are no hard and fast rules to when it comes to property markets, but as a rule of thumb if the unemployment rate is above 7.5 percent and rising, you'd pretty much want to know the heck why. 

Even more so after seeing the fallout experienced in the UK regions through the financial crisis, we don't recommend regional property markets (unless you are a genuine counter-cyclical investor, which absolutely does not mean buying now).

Be particularly wary of statements such as "it's OK because most people don't work in mining in this region" or "we pick outperforming suburbs and properties regardless of wider market conditions", among countless others. 

Naturally, property promoters use all kinds of justification and twisted data for pushing their favoured markets, but ultimately if unemployment across a region has gone from 2-4 percent to around 8 percent and - is still rising - I'd be concerned.

In 2015, we expect to see Sydney continuing with its hot streak buoyed by stimulatory borrowing rates and a stronger year for Brisbane as investor attention shifts north of the border. For that reason, we'll be buying in Brisbane too in 2015.