Pete Wargent blogspot


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Thursday, 31 December 2015

No fireworks, but housing credit rises again (62 month high)

Credit grows by 6.6 per cent

Well, you win some, you lose some: the Reserve Bank did indeed release its November Financial Aggregates figures today. Happy New Year, by the way!

The final release of the calendar year showed annual credit growth rising at a healthy 6.6 per cent pace over the year, after a softer monthly result of 0.4 per cent.

Deposit growth was up very strongly by around 15 per cent over the year to November, so there are few concerns in that regard for the housing market. 

Business credit flat in November

Business credit was only flat in November, and so growth slowed to 6.2 per cent for the year ended November 2015.

Housing credit growth highest since 2010

Looking at the headline credit growth figures we can see that total housing credit inched up to 7.52 per cent, the strongest annual result in some 62 months since September 2010.

The annual rate of growth in investor loans slowed further from a peak of 11.0 per cent in June to just 9.1 per cent, thereby continuing to decline well below the arbitrary 10 per cent threshold stipulated by the regulator.

Over the past three months investor credit has grown at an annualised pace of just 5.3 per cent.

Narrative changes

Due to the introduction of an interest rate differential between owner-occupier and investor lending, a number of borrowers have changed the classification of their loans, which has resulted in reclassifications totalling $32.5 billion.

Although a further $1.9 billion was reclassified to owner-occupier lending in November, most of the impact of these changes has now washed through, and normal service should be resumed forthwith.

With the impact of loan classification changes stripped out, investor credit grew by 0.4 per cent in November, while owner-occupier lending strengthened once again to a hot monthly growth of 0.8 per cent - the strongest result since mid-2009 - with annual lending to this sector now surging to 6.5 per cent, which is the strongest annual result since February 2011. 

The investor share of outstanding credit has thus fallen sharply from a record 38.6 per cent in July to 36.1 per cent.

Total housing credit outstanding has increased very strongly by 7.5 per cent over the last year to $1.52 trillion, a rate of growth which suggests that solid dwelling price growth is set to continue in 2016. 

As a point of comparison, this time last year housing credit growth was only 7 per cent, from a lower base. 

Housing credit growth

November 2012 - 4.6 per cent
November 2013 - 5.2 per cent
November 2014 - 7.0 per cent
November 2015 - 7.5 per cent

Residential property was the best performing asset class of 2015, with gross returns of around 12 per cent easily beating shares and other investments, and particularly so for Sydney and Melbourne housing.

Caveat emptor

Given that most property investors use leverage, residential property as an asset class has seen many market participants achieve spectacular results in recent years, particularly in Sydney and Melbourne. 

There has been some fierce debate in property circles over the last few years about whether capital city property would fare better or worse than mining towns and regional property.

Some of the mining towns which were recommended by advisors essentially as a "get rich quick" scheme (with no exit strategy worthy of the name) have seen prices crash by 80 to 90 per cent, leaving some investors in negative equity to the tune of millions of dollars.

There will likely be worse to come for resources regions in 2016.

Since property prices are ultimately a derivative of land prices, mining town speculators were effectively betting on something with no inherent scarcity value, and as the construction phase of the mining boom continues to wane the fallout for property prices in mining towns will often be catastrophic. 

It is important to note that the mining towns crash was not caused by the government, the since-repealed mining tax (MRRT), or by mining companies, as is sometimes inferred - export volumes have ramped up just fine.

No, mining town property speculation was simply a flakey idea for long term investors, as was warned all along. No apologies here for sticking with a recommended strategy of long term buy and hold hold in capital cities throughout. Slow and steady wins the race.

Business lending has never been so cheap

Business credit growth recovery

To the best of my knowledge the Reserve Bank won't be releasing its usual end of month Financial Aggregates today since the good folk at Martin Place take a well earned Christmas break (and why not?).

That's a shame, as I'm sure all readers will agree that there are few more exciting times of the month than those breathless moments surrounding the release of a central bank's Excel tables. 

As I looked at here last month credit growth increased to an 83 month high of 6.7 per cent (if you don't think that sounds like a particularly high rate of growth, see my post here on how much money and outstanding credit there is in Australia today). 

Mostly this cycle has been driven by housing credit growth, but the dark blue line in the chart below shows that business credit growth has also slowly but surely increased to an 80 month high of 6.6 per cent, having previously slumped into negative territory through the financial crisis.

Business loans cheap

Alas today we won't get to find out whether business credit was still growing into the end of the year.

