Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent 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'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Saturday, 28 February 2015

Emerald the next hotspot to crash

Sydney to power ahead of poor mining locations

Interesting how quickly things change.

Only a little over two years ago my predictions of a Sydney property boom were very much out of favour because I'd neglected to note the fortunes of Gladstone, Port Hedland, Moranbah, Karratha, the Hunter Valley etc etc.

Unfortunately for those favouring mining towns those property markets have been crashing all over the place.

Port Hedland, Karratha and Moranbah have all capitulated in spectacular style.

I haven't been up to Gladstone for a couple of years and I'm not really qualified to comment, but the prognosis is for a crash.

Although coal jobs are being cut all over the shop, Newcastle and the Hunter Valley are unlikely to be the worst hit areas, because they do have an element of employment diversity.

I expect Emerald will be the next of the small town property hotspot recommendations from 2013 to implode as mining workers relocate back to Brisbane.


"Blake Graham is uneasy about the changing nature of his home town of Emerald in central Queensland, now the coalmining boom has bust.
“It’s like a ghost town,” admits the 31-year-old, who works for his family’s mine machinery hire company, Grahams Plant Hire.
“Heaps of my mates were working out here in the mines but they’ve had to move back to the Gold Coast and Brisbane; they’ve lost their jobs, sold their jetskis, new cars and all the other sh_t that you buy when you are 27 and earning $140,000 or more, and gone home to a labouring wage.”
It’s a vastly different Emerald that is showing its country face to new arrivals and travellers these days, from the flashy height of the coalmining boom two years ago.
Gone are the loud pubs overflowing with cashed-up workers in fluorescent mining garb; the shiny new black utes with chrome rollbars trawling the main drag; prostitutes lolling against motel walls; and hotels charging more than $300 a night.
As world coal prices have plummeted, planned new coalmines in central Queensland have been shelved and future explor­ation halted. So too has Emerald’s growth as a thriving mining hub come to a screeching halt.
Empty shops line the town’s main street. The local council is owed nearly $10 million from homeowners unable to pay their rates.
Motel owners used to full occupancy and high rates are going broke by the week, with rooms only 30 per cent full at a lowly $89 a night.
Rents for a three-bedroom house have similarly slumped, from $800 a week to a pre-boom $250 per week. Many landlords are dangling offers of the first month’s rent free in the hope of enticing a rare new family to the town.
Graham’s family equipment business, which in its heyday supplied contract heavy mine machinery, drivers and service mechanics to some of the biggest coalmines, has shrunk from a workforce of more than 250 in 2013 back to a small Emerald-based team of nine.
Its work yard is filled with big yellow dump trucks and mine bulldozers with nowhere to go.
“When the coal price went down, contractors like us were the first ones to go; we’ve had to change our business to stay afloat and it hasn’t been easy,” says Graham.
“It’s the same for everyone in Emerald, back to reality in a way: the pubs and restaurants are struggling, you can get a park outside the post office any time, and all my age group has gone again. It’s pretty dead and slow on a Saturday night in town now.”
It is in the new housing estates — carved from Emerald’s bush fringe with their manicured lawns, grand display homes and pretentious names such as Maranda Heights, Mayfair Ridge and The Vines — that the dashed aspirations of hundreds of mine-dependent families are most evident.
There are currently 477 vacant houses for rent in Emerald and more than 300 on the market. In a town of 12,000 — down from a boom population of 15,000 in 2012 — the bleeding shows.
New cul-de-sacs and silent courts are lined with For Sale signs. Some new homes have never been lived in, as local coalmines such as Rio Tinto’s Kestrel and BHP Billiton-Mitsubishi’s Blackwater have slashed worker numbers in the past 18 months, despite maintaining coal production levels.
Other empty houses are owned by absent city speculators, caught too in the boom-bust cycle.
Local valuation firm Taylor Byrne has tracked how house values in Emerald have fallen in concert with dropping world coal prices, now as low as $77 a tonne.
Modern new homes that were selling like hot cakes for $450,000 in 2012, when coal prices were just off their $142/tonne peak, can now not find a buyer at $250,000.
Banks in possession of dozens of houses, seized from out-of-work miners unable to maintain big mortgages, are offering deeper discounts.
Taylor Byrne valuer Annette Smith says it is not only the resident miners and their families who have left town. Gone too are the troops of fly-in, fly-out miners who used to arrive daily at the airport to live on remote mine sites; FIFO numbers have halved from their peak in 2012-13.
Dozens of service and supply companies that arrived in Emerald while the coal sector thrived have also vanished."
Terrible.

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Sydney's market goes from strength to strength with a massive and "irresistible" 85.5 percent preliminary clearance rate on Saturday.

This is the second highest preliminary clearance rate on record. 

Articles of the week

Neatly summarised in one easy place by Michael Yardney over at Property Update.

Take a read here.

