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.

Tuesday, 30 September 2014

20 second brain teaser

h/t Business Insider.

A 20 second brain teaser - think literally and think laterally as the old radio show used to say...

See link for answer.

What parking space number is the car parked in english translation



There is a veritable flood of economic data coming our way imminently which will be indescribably exciting, but not for a couple of days yet, giving me the chance to riff on a few esoteric topics for a day or two.

Been up in Lincoln today, always worth a visit for its stunning cathedral. 

Although it has stood proudly in its place quite magnificently since being constructed under William the Conqueror in 1088, nobody had heard of Lincoln Cathedral until it decided to raise funds by allowing 'Rose Line Productions' to use the interior as a film set for Dan Brown's gelastic romp The Da Vinci Code in 2005 (unsurprisingly, Westminster Abbey had declined the lure of the lucre).

Although it is obviously something less of a drawcard than being able to stand at the spot where Silas uncovered the clues to the Rose Line (or whatever happened here in the movie...actually, what did happen here in the movie?), the cathedral is also home to some quite cool and even more significant history than the shooting of Dan Brown flicks.

This includes being able to boast one of only three legible copies of the Magna Carta, which has been the under ownership of the cathedral since 1216. 


Of all the exams I had to sit to become a Chartered Accountant, the one I found trickiest to get my head around was tax. Not only was Britain operating under an archaic schedular tax system, there were seemingly trillions of silly rules with no apparent rhyme nor reason to them (and there was no such thing as an "open book exam" in those days).

The complexity of tax legislation is not too surprising when you think about it. It was the Magna Carta itself in 1215 which laid down the fundamentals of today's tax law, including the rather salient point that the King now had to actually ask for consent before demanding taxes from the populace.

Next year will of course mark the 800th anniversary of the signing of the Magna Carta, and what a phenomenally complex and intricate tax legislation has evolved over those centuries since.

Inextricably linked

The tax laws don't operate in isolation. A bit like Newton's Third Law, for every action there often an equal and opposite reaction. Or in the case of tax law, several reactions.

Amendments to tax legislation are complicated and therefore must should pass rigorous modelling as well act Acts of Parliament before being adopted and administrated by Her Majesty's Revenue & Customs (HMRC).

Notably, tax legislation is usually amended via the consultation of tax experts and rarely is it adopted at the behest of bloggers, comments from punters on Facebook or from debates held in the Twittersphere.

On an obliquely related note this year the Bank of England allowed queries to be asked of the institution via a Twitter hashtag (#askBoE), but one suspects that will be the first and last time it undertakes the offering of such an olive branch of approach-ability following a cascade of facetious questioning and strongly-worded suggestions.

Britain's schedular system of taxation was cleaned up in part by a new act around a decade ago, while Australia has no such schedular system of taxation in place.

Negative about gearing?

Indeed, it is exactly this fact that Australia does not operate under such a schedular system of tax that has been causing so much debate in recent times with respect to so-termed "negative gearing" (NG) legislation, the existence of which allows investors in property to offset net rental losses plus depreciation allowances against current year salary income (this is not allowable in Britain, for example).

While it is doubtful anyone would create a new set of tax laws today which allowed for such an offset (more typically, a loss in an investment class could be carried forward to be offset against gains from the same asset class), some of the ongoing arguments used for necessarily scrapping NG are painfully oversimplified.

One of the favourite lines of reasoning is that government could "save" several billion dollars simply by "scrapping" the legislation. Setting aside the fact the the legislation reflects timing differences and losses claimed should or could theoretically be offset by future rental gains, it is also important to consider Newton's Law and the opposite reactions.

Ignoring the argument of whether or not rents would rise sharply as they did in Sydney and Perth when the NG rules were previously quarantined for two years from 1985, if the desired effect of quelling investment activity is achieved, what of the stamp duty foregone?

What of the rapidly reduced corporation taxes collected from developers and materials businesses as fewer dwellings are constructed when prices are dampened (as would surely eventuate)?

More pertinently, if waiting lists for public housing spiral by nearly 30 percent in New South Wales as they did between 1985 and 1987, who picks up the tab for that?

I'm not saying there aren't achievable work-arounds for each of these points, but it does seem to me that the key point is that driving down prices would result in an immediate capitulation of the dwelling construction boom which has been engineered by higher prices since the middle of 2012.

This point seems to be overlooked or more usually ignored every time the debate takes place, although I did notice it referred to by Ross Guest in an article this week.