Generally speaking capital expenditure surveys have suggested that investment plans remain downbeat, even if the outlook has improved a little. 

On the other hand scrolling the Reserve Bank's spreadsheets (which, incidentally, is a great way to spend New Year's Eve) tells me that the weighted average interest rate on outstanding bank loans to business hit a record low of just 4.55 per cent in the September quarter, down from the most recent peak in June 2008 of 8.45 per cent.

Now I know some people love a good anecdote about the economy slowing, and others have some odd models in their heads, but it should not be a great surprise that businesses have gradually begun to borrow and spend a bit more looking at this chart.

That said, the Deloitte CFO survey this year showed that around 90 per cent of corporations still have hurdle rates of more than 10 per cent, and half of those have hurdle rates of 13 per cent or above, so in some cases unrealistic expectations may be curtailing investment in potentially profitable projects. 

Capital raisings update

At a time when most people are more interested in mince pies and Christmas stockings than stocks, the Aussie share market has notched up a ninth consecutive positive trade. 

Statistics released by the Australian Securities Exchange (ASX) show that more than $5 billion of secondary capital has been raised over each of the past six months, for a total of nearly $35 billion.

Of course, secondary capital can be raised for any number of reasons: for investment, yes, but also to bolster capital buffers (e.g. banks), while some companies are forced to recapitalise (e.g. marginal resources producers). Anyway, here are the figures.

The rolling annual total capital raised has dipped slightly from $88.1 billion in September, which was the highest number since the great flood of recapitalisation through 2009-10. 

The rolling annual total of initial capital raised has pulled back from $38.6 billion to $38 billion, largely because the $5.7 billion Medibank float of November 2015 has now dropped off the annualised figures. 

Notably recent listings have included a high profile real estate float, with McGrath Limited (MEA) listing on December 7 and now being valued at $239 million, while the Real Estate Investar Group (REV) also had a listing date of December 10 and is valued today at $9 million.

Meanwhile stock market futures are* tentatively pointing to a tenth consecutive positive trade, suggesting that markets are cautiously optimistic about the year ahead.


*SPI now -14pts, DOW -118pts.

Wednesday, 30 December 2015

Book promo!

I should've thought ahead and done this before Christmas, hey? Marketing has never been my strongest suit, truth be told.

You can find copies of my books for sale on my publisher's website here.

My first book Get a Financial Grip discussed why and how to invest in shares (including chapters on value investing and how to analyse and value companies, investing in index funds, understanding stock market cycles and timing the market, share trading techniques, and more) and how and where to invest in property.

Don't forget to click on the Customer Reviews tab here to see what people have said about it.


As part of my training as a Chartered Accountant I was always told to remain healthily sceptical. And if you were being healthily sceptical you would probably say that a publisher's website would not allow detrimental or negative comments (actually, I should check with them about

The uncensored stuff you can always read on Amazon anyway, of course (see here).

My second book Four Green Houses and a Red Hotel discusses in more practical terms where and how to invest in property and shares.


And my third book Take a Financial Leap looks at the three golden rules for financial and life success, which I'm sure I've noted on this blog before somewhere. Ah yes, so I have: see here for more details about what this book covers!

This book also looks at the practicalities of escaping the rat race of paid employment and taking the potentially daunting step of moving into small business. 


My fourth book won't be out until 2016, so you'll have to wait for that one.

Tuesday, 29 December 2015

Wasted youth?

Youth unemployment falling

Not an angle that is likely to get much airtime, I suppose, but between January and November seasonally adjusted youth employment jumped by more than 76,000 persons or 4.3 per cent to 1.86 million.

Which is quite a lot. Quite a big lot! 

And much faster than employment growth as a whole, even in trend terms.

In turn, youth unemployment has also been declining from its November 2014 peak. 

This is a worthwhile trend to watch, not least because those experiencing unemployment in this age range may on average be more likely to join the ranks of the longer term unemployed.

It is also a key metric since when times are turning tough it is likely to be the most inexperienced workers that are shown the exit first (or simply not hired in the first place), and as such rising youth unemployment can act as an early warning signal for troubled times ahead. 

Of course, the youth unemployment as is typical remains higher than the headline rate of unemployment at 5.8 per cent, but by a lower ratio than average.

Hoping to see more of the same in 2016.

8 in a row

8 on the bounce

2015 has by and large been a year to forget for the stock market. 

