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Saturday, 31 January 2015

Sydney inner suburbs have outperformed...and will "stay hot forever"

Sydney's inner suburbs "to stay hot forever"

Unsurprisingly Domain's research shows that the big property price gains in Sydney in 2014 were experienced in the inner- and middle-ring suburbs.

Equally unsurprisingly, the performance of dwelling prices over the past decade in the inner 10km ring (+71.5 percent) has been a world apart from properties outside the inner ring (+48.4 percent), a point made many times on this blog, of course.

From Domain:

"Economists and property agents are talking up the long-term prospects of properties in inner ring suburbs in Sydney as new figures reveal house prices within a 10 kilometre radius of the city have outstripped outlying suburbs over the past decade.
Suburbs close to the city are becoming so desirable that they will be "hot forever", according to one of the city's most high-profile agents John McGrath.
Although he stopped short of declaring property prices - in those suburbs in a radius roughly 10 kilometres from the city - immune from price falls, the chief executive of McGrath Estate Agents said these areas would always be attractive to buyers because of their proximity to the city, beaches and other lifestyle amenities such as art galleries and restaurants.
"There is just no end of demand from overseas and local buyers who want to live in those precincts," he said.

"There is sometimes a very minor price correction for a small amount of time but generally speaking Sydney is becoming a New York. It's a big international city and people want to live in it ... and there's very limited stock available. It's always going to be blue-chip and a market leader."

Inner suburbs outperform

The article goes on to confirm that Sydney's inner suburbs have massively outperformed those further out over the past decade:

"The latest data from Domain Group that shows the 10 suburbs with the biggest price growth in 2014 had largely been in the middle and outer rings.

Analysis by Domain Group's senior economist Andrew Wilson found over the past 10 years the average price of properties within that 10-kilometre radius had risen 71.5 per cent, compared with 48.4 per cent for those more than 10 kilometres out.
AMP Capital chief economist Shane Oliver said there were always circumstances where inner city prices could fall but any fall would be "short-lived and minor".
"There's still going to be interest rate cycles, recessions, building booms and busts, but ... the impact of them on the inner city suburbs tends to be far less than the outer suburbs," he said.
In decades past, residents left the inner city in droves for the space and tranquility of the suburbs. 
But since the 1960s, waves of gentrification have transformed many former gritty working-class areas of the inner city, such as Paddington and Balmain, into enclaves only the well-heeled can afford.
Bill Randolph, director of the City Futures Research Centre at the University of NSW, said these changing demographics were largely driven by the shift from manufacturing to "high-end, knowledge-based" jobs. 
And despite more and more dwellings being built in these areas, the exorbitant prices for houses and apartments in most parts of the inner ring was creating a divided city. 
"The middle and lower incomes are being pushed out of the inner city by and large. That's a global trend and I think here to stay for the foreseeable future," he said."
The wrap
Nothing too surprising here, of course!
Inner capital city suburbs will perform better over the longer term simply because there such a minimal supply of available land within that radius and such a huge demand for it.
Properties with a high land value content therefore outperform.
Conversely, even in Sydney there is a mass of land available for development on the outer, but very little demand for it from either investors or from owner-occupiers.
It's largely a case simple geometry as I discussed here.
The trend is accentuated by a shift towards centralised capital city living and employment growth, as quite rightly highlighted by the Prof. Randolph.
Not that you need to be a Professor to understand much of this!
Sydney's population is forecast to explode to 8 million by 2050, and since most people favour the inner suburbs, construction fails to keep pace.
Supply and demand!

Friday, 30 January 2015

Strongest credit growth since 2009 (housing investors to dominate 2015)

Fastest credit growth in 6 years

The Reserve Bank today released its Financial Aggregates data for the month of December 2014.

The figures showed credit growth ticking up to 5.9 percent over the past year, which is the strongest rate of credit growth since the start of the 2009 calendar year.

Housing credit once again lead the way with another 0.6 percent growth in the month of December to notch up 7.1 percent growth over the past year.

Business credit also recorded an improved 0.5 percent growth to grow by 4.8 percent over the past 12 months.

Personal credit grew by only a paltry 0.9 percent year-on-year.

Part 1 - Business credit growth improves

An improved month for business credit with a slack 0.3 percent growth in November 2014 being bettered by 0.5 percent growth in December.