Moreover, were the full impacts of lower housing prices to be modelled the tax take might well look very different to a supposed saving of several billion. Ed Chan, an accountant who unlike me does specialise in tax, argued here that scrapping negative gearing could potentially cripple government budgets in costing hundreds of million dollars in public housing expenditure.

There is no need for another drawn-out debate on the merits or otherwise of the legislation here since most people have long since adopted their positions based on their own housing status and tax position, only to note that the rules will not be scrapped outright for the reasons listed above. Legislation may be amended prospectively, though, in particular restricting new claimants to losses made on new dwellings. We'll have to wait and see.

Replacement cost

The thing about large cities with strongly growing populations, of which Australia has four, is that prices should ultimately oscillate close to their replacement cost, which is why capital city housing tends to be a good inflation hedge. It is possible to force prices below replacement cost for a time but then construction will quickly cease, only to fire up again once prices are acceptably above replacement cost.

In short, I have no doubt whatsoever that the scrapping or quarantining of negative gearing rules would cause dwelling prices to temporarily ease, but if the outcome is the end of the construction cycle and a chronic housing shortage eventuates in Sydney then the merits may not be no great.

If these points seem somewhat circular, that is because housing markets are naturally cyclical. At this stage in the cycle we should be seeing more supply which will eventually bring rentals costs under control and the price cycle will pass its peak in due course.

Population growth adds to the challenges

Of course, tax legislation is one thing, but Australia's rampant population growth, a policy doubtless in part adopted in order to keep the tax dollars flowing in, is quite another.

Although we believe that population growth will slow markedly as the year progresses, the data released last week which I analysed here showed that population growth has exploded higher in New South Wales by 114,500 persons in the 12 months to March 2014.

While population growth was slower (and slowing) elsewhere a total annual population growth of 388,000 persons puts great strain on housing in four capital cities in particular: Sydney, Melbourne, Perth and Brisbane.

Over the past year New South Wales (+114,500), Victoria (+108,800), Queensland (+75,800) and Western Australia (+63,400) accounted for all of the materially significant population growth in Australia covering off a massive 93.3 percent of the total. This continues the long run trend of population growth being heavily focused on these four states (click charts to expand).

Note that more than 230,000 or around 60 percent of that population growth was due to net migration, although this figure will slow as the year progresses.

The long term population growth figures in New South Wales, Victoria, Queensland and Western Australia tell their own story.

Australia's population policy is in part driven by the desire to replace the rapidly ageing workforce with new younger taxpayers, which gives us an enviable population pyramid when compared to most developed countries but may come at the expense of GDP per capita...and high house prices in Sydney and Melbourne.

While we continue to add 80,000 to 90,000 people to our largest cities each year, this represents a huge underlying demand for housing.

Au revoir cheap holidays...

Dollar finally declining

There are some lovely places to holiday in Australia.

Which is just as well, because having enjoyed an Aussie dollar at around parity or above for nearly four full years since October 2010, holiday makers are now going to have to get used to the dollar returning to what has been a more 'normal' level over the medium term.

When commodity prices and iron ore in particular went on a tear from 2008, the Australia dollar went bananas from Q4 2010, and for quite a long period of time was even stronger than the US greenback.

The supply response from miners has been swift and effective, with Australia and other countries shipping more and more ore into China at rapidly declining prices. Overnight the iron ore spot price (62% Fe) hit a new five year low of $77.70 per tonne as the glut takes its toll on the market.

In theory such spectacular weakness in the chart prices of our three main export commodities (iron ore, metallurgical coal & thermal coal) should have quickly been reflected in a weaker currency.

In the event, for a long time through April then May, June July and August the Aussie battler seemed to defy gravity, still buying around 95 US cents.

However, this month has finally seen the Australian dollar respond declining all the way from 94 cents to below 87 cents, before settling back at around 87.3 cents.

This is welcome news for the exporters, of course.

But it will not be so much fun for holiday makers who were just getting used to that strong dollar. It may be time for Aussies to start considering the Gold Coast for holidays again!

I explained why I was a buyer of GBP at around $1.73 here, a play which is travelling very nicely, with the British pound sterling now buying A$1.865 and counting, a move of nearly 1400 pips in three weeks. There could be more to come too. 

The Bank of England Governor Mark Carney suggested that an interest rate rise is "getting closer" for the UK, but he has acknowledged that low interest rates are likely to be the "new normal", perhaps at around just 2.50 percent.

Low interest rates the new norm

Australia looks set for an era of low interest rates too.