But, just when nobody is looking, after eight consecutive positive trades the ASX 200 (XJO) is at least making a last ditch bid to finish the year back where it started.

The index is now up by more than 7 per cent since its December 16 low.

It remains more likely than not that the index will finish the calendar year down, but in accumulation terms (i.e. inclusive of dividends) investors should now at least have eked out small gains.

Sectoral overviews

This year has been one of stark contrasts, so it is worth considering sector index overviews.

Despite the recent bounce, the Resources Index (XJR) is down by more than 27 per cent year-on-year, the Metals and Mining (XMM) index is down by 27 per cent, and the Energy Index (XEJ) is down by more than 32 per cent. 

On the other hand the Industrials Index (XNJ) and the Health Care Index (XHJ) have each recorded gains of around 10 per cent respectively.

Overall, then, it may well have been a lucrative year, but probably not if you have broad exposure to commodities. 

Destination Australia

Land Down Under

Growing up in Britain, until I was a teenager in the 1990s I think I'd only met two families who had been to Australia - one was itself an immigrant family to England, and the other lot were the extended family of a well known round-the-world sailor (who I guess had travelling in the blood). 

It wasn't just that Australia wasn't well known about, although that was a factor, it was largely the twin tyrannies of cost and distance.

The relative few who travelled to Australia returned telling tall tales of big bananas and three day train journeys (both I've since corroborated).

Back then of my school friends a few were from families that holidayed in Majorca, or Menorca, or even "Lanza-grotty", but before the advent of the cheap package holiday most Brits either holidayed at home, drove to Wales, or chanced a ferry to Calais.

Much has changed!

1986 was the year of Crocodile Dundee, and perhaps more significantly, the superbly cheesy soap opera Neighbours was first aired in the UK in October of that year. 

The impact of Aussie soaps shouldn't be underestimated, for these were days when a popular episode - Scott and Charlene's wedding, for example - could attract an extraordinary 20 million viewers, well over a third of the entire UK population, let alone television viewing figures.

Home and Away followed in 2008, and helped to perpetuate the excellent myth that all Aussies lived in very large houses by the beach, despite apparently working part time in coffee shops and surf clubs.

By the beginning of the 1990s around 20,000 short term arrivals Down Under per month hailed from the UK as the word spread, a number which had soared to nearly 600,000 per annum by the time of the Sydney Olympics, with the pound sterling periodically buying up to three Australia dollars (ah, the halcyon days!).

The annual number of UK visitors to Australia reached a crescendo of 741,000 by the early part of 2007, before a UK recession, a spate of quantitative easing, and a crumbling currency ended the party, knocking around 20 per cent from those figures.

Drivers of tourism

Touched upon above are a few of the drivers of short term arrivals into Australia. The headline numbers tend to be impacted particularly by exchange rates, awareness of Australia as a destination, household wealth and consumption patterns, proximity, mobility, and economic cycles.

People come to Australia for a range of reasons: predominantly for holidays, or to see friends and family, but also for business, for conferences, for education, employment, or for other pursuits.

We have already considered above the surge of UK visitors, fuelled by a strong currency, awareness of the desirability of Australia as a holiday destination, and a booming British economy, before a punishing recession led to a partial decline.

Troubled times in Japan's domestic economy has seen Japanese visitors decline too. By 1996 some 814,000 Japanese short term visitors were making the trip to Australia annually, but a prolonged economic malaise has seen this number shrink to just 326,000 today.

On the other hand, following a dramatic increase in Chinese living standards and levels of consumption, the number of visitors from China, Taiwan and Hong Kong has exploded from just 382,000 in 2003 to 1.34 million today. Amazingly China alone is poised to surpass New Zealand as the pre-eminent country of origin within the next year or two.

Oprah Windrey helped to raise awareness of Australia substantially for Americans upon her visit to the "Oprah House" in December 2010. But it wasn't until the exchange rate moved in favour of the greenback that visitor numbers jumped, from 447,000 in 2012 to an impressive 594,000 today.

Canadian visitor numbers have followed a near-identical trajectory in rising to 144,000.

New Zealand has always had a relative proximity to Australia, of course, but increased mobility has seen the number of annual short term arrivals almost triple from about half a million Kiwis a quarter of a century ago to nearly 1.5 million today.

The outlook

The latest available data suggests that continued downward pressure on the Australian dollar will send total short term arrivals to beyond 7.5 million for the first time in 2016, following on from the record 7.3 million vistors in the year to October 2015, a welcome boost to the Aussie economy.