The 4.8 percent year-on-year growth in business credit growth is the strongest annualised result since March 2009, although clearly we are coming from a low base.

The chart below shows that while Australia may have avoided a technical recession through the financial crisis, some Australian businesses may have experienced recession-like conditions for a couple of years from the middle of 2009.

With housing credit growing faster than business credit this will lead to further debate as to whether property investors are somehow "crowding out" small business lending.

It seems a dubious conclusion, since lending is said to be available for ventures with a sound business case, while it is simpler for many of us as small business owners to use lines of credit secured against housing for the purposes of business expansion.

Moreover it's a great deal cheaper, since banks tend to lend at a materially lower rate against an immovable asset such as a house.

I looked at this conundrum in much more detail previously here.

The latest stock exchange (ASX) Market Statistics shows that there is a bit happening in terms of both initial and secondary capital raisings.

In terms of what businesses at the upper end of town are up to, $29 billion of IPO capital has been raised on the ASX in the past year, which as high as we have seen.

There is also plenty of volume in terms of secondary capital raisings - $35 billion through 2014 - although nothing like the almighty flood of capital raised in 2009 as listed companies licking their wounds looked to shore up their balance sheets.

Part 2 - Property investors dominate

On to housing credit growth, and the month's data once again showed investor credit (+0.8 percent seasonally adjusted) continuing to rise at a significantly faster pace than owner-occupier credit (+0.4 percent).

In fact the rate of owner-occupier credit growth slowed a touch in seasonally adjusted terms in December, while investor credit has simply kept humming along.

In terms of rolling annual credit growth, we naturally expect that these figures will remain lower than in decades past, since we are of course starting from a much higher base.

Below we can see the daylight between the growth in owner-occupier credit and investor credit which has grown by 10 percent over the past year, and nearly as quickly in rolling annual terms.

The will raise the interest of APRA, with the regulator having stated that it will be monitoring lenders which are growing their investor loan books at "materially above" a double digit pace.

What "materially above" actually means is another matter, and the general view seems that APRA is keen to wait until it has more data before considering stepping up its role any further.

Unsurprisingly low interest rates have led to investors taking a new record share of total housing credit at 34.3 percent.

With Australia continuing to pump relatively high levels of net overseas immigration heavily focussed upon our four largest capital cities, I expect this trend to continue towards a 40 percent share over time, although this will take a long time to play out.

There is growing evidence to suggest that younger Australians are increasingly choosing to buy an investment property as their first step onto the housing ladder (in fact, it's long been obvious to those in the industry). 

While unconventional this may not be entirely irrational if the duration of the average employment contract is to shorten - particularly given the high frictional costs associated with trading property (most notably stamp duty, but also other acquisition and disposal costs).

The wrap

With interest rates appearing likely to be cut again in the months ahead - and perhaps more than once - 2015 is surely going to be another big year for property investors. 

It will be interesting to see whether the slowing pace of owner-occupier lending continues. 

This suggests that the property types and locations which will outperform are, quite simply, those favoured by investors, which typically means inner- and middle-ring properties in the capital cities.

The data shows Sydney absolutely miles out in front in terms of investor lending growth, although investor finance in Queensland has been steadily increasing now in rolling annual terms since August 2011, and significantly is more than 20 percent higher over the past year

The housing finance data suggests that Brisbane will have a strong 2015, although there is likely to be a very significant variance across property types given the mismatch between the new supply and what is in demand by the market.

Business credit growth is now at it highest level in nearly 6 years, but uncertainty abounds in this sphere and surveys suggest that progress is at best likely to be tentative.


Invest in outperforming properties:

Dollar sliding further on rates expectations

Well done if you steadfastly stayed short the Aussie dollar - you have been making some serious returns!

As the market increasingly expects interest rates to fall in the first half of this year, the Aussie has now fallen to only 77.8 cents.

That's a dramatic move in only the past two weeks from well above 82 cents.

The Reserve Bank Board meets next on February 3.

Whether or not interest rates are cut at the February Board Meeting, we can expect to see a change of intentions in the wording of the Monetary Policy Decision.

Previously there was reference to a likely "period of stability" being the most prudent course of action.

At the very least that line will surely be dropped next week.

Thursday, 29 January 2015

Down we go

Markets now expecting a February cut

Well, here come the interest rate cut expectations we were talking about only earlier.