Some time ago I explained here and here why I think a neutral or "new normal" cash rate today is likely to be significantly lower than in times past - perhaps at around 3.75 to 4.25 percent - it's much to do with higher household indebtedness today and the fact that hikes will have a bigger impact than they once did.

An article in the Sydney Morning Herald this week discussed a similar question, that being where interest rates could hit their peak in their next cycle.

Shane Oliver, Chief Economist of AMP, who always strikes me as someone who speaks a great deal of sense, argued that 4 percent might be a reasonable expectation for where interest rates might peak, which is only 150 basis points where we are at today.

It's common for people to argue along the lines of "if interest rates were at 12 percent..." but quite simply they aren't, and while one should never say never, they probably will not be for a very long time to come.

In the meantime, it could be time to check out Australian holiday brochures because the dollar has been sliding sharply over the last four weeks.

Monday, 29 September 2014

Sydney "best start to a spring selling season in its history"

Sydney's inner west continues its sizzling run with another 90 percent plus auction clearance rate from 93 reported auctions on Saturday.

After 7 or 8 years of chronic undersupply and a rush of demand from couples and young professionals who could no longer afford swanky apartments in the beachside suburbs, Sydney's inner west has seen its property markets undergo quite an extraordinary thrust over the past half decade.

It has been a huge boon to investors who were ahead of the curve. 

It seems remarkable now, but not so many years ago many Sydneysiders had never even heard of many of these boom suburbs, thinking of the inner west as more of a 'Wild West'. 

The end of the inner west boom must surely come eventually, but the market even now does not seem ready to roll over just yet.

From Australian Property Monitors market wrap:

"The Sydney weekend auction market passed its biggest-ever Saturday September test recording another exceptional clearance rate at the weekend. Despite hosting 723 auctions - a new record for a September Saturday – the Sydney market reported its eighth consecutive weekend clearance rate above 80 percent with an 81.9 percent result.

Sydney has produced the best start to a spring selling season in its history with historically high levels of auction sales for this time of the year. The weekend’s record early spring auction numbers were well ahead of the previous weekend’s 621 auctions and the 593 listed over the same weekend a year ago.
This weekend’s auction clearance rate was the eighth consecutive weekend with rates above 80 percent. Sydney’s four-weekend average clearance rate now stands at 82.9 percent compared to 82.0 percent over the previous four-weekend period.
The inner west reported the highest clearance rate of all the suburban regions at the weekend with a 92.5 percent result from 93 reported auctions. This was closely followed by the upper north shore with a clearance rate of 89.3 percent, the city and east with 85.1 percent, the northern beaches at 84.1 percent, the south 84.0 percent, the lower north 80.4 percent, the west 78.7 percent and the north west with a clearance rate of 76.2 percent.
Underlying demand for housing in Sydney continues to rise offsetting to some degree the strong activity from investors currently providing record levels of new rental supply into the local market. Latest ABS data reports that the NSW population increased by 1.6 percent or 114,500 persons over the 12 months ending March this year. Of this increase, 76,274 were overseas migrants – 24,494 over the March quarter alone the highest quarterly total since September 2008 – and all of them needing somewhere to live.
The Sydney auction market now heads into October following a record performance over both August and September. Next weekend activity levels will wind back temporarily due to the Labour Day long weekend holiday with the prospects however following the break of strong market conditions to continue all the way to Xmas."
Where next?
Some of the lower north shore suburbs have been performing strongly in recent months.
But where is going to blow off next in the harbour city?
For some time we have had our eye on (and have been buying property in) a number of suburbs in the Canterbury-Bankstown region which are likely to benefit from the twin effects of gentrification and the outwards ripple effect of the property boom from the inner west.
First come the coffee shops and restaurants, and then the demand follows.
Certain Canterbury-Bankstown suburbs will appeal strongly to migrants from Asia which will see demand rising very strongly. The region is still a little rough and ready in parts, and the eastern suburbs types will look down their noses (exactly as they did to the inner west not a decade ago), but some of these gentrifying suburbs will doubtless see price agains ahead.
Meanwhile, supply remains tight and vacancy rates have been exceptionally low for more than decade, even now at only at 1.3 percent.

Whatever the theorists and academics try to argue, where demand rises and supply is tight, this forces up rents and then prices. 

It is at this point that the speculative buying can kick in and see prices overshoot fundamentals, but those market fundamentals must be present in the first place to start the ball rolling.

Of course, city-wide property price indices are only an indicator more than anything else, but it may be that the Sydney market finishes the calendar year recording capital growth a little above our 6 percent to 9 percent 2014 forecast (click charts to expand).