This is one of the ways in which a lower dollar can help to rebalance growth, with increasing tourist numbers combined with the gentle encouragement for more Aussies to holiday at home.

Key trends to watch in 2016 will almost certainly include record high visitor numbers from China and its provinces, and record high international student arrivals. Follow the hyperlinks for more. 

Sunday, 27 December 2015

Construction boom to peak in 2016

Construction boom to peak

A quick break from the cricket to nut out a blog post!

In 2015 average capital city property prices once again outperformed regional property markets, with lot values in the capital cities again rising strongly

The result of the drip-fed or constrained supply of shovel ready land is an interesting dichotomy, whereby detached "cookie cutter" housing is built largely on the city fringes - where greenfield land is plentiful but facilities and transport options are sparse - while infill developments are becoming dominated by high density or high rise apartments.

Units above marginal replacement cost

With prohibitive land remediation costs on brownfield and previously developed sites, it has taken record low interest rates, rising apartment prices, and a ready and willing market of offshore buyers to get consents rising, but in 2015 rise they did, and to unprecedented highs.

Splitting out building approvals by property type in the chart below shows that this cyclical boom has been dominated by high rise apartments (rather than houses, terraces, townhouses, or low-rise developments), although ultimately these will only be built where it is felt that the market is willing and able to absorb the new stock.

With APRA having effectively tightened deposit requirements, building materials and labour costs inflation rising as the residential construction industry hits its full capacity, and Chinese authorities reportedly clamping down upon capital flight, rolling annual dwellings starts appear likely to peak imminently, at around 213,000 or about 10 per cent below the record number of approvals. 

The above graphic underscores that those seeking outperforming property in 2016 would do well to steer clear of the glut of new high rise supply, instead seeking out supply-constrained suburbs and scarce property types which are in high demand from owner-occupiers.

Stock overhang

Ostensibly the relative number of lone and two-person households is poised to increase, but in reality many of these high density developments are targeted specifically at investors, and relatively few owner-occupiers have a preference for living on the 10th floor of a block.

Experiences and historical evidence from overseas suggest that new supply is not always effective in slowing price growth while credit is still expanding at a solid clip, particularly in larger cities where new supply represents only a fraction of the total dwelling stock. What a glut of supply can do, however, exacerbate downturns. 

On the other hand markets and property types which are undersupplied can bounce back more quickly from a downturn, which goes some of the way to explaining why London house prices are now at record highs, only a few short years after the harshest recession in decades.

Would-be property buyers should be aware of the difference between advisers that are acting with their best interests at heart (typically charging a transparently disclosed fee for service), and salesmen pushing a product, typically a newly built property (earning a percentage fee for a punchy commission). 

Housing ladder broken?

In a model housing market where transactions tend to work in a chain, a surge in housing starts should be met with a correspondingly strong rise in the number of owner-occupier transactions.

While this link has not been severed entirely in Australia, the rise and rise of the property investor has certainly muddied the waters, and punitive stamp duties are also acting as a discouragement to market mobility. In short, as shown by the chart below, while housing starts are at their highest ever level, but the number of owner-occupier transactions remains well below the levels seen previously.

The notion of the traditional housing ladder still holds true to some extent in capital city areas where demand is at its strongest, but in many regional locations for a number of reasons the rungs of the housing ladder have effectively been sawn off. 

On average first homebuyers are buying later than they once did, some opt to rent and buy an investment property instead of a place of residence (perhaps understandably, given today's more flexible labour market), and countless others have failed to gain the requisite capital growth in order to trade up.

Of course, some regional markets have performed well, particularly a number of those within a reasonably close radius of the largest capital cities. Some others have been hurt by the resources downturn.

Median price statistics can sometimes be skewed higher at this stage in the construction cycle by new builds, but listening to the stories of market participants suggests that this cycle has been underwhelming in most parts outside the self-sustaining jobs markets that are Sydney and Melbourne.

Different proposition

It is worth considering momentarily how the property ownership proposition has shifted over recent decades. Two decades ago in 1995, mortgage rates were still high (although not as high as they had been), so too were rental yields, and on average inflation and capital growth expectations were generally higher.

Today mortgage rates, inflation expecations, and rental yields are all considerably lower, while dual income households in particular have compensated by taking on greater levels of debt, meaning that serviceability costs may potentially remain more onerous for longer (especially given lower inflation and wages growth). Granted, this is a stylised example, but it raises some interesting questions. 