It has been an amazing shift in cash rate futures in just 24 hours.

To a fair extent it seems that this change in view may have been driven by Terry McCrann's article.

Note how the February 2015 contract is now trading at just 97.65, implying a yield of just 2.35.

That suggests a market expectation of a 2-in-3 chance of a cut on February 3 - or significantly more likely than not.

Also note how the chance of a cut by March is priced in at more than 100 percent.

Meanwhile the yield on contracts out until the middle of 2016 is only 1.9 percent!

Lower interest rates here we come.

Greatest share of overseas born Aussies since the gold rush!

Overseas born Aussies at 120 year peak

The ABS released its Migration data today which confirmed that since 2006 most of Australia's burgeoning population growth has consistently been accounted for by net overseas migration.

The figures showed that a massive 6.6 million Australians - including a fair few Poms such as myself - were born overseas.

This takes the proportion of Australians born overseas to an amazingly high 28.8  percent. That's the highest proportion of overseas born Aussies we have seen in 120 years since the gold rush of the late 1800s!

Unsurprisingly the greatest number of those born overseas continue to hail from the Old Dart (the British Isles) and New Zealand, at a combined 1.8 million. 

Incredibly some 10.9 percent of the entire state of Western Australia was born in the United Kingdom, while 4.8 percent of Queenslanders were some-time Kiwis having been born in "the land of the long white cloud"!

However, the proportion of the Aussie population born in those countries is now in decline, a trend reported here previously - the UK falling from 5.,6 percent share to 5.2 percent, and New Zealand from
 2.6 percent to 2.1 percent.

The real story here is the rise, rise and further rise of Aussies born in China (447,400) and India (397,200).

Asia dominates 

The figures show that Asian countries are playing an increasingly important role in Australia's demographic make-up.

For example, the number of Australians born in India all but tripled over the past decade, while the number of Aussies born in China soared, more than doubling from 205,200 to 447,400. 

The data shows that Australians who hail from China and India overwhelmingly are stationed in Sydney and Melbourne, and not a week passes without news of how these shifting demographics are impacting market trends in Australia.

Analysis that I carried out here also showed that Australia is playing host to record numbers of Chinese visitors by the year, suggesting that the net overseas migration from Asia is a trend which is likely to continue. 

Migration driving population flows

The implication of this for property investors is that they need to understand net overseas migration and how this is going to impact property markets.

Natural population growth does what it does and will continue to do so, but the net overseas migration figure showed that in particular the state of New South Wales benefited from an enormous volume of overseas arrivals in 2013/14 at an astonishing 166,267!

Clearly a huge volume of immigrants remain attracted to the harbour city of Sydney, making balderdash of the notion that the property market may be "oversupplied" with dwellings.

However, a fair number of Aussies depart from those shores too leaving net overseas migration of an almighty 73,300 bolstering the New South Wales population, some 34.5 percent of Australia's total for that financial year.

The other states which benefited from net overseas migration were Victoria (+59,000), Queensland (+30,270), Western Australia (+32,270) and, to a lesser extent South Australia (+11,166). 

The figures for other states and territories were negligible. 

Of course, population flows need to be understood by property investors in a more nuanced fashion than simply this.

The net interstate migration figures showed that those leaving New South Wales for other states has declined to its lowest level on record as Sydneysiders stay put for greater employment opportunities.

The biggest beneficiary of interstate migration over the past decade by a huge margin has been Queensland at well over +15,000 per annum. 

However, this trend of population inflows to mining states such as Queensland and Western Australia has clearly been slowing in recent times as fewer mining construction projects remain underway and the mining boom shifts into its production phase.

The wrap

The number of Australians born overseas has hit levels not seen for 120 years since the gold rush.

When one includes the offspring of those born overseas, the proportion of Australia's population with close ties to other countries is very high indeed.

The key trend to watch for property markets is the increasing dominance of immigration from Asia - mainly from China and India, but also a range of other countries. In particular, immigration to Australia tends to be heavily focussed on a few of our capital cities. 

I took a look at the settlers by region in Australia in more detail here.

Stand by for interest rate cuts (plural)

Markets react to inflation data

I had a look through the mixed reaction to yesterday's inflation data here.

Currency markets and futures markets generally took the somewhat higher than expected core inflation readings to mean that interest rate cuts may be deferred or pushed out to March or beyond.