Most of our other 2014 forecasts look to be on the money, although with reported year-to-date capital growth of 3.9 percent under its belt Adelaide could yet finish the year a shade stronger than we anticipated leaving our forecast for the South Australian capital to be a possible miss to the downside (click chart).

If that plays out, then so be it - we don't weasel away from missed forecasts or attempt to move the goalposts, only analyse variances where they arise and the reasons for them.

We will run through our chart packs in far more detail in our full Monthly Macro Housing Market Update for September late next week, which will reveal some interesting new trends.

As for the year ahead, SQM Research forecasts 8 percent  to 12 percent capital growth for Sydney, and looking at these very strong auction results it's not too hard to see why.

Sunday, 28 September 2014


In truth beaches are not London's strongest suit, but undeterred the chap with the sculpted sandcastles below is standing in the 2015 UK General Election for the Beach Party, which aims to clean the planet and its coastlines using EcoBots.

Being a sand artist, he sculpts and preaches not at Speakers Corner, but in the shadow of the colossal South Bank Tower redevelopment project and the Oxo Tower.

While London scores a not-so-oblique miss for its beaches, what the English capital does have is some wonderful parks. 

This small oasis of calm below has been a sanctuary from the gambolling chaos of Soho since 1861. Today it is known as Soho Square, but originally it was simply King Square, named for King Charles II, the statue of whom still stands in the square's centre today.

This image of summery idyll was snapped in the mid-afternoon, so it is far from clear what all these people actually do for a crust. 

Predominantly foreign students, a smattering of buoyant tourists and the occasional idle cove such as me, I'd hazard.

Saturday, 27 September 2014

6 month low for shares

Markets have been a little spooked by declining commodity prices.

The Australian dollar is now only buying 87.7 US cents as compared to around 110 cents at the peak of its powers.

Meanwhile the share market has reversed all of the year's gains over the past month to be down at a 6 month low.

Nevertheless, the market has taken on board the Reserve Bank's rhetoric and expects no further interest rate cuts at this juncture, rather just rates to be on hold for-everrrrr...perhaps until well into 2016.

Interest rates have in fact been clipped by the lenders independently of the Reserve Bank - Commonwealth Bank dropped its 5 year fixed rate to under 5 percent in an unprecedented move

And a number of factors have caused the cash rate futures implied yield curve to flatten out over the past two months, including a freakishly positive Labour Force report (surely a head fake), signs of life in commercial lending and maybe non-mining capital expenditure, and perhaps crucially, the words of the RBA itself.

Still no hikes on the horizon for the next 18 months though and we could see records broken for monetary policy inactivity (click chart):

Is Sydney heading for an oversupply of property?

New supply coming online

Experts in housing economics have demonstrated how a new supply of dwellings tends to have a far less significant impact on dwelling prices in large cities than commentators expect. At a time when other commentators were predicting a crash in the London markets, Michael Oxley concluded:

"With only 6 percent of all houses in London being newly built, the idea that house prices in London would fall in the event if there being an increase [in the building of new houses], even a massive increase, is highly implausible".

And absolutely right he proved to be, even when others were predicting an inevitable meltdown.

On the other hand, by way of an example, take a look at the south coast of New South Wales where there might only be 10,000 households in a regional town - a new supply of turnkey package housing packages can materially alter the balance of supply against demand, and this can also cap dwelling price growth in the established stock. 

A glance at the number of owner occupier loans written by purpose in Australia on a rolling annual basis shows two things. Firstly, only a relatively small percentage of the housing stock ever transacts in any given year. And secondly, most of the activity relates to the buying and selling of the established housing stock, rather than new dwellings (click charts to expand).

What about investors? Well, the chart below is the one which is getting everyone hot under the collar right now, because the level of investor activity is rising strongly just as it did during the last major property boom in around a decade ago. And, in fact, thanks to tempting low interest rates investor demand rising more strongly than the demand for owner occupied loans at this point in time.

It is clear that in some areas are more investors in the market than is healthy and this will lead to some pretty unbalanced markets on a micro level. However, despite popular belief on a macro level Sydney is not heading for a massive oversupply of property. Let's take a look at precisely why in three short parts.

Part 1 - Vacancy rates

One handy (although not foolproof) indicator to look at is rental vacancy rates, which shows that vacancy rates are much lower than they have been historically. This is particularly the case in Sydney where rental vacancies were well above four percent during the last property boom which "ended" in early 2004.