In today's capital cities an average income typically does not buy an average house. As such new entrants to the market today face the prospect of an arduous task in wearing down a higher level of mortgage debt, whereas once high inflation, capital growth, and wages growth did much of the heavy lifting for homeowners, even if serviceability was periodically harsh.

It is not all bad news, however, with the cost of money very cheap homeowners are building mortgage buffers and forging on ahead on repayments, while Fitch's latest index showed 90-plus-day arrears at record lows of just 0.41 per cent.

Moreover, despite what you intuitively might think, the internal rate of return on property as an investment may not be lower, even with lower rates of capital growth - in years gone by capital growth had to be considerably higher just to keep pace with inflation.

The wrap

As macroprudential measures bite it seems likely that the apartment construction boom will pass its peak through the year ahead. The latest housing finance data suggests that banks are pushing lending at the owner-occupier segment of the market hard in order to make up for the decline in investor lending.

This may work over the short term as existing owners play musical chairs for a while, but if housing credit growth is to be sustained at 5 year highs then at some point the first homebuyer segment of the market will need to start buying. I discussed this in a little more detail here

Thursday, 24 December 2015

Wolds end

Xmas in the mother country.

Bona fide first homebuyers to become critical

Making waves

Earlier in the year I wrote a short piece on this blog (faithfully reported in The Australian here) noting how in 2014 there had been a relative dearth of people in my age bracket, that being the 31 to 38 year old cohort (refer to Point A on the below chart).

With the latest demographic statistics being reported last week, I thought it would be germane to revisit Australia's demographic pyramid, particularly in the context of what it means for the housing market going forward.

Headcount swells

Most property market commentary and analysis focusses purely on headcount, and there's no question that even if we look solely at the 25 to 55 year old age range, the market of potential homebuyers is swelling impressively over time from fewer than 5 million persons in 1971 to more than 10 million today.

Over the present market cycle, however, the actual number of owner-occupiers buying homes has not recaptured the levels seen in previous cycles, despite a recent spurt in New South Wales.

There have been a number of reasons for this, including the deposit hurdle, affordability constraints in some capital city locations, lifestyle choices, and a huge surge in the number of investors, with a more transient workforce and legislation which also allows generously for deductions against taxable income. 

Demographic waves

At least a part of the dynamic has related to demographics. Demographics are always vital, because by and large people tend to do reasonably predictable things at predictable times in their life. 

While there will always be a certain percentage of first time buyers who are gifted or inherit deposits, most buyers who save a deposit will on average be buying their first homes later than previous generations did. 

With skilled migration having centred on the under 30s cohort, lately there has not been a critical mass of headcount in the 31 to 38 year old age bracket, which in an age where we do most things later than we used to is likely to capture most first homebuyers, at least in the capital cities.

Dicing up the most timely available data into a population pyramid by year of age reveals that following a lull over the last decade there is a wave of twenty somethings and early thirty somethings eventually set to flood the first homebuyer sweet spot over the years ahead. 

Looked at another way below, we can see that the total headcount of the 31 to 38 year old cohort actually declined in both the 2010 and 2011 financial years respectively, to sit just shy of 2.5 million (refer to point B on the chart below).

Beginning in financial year 2016, however, as denoted by Point C on the below chart, the figures are steadily expected to ramp up, and upon running some nifty projections it can be seen that the total will move close to 3.1 million by the end of the decade (Point D).

Will first homebuyers return?

There has been a good deal of hand-wringing about first homebuyers having gone "on strike" through the present market cycle, although it was fairly obvious to those working in the industry that first time buyers were often simply purchasing as investors instead. 

Following an investigation into the matter the ABS eventually acknowledged in early 2015 that the number of first time buyers was being under-reported, although in truth the issue was well known about and freely discussed in the more enlightened property forums as far back as 2013.

While the debate was previously largely dominated by pettiness and point-scoring, with APRA's macroprudential measures effectively knocking the investor market for six this issue is about to become "mission critical" for housing markets.

The fate of markets in 2016 and beyond will be determined by the appetite for owner-occupier lending and purchases, and in aggregate volumes cannot easily increase unless bona fide first homebuyers return to the market. 

The wrap

To date the decline investor activity has largely been offset by a corresponding increase in owner-occupier lending, although it seems likely that some of this was accounted for by refinancing in the face of tightened mortgage rates (as opposed to genuinely new owner-occupier demand).