By the close of trade yesterday February cash rate futures contracts were trading at 97.535, thus implying only a fairly remote one-in-six chance of a cut in interest rates at next week's meeting to 2.25 percent.

The implied yield curve remained inverted, essentially pricing in two cuts by the end of 2016.

It's not what the Reserve Bank was planning necessarily, but with interest rates globally cascading lower - a trend exacerbated by lower oil prices - Australia's 2.50 percent interest rate is comparatively high for the industrialised world economies.

Deflation is increasingly being seen across the world as a bigger risk than high inflation.

All clear then?

Weeell, not quite...

February rate cut "almost a certainty"

The Reserve Bank is clearly very keen on issuing forward guidance to markets - and when the Board met way back in the first week of December, the official line was still that "the most prudent course is likely to be a period of stability in interest rates".

Step forward the Reserve's alleged mouthpiece Terry McCrann to deliver a series of extraordinarily specific reasons as to why interest rates will be cut, and "almost certainly" as soon as February.

In short, the RBA was not too keen to cut interest rates once, but now that it sees "two to four" interest rate cuts as potentially necessary, Stevens will be moved into action.

"After 18 months of keeping its official interest rate unchanged, the Reserve Bank will almost certainly cut the rate at its first meeting back for the year next Tuesday.

What is absolutely certain is that the key language in RBA governor Glenn Stevens’s post-meeting statement will change. That would obviously be the case if he’s announcing a 25-point cut, but it would change to “signalling a future cut” even in the now unlikely case the rate was left unchanged."

Elucidates McCrann:

"Last year it continually contemplated a — to stress, single — rate cut and determined there was no point; that a period of stability was preferable.

Now, it sees a series of rate cuts — at least two 25-pointers, perhaps as many as four — as not just likely but all-but as inevitable through 2015. Crudely, with that expectation, there’s no point in starting the year by “umming and ahing”, but to, well, make a start.

It’s also the Stevens style. If commentators should have learned one thing about the “guv” in eight years, it is that when he comes to a viewpoint he acts"

The full article you can read here.

The information was clearly treated as credible by markets which are now pricing in an each-way bet of rates being cut in February and a cash rate of below 2 percent in 2016.

Hang on to your hats, then.

As McCrann himself puts it, a series of "two to four" rate cuts is set to pour further fuel on to particularly Sydney's property market bonfire.

A series of cuts is also likely to reignite lending to investors in other markets. 

Personally I get the sense that there is a good deal of increased interest for interstate investors looking at the Brisbane market, as the next few months of housing finance data will likely confirm.


Invest in outstanding properties:

"Sydney back in boom mode for 2015"

Sydney growth accelerates

Unsurprisingly given low borrowing rates which are heading lower, Sydney's housing market  is set for another bumper year in 2015.

The latest Domain Group figures revealed that Sydney house prices accelerated in Q4 2014, recording 4.1 percent growth to be 14.1 percent higher over the year.

This was the strongest quarter of 2014 according to Dr. Andrew Wilson of the Domain Group.

"As this comes on the back of more than 15 per cent a year earlier, Domain Group senior economist Dr Andrew Wilson said the figures confirmed the Sydney property market is in "hyperdrive while the rest of the country is in second gear". 

Dr Wilson said most of the growth was in the December quarter. 

"The Sydney boom is back...the median house price increased 4.1 per cent – that's the strongest increase of any of the quarters of the year."

Dr Wilson is forecasting price growth of between 7 and 10 per cent for 2015. 
"And closer to 10 per cent," he said.
The median house price for Sydney is now $873,786. 
Apartment prices jumped 10.4 per cent over the year and 2.9 per cent over the quarter to $597,668.
Some regions had extraordinary house price growth last year, with the upper north shore and north-west shooting up 21.8 per cent."
Although median prices don't always paint a full picture our favoured sectors of the market generally performed very strongly in 2014 including the upper north shore (+21.8 percent), the inner west (+18 percent), Canterbury Bankstown (+15.8 percent) and the lower north shore (+13.1 percent).
Concludes the article:
"You would have thought it would have slowed down, but it just hasn't.
"And because of this talk of interest rates going down even further, that's led to even more people inquiring."
Dr Wilson said across Sydney, most of the house price growth was in the $1 million to $2 million price range, although prestige prices had grown about 10 per cent over the year."
The weakest performing markets for median house prices in Q4 2014 were Adelaide (+0.3 percent), and seasonally volatile Darwin (-6.0 percent), where median house prices have tumbled by 6.8 percent over the past year.
Other markets are generally moving up but less significantly, with national median house price growth up by 2.1 percent in Q4 2014, a figure skewed by the large gains in Sydney.