If we take a look at New South Wales vacancy rates on a regional level you will find that the real risk of oversupply is is regional areas, not in metro Sydney itself. In the inner suburbs (0-10km ring) vacancy rates in Sydney have long been well under 2 percent, and in some inner western suburbs vacancy rates have tracked at around only 1 percent for a decade now. More supply is to be welcomed.

Part 2 - Approvals by capital city

What about approvals in the pipeline? If you look at the chart below for the whole of Australia some key points immediately become clear. 

Building approvals are in total are tracking at close to their highest ever level on a rolling 12 monthly basis at just over 195,000. If all of these properties are eventually built they will add a little over 2 percent to the total established housing stock of 9,300,700 dwellings. 

The type of property which is more likely to see oversupply in this cycle is clearly the attached dwelling - units and apartments - with approvals breaking record highs.

Melbourne has approved many thousands of houses over the last half decade, but Sydney most definitely has not. There is little oversupply risk here for the harbour city in aggregate, although there may well be in some fringe estates where demand for housing can initially be very low.

On a rolling annual basis Sydney has approved only 12,463 houses as you can see above, but many more units at 28,602 as recorded in the chart below.

Will this lead to a massive oversupply? On a city wide basis - no - for two reasons. Firstly, because population growth has exploded higher in New South Wales with the state adding 114,500 persons in the year to March 2014 as I analysed here

We don't yet know what precisely what proportion of that population growth took place in Greater Sydney, but the answer is probably somewhere close to 90,000 (in FY13 the comparative figures were 80,300 for Greater Sydney and 105,400 for New South Wales, the city metropolitan area accounting for 78 percent of the growth).

And secondly, because in all likelihood apartment approvals in Sydney are already a couple of months past their peak as has been indicated by the plans of major developers, although we will need to see another month of two of data to confirm the downtrend (approvals could certainly have a second wind if prices continue to rise strongly, and the strongest part of the year for apartment approvals is coming right up).

Past 3 - Commencements

Approvals are one thing, but what are we actually building? At the state level in New South Wales we saw 20,225 house and 25,129 unit commencements in the year to March 2014. 

Yes there are still a healthy level of approvals in the pipeline, but the vital point to note that here is that even if these commencements are perfectly allocated against demand (and there is zero chance of that) this number of commencements is barely enough new stock to keep pace with population growth, let alone address the issues of stock obsolescence and half a decade of chronic oversupply.

It is possible that the number of persons per dwelling could shift around a bit and the forecast decline to below 2.5 persons per dwelling may not play out, but even if every single one of the ~41,000 approved dwellings over the past year are built, this hardly represents a significant oversupply risk given the unbridled pace of population growth. 


In short, the risk of an imminent city-wide oversupply in Sydney has been widely, and in some cases wildly, overstated. Of course, as in any construction cycle there will be pockets of oversupply, and in this cycle there will be a glut of apartments in certain suburbs.

The sectors where a temporary oversupply will likely eventuate include the Central Business District itself where new Chinese-funded tower blocks will appear on the skyline, in certain parts of the inner south and around the airport (there are thousands of new apartments sprouting up in some of these suburbs - far too many), and within a number of the Urban Activation Precincts (UAPs).

We would not recommend buying a new apartment in potentially oversupplied locations, that much is certain. In particular, there is likely to be risk in buying apartments off the plan  for a number of reasons.

It is hard to know exactly what you are buying when you go off-plan, there will be dozens of properties almost exactly like yours which applies downwards pressure to that market as and when you want to sell, there is a greater risk of oversupply of units than there is of an oversupply of houses, and new apartments are often painfully expensive when compared to established stock.

Yes, some investors will buy new apartments and then see the values fall as the perceived value of those shiny new units depreciate.

But as for a risk of a huge oversupply of property in Sydney? That appears very doubtful over the near term. Investors would likely be better served to stick to quality established stock in supply-constrained suburbs with good transport access to the city.

Most interesting articles of the week

Summarised in one place by Michael Yardney at Property Update here.


Not the greatest weekend of sport ever, but nevertheless, congratulation to Hawthorn!

Friday, 26 September 2014

AC/DC Ride On in 2015

After tonight's utterly tragic football results, I can hereby announce that this blog is officially now a Rugby League free zone until 2015. Horrible to admit but the better team won on the night, unfortunately for the Roosters.

However, in proof that prayers can be answered - and indeed in heartening news for innuendo-loving headline writers everywhere - AC/DC has announced that they will tour again in 2015, which will provide a neat mini-boost to the New South Wales state economy.