The demographics show that there is a wave of millions potential first home buyers set to sweep the market over the years ahead. 

The $6 trillion unanswered question is: can lenders and policy makers persuade first timers to buy, or facilitate a smooth handover to owner-occupiers? Only time will tell. 

Wednesday, 23 December 2015

China stocks - the year that was

Bubble & burst

If you had predicted that China stocks would outperform other prominent indices to rise by about 13 per cent in 2015, then so it has been.

Yet it has been quite some rollercoaster year for Chinese stocks, with a huge run-up in valuations which had become disconnected from all fundamentals, an alarming crash in the middle of the year, a slew of "interventionary" measures, and then a tentative recovery.

After the peak of the bubble on June 11, the market lost close to a third of its value within a month as newly leveraged investors were hit with margin calls, the index falling by 30 per cent by July 8.

After a few preliminary interventionary measures, the index crashed again by more than 8 per cent on August 24, and backed that up with another similar decline of a similar magnitude the following day.

It is easy enough to smirk about the "tinned food" and "find a safe place with loved ones" recommendations now, but global investors were certainly spooked at the time, reflected in the uneasy reaction of world markets. 

Following a couple of dozen government measures including putting a stop to IPOs, the banning of short selling, restrictions on ownership and selling, suspensions of trading, and a whole raft of other actions, the crash was eventually arrested.

China stocks may be looking set to finish the year up about 13 per cent, but it's been anything but plain sailing this year.

Merry Xmas 2015

Xmas time

An early Merry Xmas from the Old Dart, where preparations for the usual festivities are well underway.

While on the subject of British news, Hometrack released its final 20 Cities Index for the year.

It's been an interesting year for the UK. The FTSE hasn't done a great deal of note, weighed down by the oil and resources stocks, but employment and the employment rate are at record highs, and unemployment keeps falling

2015 was another year where commentators predicted a property market correction for London, but on the back of a 4.1 per cent surge in the last quarter, London prices are up by 13.3 per cent year-on-year to once again top the table.

This represents another increase o£52,900, and follows very strong gains of 14.7 per cent in 2014.

London prices are now 45 per cent above their 2007 peak and up 74 per cent from their trough. 

The capital city therefore just nudges out Cambridge as the top performer, where prices are up by 72 per cent from their trough to be 44 per cent above their 2007 peak.

On the other hand, most regional cities have done next to nothing since 2007 despite periods of high inflation, and several remain below their respective 2007 peaks, most notably Belfast in Northern Ireland.

Interestingly the oil price shock has seen slick house price growth in Aberdeen quickly turned to sludge, with prices now down over the year. 

Overall city house price growth came in at 10.1 per cent growth in 2015, despite lower sales volumes.

Debt servicing costs continue to fall leaving affordability broadly unchanged, with the average rate payable on outstanding mortgage debt now just 3.1 per cent. 

City prices are forecasts to rise by 7 per cent in 2016 in spite of a likely slowdown in investor activity, with the ongoing dearth of available stock expected to be a key driver.

Read Hometrack's insights here

Tuesday, 22 December 2015

Brighter days ahead for Sydney renters

Sydney rents versus inflation

Scrolling back through more than four decades of data, we can see that there have been three distinct periods where rents in Sydney have outpaced consumer price inflation, each of which, logically enough, has followed a pullback in investor activity.

Most notably, in the period following the quarantining of “negative gearing” legislation in 1985 rental increases rose at a blistering record annualised pace of nearly 17 per cent per annum (refer to point A on the chart below), before falling sharply after the reinstatement of the legislation as investors and developers returned to the market.

Cabinet papers from the time show that unlike some other capital cities Sydney’s rental market was already relatively tight in 1985, and while Melbourne was experiencing what was then a near-record net outflow from interstate migration, population growth in Sydney was robust (albeit not even remotely close to the levels being seen today).

The detrimental impact of the quarantining of negative gearing legislation on housing starts was predictable, marked, and immediately reversed upon the reinstatement of allowable deductions, while waiting lists for public housing also spiked between 1985 and 1987.

Less dramatically, there was a second stretch running between 1996 and 2000 when rents were rising faster than consumer prices (point B), until a multi-year, investor-led property boom around the time of the Sydney Olympics.

Most recently, from 2007 forth there was a third period where rents rose sharply, with a notable spike in 2008 when tales of landlords in the eastern suburbs jacking up rents in double digit magnitudes were commonplace (point C).