Wednesday, 28 January 2015

Inflation a mixed bag


A very interesting inflation release today, then!

The headline inflation figure of 0.2 percent for the quarter was very soft, taking the December 2013 to December 2014 reading down to only 1.7 percent, below the bottom end of the target range.

As expected, the plummeting oil price played a key role in that.
  • The most significant price rises this quarter were for domestic holiday travel and accommodation (+5.8%), tobacco (+4.8%) and new dwelling purchase by owner-occupiers (+1.1%).
  • The most significant offsetting price falls this quarter were for automotive fuel (-6.8%), audio, visual and computing equipment (-5.2%) and audio, visual and computing media and services (-3.8%).
Despite this very soft headline print, the figures reported for the less volatile and preferred trimmed mean/weighted median for the December quarter came in stronger than expected at 0.7 and 0.7 respectively.

With downward revisions to earlier quarter figures the annualised underlying figures for these two key underlying measures came in at 2.2 percent and 2.3 percent respectively.

These readings are obviously at the lower end of the 2 to 3 percent range but the twin 0.7 prints for the quarter might just be enough to keep interest rates on hold in February. 

Rents grow at 2.4 percent

An interesting data series hidden within the inflation data is to be found in the sub-indices for rents.

Rental growth seems to have stabilised nationally at 2.4 percent growth over the past year.

However this 2.4 percent reading masks significant variations in fortunes by capital city.

Rental growth remains robust in Sydney (+3.0 percent), Melbourne (+2.4 percent) and Brisbane (+2.0 percent).

Rental growth is, however, softer in Adelaide (+1.7 percent) and falling sharply in Perth (+1.5 percent).

In the smaller capital cities rental growth is also looking very soft.

The rate of rental growth continues to nosedive in Darwin (still +2.7 percent, but down from above +8 percent in 2013), remains soft in Hobart (+1.0 percent) and has turned sharply negative in Canberra (-1.8 percent and still declining).

It is probably worth noting here that despite rental growth being "softer" than it has been, in nominal terms - which is what matters to property investors who own property - the rental index continues to climb to record highs by the quarter.

The wrap

A bit of a mixed bag here for the inflation figures, then, and a data series which might easily be interpreted either way.

A very soft headline inflation reading of 1.7 percent suggests that the next move in interest rates is still likely to be down, particularly given that we have weak GDP growth, uncertain business confidence and low wages growth (hardly a recipe for persistent inflation, one would have thought!).

But trimmed mean and weighted median readings of 0.7 percent in the quarter will probably convince the Reserve Bank to keep interest rates on hold in February.

Nevertheless, annualised core inflation of 2.25 percent seems unlikely to preclude another interest rate cut should one be deemed necessary.

Currency markets weren't entirely convinced about how to interpret the figures either, with the Australian dollar first shooting up and then dribbling back down a bit, then stabilising around 79.9 cents.

Tough to call.

If I was a betting man I'd take a punt on a cut in the official cash rate in March to 2.25 percent.


My view of beautiful Brisbane...aka. the "Paris of Asia" (h/t Dan Petrie of Bloomberg).

Huge day for interest rate news !

Soft inflation data expected

A massive day for interest rate twitchers today with the release later this morning of the inflation data for the December 2014 quarter.

There has been a theory in Australia which goes something like this:

-China slows down and the iron ore price crashes

-Australian property falls sharply in price

-Australian banks become insolvent as mortgages go bad

Or variations upon that theme.

1 - Commodities

The first part was more or less a given, with Australia's terms of trade now coming back down to earth from incredibly high levels. 

This morning the iron ore price of $US62.80/t takes the spot price back all the way back down to about where it was in May 2009,

This has clear implications for national income.

While the larger miners (BHP, RIO) have cash costs much lower than this level, there are a range of smaller producers higher up the cost curve that will be struggling to turn a profit unless the Australian dollar falls much further from its current level.