Whether or not Angus and the lads have the pulling power to fill out the 80,000 capacity ANZ Stadium three times over given Malcolm's absence remains to be seen. Malcolm Young has announced his retirement from the band having suffered from health issues, and seems likely to be replaced on rhythm guitar by Alex Young's son Stevie.

Nevertheless the tour will be a welcome fillip for the Sydney economy in 2015. The only tough decision for me will be whether to try for tickets for one or two nights...

AC/DC's awesome Black Ice World Tour, which ran across 2008 to 2010, saw the band play to more than 4.8 million concert attendees worldwide and in generating more than US$440 million was the fourth highest grossing world tour in history.

Burning pain ahead for coal mining regions

What next?

If there is one thing I learned from working in the mining industry, it is that forecasting commodity prices is a fool's errand.

Working in the copper/gold/silver sector each year I prepared budgets and forecasts based upon a range of assumptions, but realistically who could have forecast the outrageous swings in fortunes of those commodities through the past decade? Certainly nobody preparing the wildly inaccurate stockbroker reports, that's for sure!

Let us take a 60 second run through what's happening to the bulk commodities right now which is causing a great deal of excitement in the media and a great deal of pain to Western Australia's budgets in particular.

Since it accounts for almost one third of the Reserve Bank's commodity price index, iron ore is attracting most of the headlines, but as we will consider below, it could be the coal mining regions which face the brunt of the pain. 

Part 1 - Price

As I looked at here the respective prices of coking coal and thermal coal have genuinely crashed, and with Australian coal mines at the sharp end of the cost curve we are going to see an ugly shakeout of the high-cost producers and elevated levels of unemployment in coal mining regions.

Coal mining regions are already suffering badly, new coal projects are unlikely to get off he ground in the present environment, and unemployment in coal mining regions has already been rising worryingly.

That turn leads me to be fearful for property markets in coal mining towns and regions of Australia.

As for the iron ore price, well, history shows that commodity prices frequently overshoot on the upside in a speculative frenzy and on the downside as producers flood the market with a glut of supply, and we are currently in the latter phase during this cycle.

How far this has to run is anybody's guess - it's nigh on impossible enough to forecast in markets where the LME provides great transparency on warehouse stocks let alone where assumptions are reliant on rubbery data out of China.

We're still in the midst of a spectacular downtrend at present which will hurt Australian income, is pushing the Australian dollar dramatically lower and is now likely to force marginal producers to the wall and out of the game, until upwards pressure returns on prices, however long that may take (click chart).

Part 2 - Supply

The Reserve Bank has implied hopefully that declining commodity prices could elicit a slowing of supply from the large producers. 

That faint hope seems highly unlikely looking at the latest data out of Port Hedland, which shows that at the current pace of growth iron ore tonnages exported from the Pilbara could soon be double what they were only in October 2012. 

That's a heck of a lot of iron ore cargo bound for China's burgeoning stockpiles!

The RBA's own charts show an incredible boom in iron ore supply from Australian shores - so huge, in fact, that the increase in trade volume has completely offset the collapse in date at least.

Bulk Commodity Exports graph

There is little point in warning that property prices and rents could crash in the Pilbara, since completely unsurprisingly, they already have.

Part 3 - Demand

What about demand from China? 

Strangely certain PMI readings have have continued to suggest ongoing expansion. These indices are notoriously difficult to read - folk tend to get excited when they fall below 50, but in an economy such as China which has been growing at 7.5 percent, a reading with a '49 handle' might only suggest 'less fast' growth, which in fact is eventually is inevitable.

In short, it is impossible for the Chinese economy to continue growing at 7.5 percent in perpetuity - if it did then due to the compounding effect the economy of China would relatively quickly dwarf that of every other country in the world.

Something doesn't really seem to stack up here. More likely than not, a significant amount of the Chinese data is materially overstated as has been suggested by mismatches in import/export figures and as I looked at briefly here.

Part 4 - Production

The Reserve Bank acknowledges that its own data out of China related to mining production costs is at best opaque, but also makes the point that iron ore spot prices in the $70-80 range should shake out foreign producers first, with most of the big-hitting Australian miners much further down the cost curve. 

Whether or not this proves to be wishful thinking we will find out in due course, but some Australian producers are looking increasingly marginally profitable. If the RBA's research is accurate supply from China should slow since many of its producers will now be loss-making.

Australia's coal mining producers are now resembling rabbits caught in the headlights with our relatively high production costs making much of our coal production unprofitable, both for thermal coal and coking coal.

I looked at the possible impacts here, but in short, while marginal coal producers may keep the show on the road for a little while, further mine closures and redundancies look to be all but inevitable in the current climate.