With more than 80,000 subscribers for the free fortnightly newsletter, Property Update is one of the most read resources in Australia.

If you haven't already done so, you can sign up for free here.

US outlook remains favourable

US Q4 result more sustainable

As the most influential economy, in terms of global  growth, if the US sneezes the rest of the world still catches a cold.

I'm not sure what the opposite of sneezing is - but that's what the US has been doing through 2014.

As looked at here recently, the "JOLTS" index showed job openings at their highest level since 2001.



And the Job Openings Rate is also now at its highest level since before the financial crisis.



Meanwhile US jobs growth has been becoming stronger, recording its strongest quarterly growth in 17 years as detailed in my chart packs here.


The US unemployment rate has fallen to just 5.6 percent.

The big question is when the Fed might start to look at hiking interest rates.

Q4 revised

Overnight the US released its revised GDP growth figures for Q4 2014, which showed the economy growing at a more sustainable 2.2 percent annualised pace in the final quarter of the year.

The Q3 figures had shown the economy expanding at a rip-snorting 5 percent annualised pace.


Consumer spending was strong recording annualised growth of 4.2 percent in Q4, though final GDP was weaker amid indicators of stock accumulation.

Growth is expected to pick up again in Q1 2015 to around 2.4 to 3 percent in annualised terms as the threat of an inventory overhang recedes, while consumer spending should remain elevated in 2015, in part thanks to cheaper gasoline prices.

The revised real GDP figures charted below in 2009 chained dollars terms affirm the US economic recovery.


Policy implications

Despite this apparent strength in the labour market, inflationary pressures in the US have remained soft to date.

As such there has been little urgency for the Federal Reserve to look at hiking its interest rates from near zero.

All of this indirectly impacts Australia's own interest rate policies, particularly via movements in the currency.

The Reserve Bank of Australia (RBA) meets on Tuesday to decide whether to leave interest rates on hold at 2.25 percent or cut them to 2 percent.

At the close yesterday markets were pricing a 62 percent chance of a cut, with implied yields on cash rate futures contracts for November 2015 plumbing new depths at below 1.7 percent.

However, the March interest rate decision very much hangs in the balance.

I will look at the likely path of Australian interest rates in 2015 in more detail tomorrow.

Friday, 27 February 2015

Private sector credit expands +6.2 percent

Financial Aggregates improve

The Reserve Bank released its Financial Aggregates for the month of January 2015 which beat expectations by showing a 6.2 percent expansion in credit.

This is the fastest rate of credit growth seen since January 2009.

Let's step through it in 3 parts and 60 seconds.

Part 1 - Total credit up 6.2 percent

Business credit is now up by 5.5 percent over the past year, and housing credit by 7.1 percent.

Personal credit increased by only 0.8 percent.



Part 2 - Business credit improves

Business credit surprised by increasing by 0.8 percent following on from a weaker 0.5 percent reading in December.



The annual rate of credit growth at 5.5 percent is now the strongest result since February 2009 when the financial crisis saw recession-like conditions hitting Australian business.


There has been a lot of largely unsubstantiated talk about property investors "crowding out" lending to business, but I think you need to dig a bit deeper than that before making such a conclusion (certainly it wasn't the view of the business lending folk I have spoken to).

What about the following forms of business financing, for example?

Firstly, bond issuance by mining companies has declined substantially since 2008, of course, but corporate bond issuance in the domestic market is alive and kicking with $2.5 billion of  corporate bonds issued over the last quarter alone.

Hybrid issuance over 2014 was very strong indeed - in fact, a record $14.5 billion was raised in the last calendar year, mainly by the largest banks.

Between November and February six financial entities raised a total of $2.6  billion of hybrid debt, which included the first "RMB-denominated" Tier 2 hybrid debt issuance by Aussie banks.

There has also across recent months been significant growth in foreign currency denominated business credit, which has effectively been boosted by valuation effects associated with the depreciation of the Aussie dollar.

So to say that property investors have "crowded out" business lending based upon such a narrow focus is misleading.

Meanwhile IPO capital raisings are tracking at their highest level in 18 years with consumer and healthcare listings leading the way cf. the $5.7 billion Medibank privatisation, which was the largest IPO in Aussie equity markets since the initial Telstra offering way back in 1997.

Naturally, my chart below does show that secondary capital raisings are tracking at a lower level than was the case through the financial crisis when there was a great flood of recapitalisation, but look at the aggregate for initial capital raisings go!



As for small businesses?

Well, I can't speak for other small business owners, but I do know that Hades would freeze over before I took a small business loan ahead of a line of credit secured against my house.

"Crowding out" is hokum and should be banned as a phrase - as and when confidence returns, businesses will find the ways and means with which to expand.

Part 3 - Housing credit

Low interest rates have unsurprisingly continued to support housing credit which will of course lead to 2015 being a positive year for property markets.

In January housing credit expanded at a faster pace than owner-occupier credit once again.