Meanwhile the larger producers continue to pump the market with supply, which must inevitably result in a shake-out of some of the smaller producers - meaning mine closures and jobs losses.

This is by no means only an iron ore story. 

Indeed Australia's coal production is in more precarious position, with many of our coal mining companies sitting higher up the cost curve.

Meanwhile, copper was off again by more than 3 percent overnight sitting at just US$2.46/lb.

In short it's a mixed story - Australia is shipping commodity volumes that we could only have dreamed about a decade ago, but we are doing so at prices which have been sliding by the month.

Such is the nature of commodity cycles. Resources companies produce commodities and therefore are unable to differentiate on their product, and instead they compete on price.

It's dog eat dog and the larger companies with the economies of scale and lowest cash costs will be the winners.

Bulk Commodity Exports graph

With mining construction also now falling into a sharp decline, it would seem that the dollar must fall further and the notion that interest rates will not fall further appears remote to me, though obviously I could be wrong. 

2- Housing

While commodity prices are indeed, falling, the house price part of the equation has certainly not happened.

In fact, as one might well have expected, as interest rates fall, house prices have been rising in most cities. 

Housing Prices graph

And so too are housing loan approvals to record highs, mainly driven by investors, which is part of a structural or generational shift towards a new way of living in Australia.

I analysed the latest round of housing finance data in much more detail here.

Housing Loan Approvals graph

3 - Banks

The other aspect of low interest rates is that life has become comparatively easier for existing homeowners.

Fitch's Dinkum Index shows mortgage arrears at a 7 year low.

"The latest "Fitch Ratings Dinkum Index", which records 30 and 90 day mortgage arrears, showed that arrears have declined to 7 year lows (30 Day) and 5 year lows (90 Day) respectively."

I also analysed the Genworth (GMA) Q3 results here, which showed that mortgage delinquencies have been cascading significantly lower by book year since 2009.

"In South Australia and in regional Queensland in particular, where a weak economy and a troubled coal sector are biting respectively, we do see some risks of elevated delinquency rates.

Indeed rates of delinquency have already run notably higher in Queensland (0.49%) and South Australia (+0.43%) than elsewhere in Australia, but thanks to exceptionally low delinquency rates in New South Wales (0.30%) and Victoria (0.32%), the portfolio records a very low rate of Australian delinquencies in aggregate at just 0.36%.

We expect that the unwinding of the mining construction boom will have some effect too, although this may be cushioned to some extent by the lucrative remuneration packages that many employees and contractors have enjoyed through the construction phase of the boom.

GMA's delinquency rate of 0.36% is skewed higher by the troublesome 2008 book year.

However, since that time, mirroring the findings of Reserve Bank research (which revealed that the average mortgage holder is some 24 months ahead on mortgage repayments thanks to Australia's unique loan product structuring), delinquency rates have fallen consistently over the following 5 book years.

Low interest rates and low interest repayments are clearly helping homeowners, and mortgage stress is relatively speaking low at the present time."

Aussie banks have not therefore become insolvent. 

In fact they are being valued at or close to their highest ever prices.

Commonwealth Bank (CBA) shares yesterday reached their highest ever valuation closing at $87.63 (as recently 2011 the valuation was well below $50).

Granted share markets do no always price companies rationally, but this does not look like the share price of a bank which is in trouble or about to grapple with insolvency issues (and few companies can be more analysed in Australia than CBA, so this represents a reasonable market consensus).

Inflation to decide rate cuts

Aussie homeowners are naturally enough hoping for further interest rate cuts in the first half of 2015 and today's inflation data will play a key role in deciding whether we get a cut in February or March.

I looked at the Q3 2014 inflation figures here which showed that weakning inflation has potentially left the door open for further cuts.

The market is expecting a soft reading of just 0.3 percent, which as per my tweet below which would take "headline" inflation below the 2 to 3 percent target band at just 1.8 percent.

Falling oil prices have likely played a key role here, however, and the key figures to watch will actually be the core readings which strip out the effect of outliers - the trimmed mean and weighted median.

The market expects to see an average of around 0.5 percent for the December quarter on the core readings.

If that happens then core inflation will be sliding towards the lower end of the 2-3 percent target range at just 2.2 percent and the clamour for interest rate cuts will likely become a cacophony.

In summary then, if core inflation prints at 0.5 percent or lower, then interest rate cuts become more probable.