The two charts below show just how many Australian coal producers potentially face making losses unless they can somehow slash costs or commodity prices rebound quickly.

A nasty shake-out looks unavoidable for some mining regions and producers.

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Thursday, 25 September 2014

Population growth explodes in NSW (slows in mining states)

Total population +388,000 y/y in March quarter

The ABS released its Demographic Statistics for March 2014 today which showed the Australian population recording a thumping population growth of +111,600 persons over the quarter and +388,400 or 1.7 percent over the past year.

The figures for the March quarter are often higher than those recorded in other quarters, but this is still exceptionally strong population growth on a historical basis (click charts to expand).

The figures brought the total Australian population as at March 2014 to 23,425,700 with the acceleration in population growth over the past decade clearly evident in the gradient of the chart below.

NSW population booms - but mining states slowing

Our 2014 state-level population growth forecasts which you can read here predicted that New South Wales could feasibly account for more than a third of Australia's total population growth in 2014 if the trend towards slowing population growth in the mining states plays out as we expect.

The New South Wales construction boom is set to keep the economy growing at a very healthy 3 percent plus clip over the years ahead.

The data for the first quarter shows that exactly what we expected is beginning to happen, with the total New South Wales population exploding higher by 114,500 persons over the year to March, but the trend in Queensland and Western Australia now clearly turning sharply south.

Over the past year New South Wales (+114,500), Victoria (+108,800), Queensland (+75,800) and Western Australia (+63,400) accounted for all of the materially significant population growth in Australia covering off a massive 93.3 percent of the total. This continues the long run trend of population growth being heavily focused on these four states.

Population growth to slow in aggregate in 2014

While the figures recorded showed a massive aggregate population increase in the seasonally strong Q1, we do expect population growth to slow through the remainder of 2014 as per our population forecasts.

The reason for this is well explained by the chart below, that being that although net overseas migration ("NOM") today accounts for a massive 60 percent of Australian population growth - as compared to only 40 percent from natural increase - the trend in NOM growth for this cycle is now rolling over as denoted by the blue line below, and will continue to decline through Q2 and Q3.

South Australia?

There was some reasonably heartening news for South Australia in this release with annual population growth staying positive at +15,500 over the past year, although the growth rate of just 0.9 percent continues to track miles below the national average.

Many of the seasoned property experts have continued to recommend buying property in South Australia over the years, presumably partly because it is relatively cheap, 

This has become even more so the case over the past six years since Sydney and Melbourne have recorded capital growth but Brisbane and Adelaide prices have failed to match inflation. RP Data's Cameron Kusher with the key stats:

Of course, we have no more access to a crystal ball than anyone else does, but we have for some time continued to note concerns here about the South Australian economy which urgently needs stimulating and job creation.

Property markets do not operate in a vacuum and cheap house prices do not in themselves assure growth in real terms over the long term unless the economy is creating jobs growth, population growth and real wages growth.

The demographic statistics today continued to show how South Australia has long been suffering from a debilitating "brain drain" and statistically significant net interstate migration. and thus the state has been heavily reliant upon immigrants to keep the population growth figure positive.

Nothing wrong with that per se, one might argue, but people will only continue to come if there are jobs for them to come for, and the labour market has been stagnant for some years now in South Australia.

Notably last month's labour force data did show a marked uptick in part-time employment, along with most of the states, but whether or not last month's outlandish jobs growth of 121,000 in a month (outrageously the highest jobs growth figure ever recorded in Australia's history as I analysed here) proves to be a quirk of sampling remains to be seen.

The red line shows the cumulative jobs added in South Australia on a seasonally adjusted basis over the past 15 years, and particularly the total stagnation of the last half decade.

It's worth noting here just how crucial this point is for South Australian property markets - the difference between an economy with a moderately growing population and labour force as compared to one with a moderately declining population and labour force is as stark as the difference between night and day.

By way of an example of why population and jobs growth is important I took a look at what happened to Detroit's population and the flow-on impacts as the automotive industry collapsed here.

Of course, South Australia is not Detroit, but this does help to underscore precisely why the local economy needs stimulus and jobs.

With the mining construction boom now set to fade into obscurity as the commodity price bubble deflates (the odds of an Olympic Dam expansion with the copper spot below US$3.04/lb instead of flying high at $4.50/lb must be fading by the week) economies such as South Australia and Tasmania urgently need job creation through government spending and infrastructure projects.

This is particularly so given the news out of Detroit itself in the past year:

"The Australian car industry is all but dead and South Australia is in shock following confirmation that Holden will cease production after more than 60 years.