The investor boom

Since 2012 a salvo of interest rate cuts has seen Sydney experience the largest run-up in investor activity in the history of the harbour city, with investor loans at the peak having accounted for more than half of the mortgage market, excluding refinancing transactions.

Since July 2012 the median Sydney house price has soared by 62 per cent, with unit prices also showing extremely strong growth of 41 per cent. 

Despite an expected lag, the supply response has been both sustained and significant, and although APRA has now enacted a crackdown on investor loans the pipeline of both construction and building approvals remains at elevated levels.

In turn this will be good news for renters is Sydney as the new supply comes to market, whilst the erosion of yields means that it is often far cheaper to rent than to own a place of residence from a monthly cashflow perspective.

Localised apartment gluts

The headline data suggests that with population growth in the state the strongest in the nation tracking at more than 104,000 per annum, there is still likely to be a relative shortage of houses in desirable inner-suburban areas.

After nearly a decade of under-building, this construction cycle has evidently been heavily tilted toward attached dwellings – townhouses, units and apartments – to a degree not previously seen, and to the extent that some parts of Sydney will see an oversupply of new units.

There are a number of obvious apartment construction hotspots, including around Parramatta and some of the formerly industrial suburbs in the inner south of the city.

Apartment prices will correspondingly fare better in supply-constrained locations, such as in some of the leafy eastern or lower north shore suburbs.

A room with a view?

In particular, this cycle has seen a huge surge in the approval of high-density dwellings, especially those of four or more storeys.

A quarter of a century ago only a fraction of total approvals was accounted for by this type of dwelling stock, but over the past three years there has been an enormous leap in high-rise approvals as former industrial sites are rezoned for residential development.

This dynamic has been echoed across each of the most populous capital cities, and the outcome will be that apartment rental growth should fall at least to the level of inflation, and more likely than not stagnate or decline in some parts.

There are a number of factors which could disrupt this trend, most pertinently if the crackdown on investor lending causes approvals to be aborted before they ever become dwelling commencements.

The Department of Immigration and Border Protection (DIBP) also forecasts very significant increases in student visa grants over the remainder of the decade, which could result in a shake-up in some inner city markets.

Overall, though, the next few years are likely to see the balance between landlord and renter swing back in favour of the renter while the looming overhang of new dwelling stock is absorbed. 

Rental demand

Whether by design or default, there will always be a strong demand for rental property in Sydney, particularly in such a city within which close to two-thirds of the population growth is accounted for by net overseas migration.

Data released for the month of November showed that annual new motor vehicle sales in New South Wales have roared to an astonishing record high of more than 378,000 as owner-occupier households enjoy the wealth effect of rising dwelling prices.

Despite a high level of infrastructure investment in the pipeline, which includes roads and motorways, these figures merely underscore that Sydney’s traffic congestion will worsen over the years ahead, and in turn landlords with A-grade properties close to key train and light rail links will likely have few problems letting them.

Generally, however, after some years of having things their own way many landlords will find the market moving into equilibrium in 2016, and for the first time in years renters will find that they have a greater choice.

Landlords may need to make greater efforts to present their property favourably, and in some cases negotiation on price may be the order of the day.

Monday, 21 December 2015

Unemployment: 2016 outlook

Sydney defies 2015 narrative

"Don’t wait to buy land; buy land and wait” is one of the oldest adages in real estate, and one which has served Sydney homeowners well over the years.

When I released my book Get a Financial Grip in June 2012, I predicted that with years of under-building in Sydney and the cost of borrowing more likely to fall than not, it would likely continue to be a strong decade ahead for the harbour city, despite the already strong gains we had experienced since the financial crisis.

While it is impossible to “fine tune” markets with anything like that level of timing or precision, this has been a pretty good bet nonetheless, with Sydney median house values rising by a further $413,500 since that time.

Residex released its final market update for 2015 which, as widely expected, showed that Sydney’s housing market slowed a little in November, although the median house price was still up by $19,000 over the month, and some $40,500 over the quarter.

Thus the “narrative fallacy” struck once again in 2015, with Sydney house prices defying a thousand downbeat predictions to rise by another 20.5 per cent or $192,500 in the year to November, following on from gains of $129,000 the in the 2014 calendar year.

Median unit values in Sydney also rose by 15.3 per cent in the year to $688,000, with an increase of 3.4 per cent over the last quarter being stronger than the equivalent gain for houses.

It is evidently an urban myth that sales volumes must surge in order for property prices to do so, since volumes in Sydney have barely budged in 2015.