More later...

Tuesday, 27 January 2015

Sydney property to rise 8 to 12 percent in 2015

Louis Christopher of SQM Research doesn't often get too much wrong with his market forecasts.

Christopher sees 8 to 12 percent capital growth for Sydney in 2015 - and if interest rates are cut, Sydney will be in "yet another bull market for the full year".

From the latest SQM Research newsletter:

"The Darwin market is in a full blown slump. The negativity going on in Darwin, has been getting worse.

Vacancy rates have continued to rise over summer, rents on our numbers are now down 14% and are in a clear downtrend as shown by this chart
Sydney on the other hand is still looking strong.  

Over recent summers (and including this one) we have been getting the usual commentary from the usual suspects stating the market is about to slow down, is slowing down, etc. 

It is increasingly feeling like the boys who cried wolf. 

Sooner or later they will be right but right now, a slowdown currently happening in Sydney? Hardly. 

I frequently speak with trusted agents with Sydney and I spent the Xmas period doing just that. 

All were reporting active buyers even right through that Xmas/New year week. Business was strong for them.

Now invariably a slowdown will come. 

The market cannot keep growing at a rate of 15% forever. 

Our forecast for this current financial year was 8-12% and I see nothing in the market to suggest it will be below that range. 

If the rate cut comes it will be yet another bull market for Sydney for the full calendar year.

My forecast for the opening of the Sydney auction season: Clearance rates will rise from the closing levels of the high 60s in December. The Sydney auction market will most likely open up in the early to mid 70s.”

Never Been a Better Time to Buy!

Employee Earnings

The Australian Bureau of Statistics (ABS) this week released its Employee Earnings and Hours data which are released every two years (not bi-annually, though I always have trouble remembering what that means!).

The May 2014 figures showed that full-time employees made up 60 percent of all employees, had average weekly total cash earnings of $1,568.80 and had an average age of 40.4 years.

That's an increase of just over 8 percent on the May 2012 figures which showed that the average weekly total cash earnings for all full-time employees figure was $1,452.00.

I thought it would be interesting to go back to the start of the data series to see how average weekly full-time earnings have changed over time. 

Some things have certainly changed a bit over time - the ABS previously used some kind of scanner or fax machine to upload their releases...

It makes the older stuff pretty hard to read, but the data is just about legible, and if my eyesight is operating properly then average full-time weekly total earnings in May 1996 were $723.90.

With a bit of back and forth I was able to piece together the average weekly full-time earnings figures for 1996 to 2014.

So what can we say about this?

Firstly, the 2014 May 2014 average earnings figures represented an 8 percent increase on the May 2012 equivalent, a little slower growth than we have seen in certain times past when inflation was higher, but not actually all that different in real terms.

This year's release provides almost limitless data to consider at the state, sector and industry level and in terms of hourly rates, gender, age, median earnings, and much more besides.

The basic headline figures over time show that in some years the rate of average earnings growth was lower when the economy was running through a rough patch such as around the turn of the century or from 2008 to 2010, and at other times the rate of earnings growth was higher.

But the really notable thing which stands out from this chart is how seemingly small increments in earnings growth equate to an enormous cumulative increase over time.

That's compound interest at work - a snowballing effect or growth upon growth. 

We have had good years, bad years and mediocre years in the Australian economy since 1996 but average weekly full-time earnings since that time have increased by well over 100 percent.

This suggests that despite the presently soft economic environment, average earnings decades into the future are likely to much higher than we intuitively think.

That's because we consistently program our brains to understand the world in today's dollars. 

Never a better time to buy!

One of the charges which is levelled against the real industry industry - and not without good reason, one might add - is that it is almost never considered to be a 'bad time to buy' property.

If prices are falling then it must be a so-termed "buyers market" where bargains abound, and if prices are rising then it really must be a time to buy then too in order to avoid missing out.

In other words, it's always a good time to buy! 

It's standard real estate agent patter, of course, even for those who have only been in the industry for a short period of time...not even long enough to experience one cycle, let alone to experience and understand several.

Of course, whether it actually is a good time to buy property largely depends upon your strategy.

If your plan is to buy counter-cyclically then some times - and some locations - are better to buy than others. 

If your plan is to accumulate property in the best location you can then you might opt to continue buying at any point in the cycle, on the assumption that over the long term the price of prime location property will move higher.