The Japanese maker is also struggling and Holden’s demise will put further pressure on its ability to stay in Australia. Experts have forecast that it will soon announce its own closure.

Holden general manager Mike Devereux, who just a day before told the Productivity Commission that GM in Detroit had made no decision to close operations, said yesterday "this is an incredibly difficult day for everybody at Holden, given our long and proud history of building cars in Australia".
But he added: "As painful as it is to say, building cars in this country is just not sustainable."

University of Adelaide economic expert John Spoehr, however, says assistance of at least $1 billion is needed to stave off long-term hardship in Adelaide’s north, which he says is already suffering from "recessionary conditions".

Opposition Leader Bill Shorten, attacked the Government for not doing more to keep Holden’s doors open. and said it was guilty of a "lack of leadership".

"The job of an Australian government is not to get rid of Australian jobs," he said. "This is the biggest car crash in Australia’s history."

South Australian independent Senator Nick Xenophon believes the closure will eventually cost tens of thousands of jobs and economic modelling concurs with that view, putting economic losses in this state at $4 billion and job losses at 65,000 by 2020.

Although stunned by the news, community leaders in the northern suburbs have vowed to overcome the economic disaster. But they stress they’ll need real help.

Glenn Docherty, the Mayor of Playford and Liberal candidate for the electorate of Newland, said the area would need both state and federal funding.

"This is the most significant economic decision the Abbott Government has made and it’s going to have catastrophic consequences for our country," ACTU secretary Dave Oliver said.

"The departure of Holden will sink the car industry in this country and the flow-on effects for jobs and manufacturing will be cataclysmic."

As noted above, South Australia is by no means another Detroit. For one thing, the major employers in the state are the healthcare and defence sectors, though this does re-emphasise the dependence upon the government for employment.

But if Xenephon is right about the $4 billion loss to the economy and a devastating 65,000 job losses then the local economy needs boosting, and given sharply declining commodity prices, the most likely source of job creation would appear to be through government and infrastructure investment.

Of course, Xenephon could be wrong and the economy could overcome the hurdles faced in the lead up to 2017.

And naturally Xenophon could be dramatising (one certainly hopes so - the South Australian economy has not added 65,000 jobs in more than fully 8 years) while the significant decline in the Aussie dollar could help exporters - the dollar crunched through 88 cents today and is now trading with a more attractive-looking "87 handle" at around 87.8 cents.

Nevertheless the growth in the South Australian economy is forecast to be the weakest of any of the mainland states and it may pay to be wary of property market commentary which endlessly emphasises upside potential without acknowledging downside risk.

As an interesting aside, if Sydney and Melbourne assets looked attractive to foreign capital when the Australian dollar was at 110 cents, then they must look by comparison an absolute steal now with the currency having depreciated by more than 20 percent (in US dollar terms) and counting. 

The Australian dollar has lost a good deal of ground against other currencies too as bulk commodity prices have declined and the cash rate down at 2.50 percent.

Residex: Sydney and Brisbane the locations to own property

Residex released its August property price data here which unsurprisingly showed the best performing property markets over the past quarter to be units in Sydney (+3.64 percent) and houses in Sydney (+3.50 percent).

Over the past year, a better measurement, the strongest performance was seen for Sydney houses (+16.93 percent) and Sydney units (+14.31 percent).

House prices defied gloomy predictions in Perth rising for the quarter (+1.37 percent) and the year (+5.46 percent), but were relatively flat in Brisbane and Adelaide for the past quarter.

As for where to own property for the next eight years?

Residex forecasts the strongest capital growth to be seen in Sydney (6 percent per annum) and Brisbane (6 percent per annum) over the next 8 years.

Residex forecasts considerably weaker growth for Hobart, Adelaide and Darwin.

It is worth nothing that a capital growth rate of 6 percent per annum implies that prices would be double what they are today in 12 years time due to the compounding effect.

It is interesting to note from the Residex data that over the past 20 years capital city house prices and unit prices performed better than their regional equivalents in NSW, VIC, QLD, WA, SA and NT, which is to say, everywhere.

Over the past 10 years capital city house prices and unit prices performed better in the capital cities than their regional equivalents in NSW, VIC, WA, SA and NT.

The one state where regional house price growth (though definitely not unit price growth) has been strong has been Queensland.

These trends will continue, the reason for which I analysed in some detail here - in short, jobs growth is accelerating in capital cities but flagging badly in regional areas outside Queensland.

Wednesday, 24 September 2014

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