Although both median house and unit rents have continued to rise in Sydney, they surely have not been keeping pace with rampant price growth for some years now, and as such yields have been eroded and the boom is living on borrowed time, even in a low interest rate environment.

Investors seeking value for money, reasonable yields, and sustainable capital growth will find better bang for their buck in Brisbane in 2016.

Unemployment outlook for 2016

Some of Australia’s greatest property booms historically, including those seen previously in Darwin and Perth, whether by cause or effect have been consistent or contemporaneous with periods of effective full employment, and unemployment rates sinking as low as 3 per cent.

At present none of Australia’s capital cities are remotely close to that level, but Sydney’s latest reading of 4.4 per cent is heading in the right direction and is indicative of a strong labour market, particularly in its inner suburban sub-regions where unemployment is very low.

Ace cards for Sydney for the remainder of the decade will be an unprecedented $70 billion infrastructure boom, as well as a projected surge in the number of international students. 

Melbourne has surprised commentators (by which, of course, I mean "surprised me"), with median house and unit prices rising by 13 per cent and 6 per cent respectively over the year to November. 

Despite residential building and approvals continuing at a furious pace, vacancy rates in the Victorian capital have declined from 2.7 per cent to 2.4 per cent over the past year, although December is likely to record its usual seasonal spike.

Through this calendar year Greater Melbourne’s unemployment rate has trended down from 6.7 per cent to 6.2 per cent on a 12 month moving average (12mMA) basis. 

At the macro level the Melbourne property market has the same potential ace up its sleeve, that being the projected boom in international students, which is expected to benefit the largest capital cities disproportionately.

Brisbane has seen house prices and unit prices rise in the year to November 2015 by about 4 per cent and 3.5 per cent respectively. 

Queensland has experienced its fair share of redundancies and retrenchments as the resources construction boom has faded, but the Brisbane unemployment rate has declined from 6.3 per cent to just 5.8 per cent over the year.

The city will benefit economically from a building boom in 2016, but some inner suburbs will accordingly play host to a glut of apartments, meaning that prospective property buyers will need to choose even more wisely than usual.

The Domain Group forecasts moderate gains for Perth house prices in 2016, following declines of about 3 per cent in the year to November 2015.

The Perth unemployment rate is still only 5.8 per cent on a 12mMA basis, but the trend has clearly been up since the most recent low in the first quarter of 2013, and vacancy rates are now elevated

With population growth slowing in Western Australia, on balance it seems likely that house prices have a bit further to fall yet before bottoming out.

Adelaide has the highest unemployment rate of the capital cities, with the moving average rising from 6.7 per cent to 7.4 per cent in the year to November 2015. 

The last two months of employment data have represented a tentative improvement, but the reality is that there are still some manufacturing closures to come. 

House prices have recorded steady gains of about 4.5 per cent over the year to November, and there are doubtless some good buying opportunities at the micro level. Just be wary of the fundamentals.

I noted back in 2014 that the Tasmanian economy should welcome a lower dollar and stands to benefit from record Chinese tourism spend, and in turn the unemployment rate in Hobart has continued to improve this year from 6.4 per cent to 6.2 per cent.

Vacancy rates are now exceptionally low in Hobart with rents rising strongly in what is the one bona fide capital city landlords’ market. 

There is every chance that house prices could “pop” higher following tepid gains of around 2 per cent in the year to November.

Question marks do however remain about the long term potential for growth, with employment gains only slender and positive net overseas migration into Tasmania to the tune of just 8 (eight) persons recorded in the June quarter.

House prices rose solidly in the ACT to a median of $569,500. 

Median household incomes in Canberra remain the highest in the country, though one always has the nagging suspicion that we're only ever one fundamental change to land release policy from a potential correction in this most artificical of markets.

Finally, house prices were fairly flat in Darwin in 2015, but I expect to see declines in 2016 as sales volumes and rents fall in the face of oversupply. 

The wrap

The outlook for unemployment varies quite significantly across the capital cities. 

In 2016 we might expect to see some off the plan transactions falling over as a result of tougher deposit requirements, and some areas are set to experience a slew of apartment completions. leading to a scramble for tenants.

The best buys for 2016 will include certain Brisbane locations, but away from the inner city oversupply. 

Perth remains on the watch list, but at this juncture the market bottom looks to be a way off. 

By the way, to find out more detail about some of these dynamics you can click on the embedded links to see where I have provided more detail and analysis.