You only have to look at some of the disastrous recommendations for homebuyers to not buy in Sydney in recent years to understand that timing the market is rarely as easy to do in real time as it appears to be in retrospect.

As the old saying goes, "the charts are easy to read from right to left". 

Actually there is no such saying, but...well, there should be. 

Index funds

Not dissimilarly, there are different arguments and viewpoints about how one should approach share investing.

While the Great Depression and a huge crash in share prices forced investors to change a few viewpoints, there are still plenty who believe in the notion that it is always a good time to invest given that valuations are likely to be higher again at some point in the future. 

It has become increasingly common for individual investors to consider that they do not need a stockbroker, fund manager or indeed any financial advice, and that they will beat the market through skilful share trading and price speculation.

Some very organised traders with great money- and risk-management skills and a relentless desire to learn from mistakes do manage to do so,

In aggregate, though, most average investors achieve at best average results, and at worst do very badly.

Again it comes down to investment strategy.

There is certainly a place for value investing in individual companies - and even for trading - but Year 7 mathematics should tell you to be very wary about the notion of an "instant 4 share diversified portfolio" if those four stocks are individual companies. 

There is not necessarily anything wrong with choosing your own companies to invest in providing that you understand how to analyse financial statements, forecasts, stock exchange releases and undertake meaningful ratio analysis.

Most investors don't - and note that picking the company to invest in first then doing a few token calculations after you've bought it doesn't count.

If even Buffett can pick stocks such as Tesco (TSCO) which lose half of their value, then this should tell you that allocating too much of a portfolio to an individual company is likely to introduce significant portfolio risk.

At the end of each calendar year, take a look back at the stock picking tips from 12 months ago and you will find that the results are often extraordinarily mixed. 



Index funds

Despite this there is a sound argument to say that it can always be a good time to buy shares with the right strategy.

An example, we have a couple of index funds into which the same amount is contributed every month come rain or shine, one of them for nearly two decades.

It doesn't much matter what happens the index from month to month with such a basic strategy - if valuations fall, your contribution buys more units next month, and vice-versa.

It's known as "averaging" or "dollar cost averaging".

If an individual business falls upon hard times it will eventually slide out of the index upon rebalancing to be replaced by another company.

Naturally folk with products to sell frequently dismiss the idea of averaging as "dumb money" or a "dumb strategy", but when the dumb money acknowledges its limitations, as the sage of Omaha himself said, paradoxically it ceases to be dumb.

Investment strategy

These are important considerations for an investment portfolio and it is important to understand what your own strategy is, or whether it is a combination of several strategies.

What of deflation - such as was experienced in Japan - which led to a long, painful and drawn-out decline in share market valuations and real estate prices?

It does seem that in the decade ahead many developed economies face a greater threat from deflation than they do from the runaway inflation seen in certain decades past. 

The recent fall in oil prices has only added to this dynamic.

There is no such thing as a certain outcome, but recent events in the United States, United Kingdom and now the Eurozone suggest that governments and central banks will take extraordinary action to avoid befalling a similar fate, resorting to interest rates set at the zero bound and quantitative easing in order to stave off deflation.


On a related note it is a huge 48 hours ahead for Australian markets, with the Q4 inflation data to be released tomorrow.

I had a look here previously at the relatively soft reading for Q3 and how this might leave the door open for an interest rate cut.

A stream of soft data since that time has suggested that more interest rate cuts are in the pipeline.

This morning's news feed shows that iron ore prices are down by more by than 4 percent or $2.60 to just US$63.30/dry tonne.

And with the oil price falling in recent times there has been a generally shift in inflation profiles globally.

Over in Britain the two dissenting voices on the Monetary Policy Committee have dropped their call for interest rate hikes.

Japan has expanded its lending programs. Canada unexpectedly cut its interest rates, while Turkey, Denmark and Peru have all eased policy in the last week or so.

The Reserve Bank in Australia has indicated a preference for rate stability, but markets are increasingly coming around to the view that the cash rate is likely to be heading to just 2 percent this year.

This might not sit comfortably with the bank's preference for forward guidance, but March is a long way off and the need for a rate cut or two to boost confidence may be deemed more pressing.

A much anticipated inflation (CPI) release lies ahead! Those wanting to see higher share market valuations and property prices should be hoping for another soft reading.