Investor credit is now accelerating at a rate of more than 10 percent per annum, and even on a smoothed rolling annual basis the rate of credit growth is now approaching double digit pace.



This will raise questions as to what role APRA is going to take as interest rates look set to fall even further.

Investors now hold a record 34.3 percent of outstanding housing credit.

This is a trend which will continue, of course, not least because in Australia we have a tax system which encourages property investors to use interest only loans and not repay the capital.


Further property market gains ahead for 2015 then but mainly focussed on Sydney and - at last I now feel - inner ring Brisbane.

Done! Was that 60 seconds?

---

Invest in outperforming property:

Brisbane@allenwargent.com
Sydney@allenwargent.com

NSW earnings rise strongly

Earnings rise 2.7 percent

The ABS released its biannual Average Weekly Earnings figures for November 2014, well ahead of the rate of inflation.

In the year to November 2014 in trend terms Full-Time Adult Average Weekly Ordinary Time Earnings (OTE) increased by 2.7 percent to $1,476.30.

The Full-Time Adult Average Weekly Total Earnings in November 2014 were $1,539.40, a rise of 2.7 percent from the same time last year.


Disappointingly the data showed a record gender pay gap of 18.8 percent.

My charts below show that average male weekly full-time OTE have surged 3.6 percent higher over the past year to be some $298 higher than the equivalent figure for female employees.



The growth in average female full-time OTE was clearly slower at just 1.7 percent.


Damningly, in percentage terms this is the widest gender pay gap in the 20 year history of the survey.

The state level private sector data showed that average full-time total earnings in original terms jumped 5.3 percent higher year-on-year in New South Wales.


There was a surprisingly strong uptick in full-time total earnings in Western Australia too.

Softer elsewhere.

All about that base...(no trouble?)

Rates to fall to 1.75 percent?

So say futures markets.

With March cash rate futures contracts trading at 97,875 this indicates a likelihood of a cut as soon as March 3 to an official cash rate of 2 percent being priced as a 56 percent chance at the close yesterday.

With the iron ore spot price resuming its downtrend after Chinese New Year, these odds could sneak higher.


Implied yields on December 2015 contracts have sunk incredibly low at just 1.715 percent, suggesting that the market believes we will see two more 25bps rate cuts by the end of this calendar year. 

The case for cuts

The case for further cuts is clear enough (see links for my more detailed analysis of each factor):

-trend employment growing, but not as fast as the size of the labour force, and thus unemployment is rising;

-an alarming increase in regional unemployment in certain areas;

-headline inflation of only 1.7 percent, with the preferred underlying readings averaging 2.25 percent, being in the lower half of the 2-3 percent target range;

-capex expected to decline sharply over the year ahead;

-GDP growth forecast to remain below trend for some time;

-a dramatic correction in the Commodities Index, particularly in bulk markets; and

-some other stuff.

And the case for keeping rates on hold?

Arguments mainly seemed to be based around:

-keeping some dry powder in case of future emergencies;

-lower interest rates may not have much positive impact on sentiment; and

-lower interest rates could cause house prices in Sydney to boom.

The Wrap

The March decision may hang in the balance, but markets see further cuts this year as being very likely.

Kangaroo Point

Viewpoint

One of the more popular locations in Brisbane: Kangaroo Point.

The northern edge of the penninsula is where the Story Bridge crosses to the Central Business District (CBD) and to Fortitude Valley.

The clifftops are also an attraction, in particular The Cliffs Cafe, which is where I took this photo from yesterday. 


The suburb is popular with rock climbers and lizards, and being a pleasant area, it has five parks.

Between 2006 and 2011 the population of the suburb increased by 1 percent from approximately 6,900 to 7,000 reflective of the fact the suburb is not being pumped with new supply in the same many inner Brisbane locations are.

However, adjacent suburbs such as Woolloongabba, Highgate Hill, West End and South Brisbane are set to be awash with new units which will almost certainly keep an effective lid on generic apartment prices here, as too will new tower blocks in the CBD itself.

2 bedroom unit prices in Kangaroo Point start in the low-to-mid $300,000s range, with median unit prices sitting at ~$500,000, but personally I believe there are better places to invest your money.

Median house prices are closer to ~$750,000, with a high proportion of the suburb made up of childless couples (38 percent) and renters (60 percent).

Those with mortgages are generally repaying $1,800 to $2,400 per month in repayments.

There is a city ferry service from Holman Street Pier or the city can be accessed by bus.

Thursday, 26 February 2015

Capex was crapex -- interest rates deemed likely to fall

Capex comes in soft

The ABS released its Private New Capital Expenditure and Expected Expenditure figures for Q4 2014 this morning.

It takes a little time to digest this release fully as it has a few moving parts, but having had time to do so, one is drawn to the conclusion that data remains soft and interest rates are deemed likely to head down to 2 percent or lower.

Let's take a look, in particular with a property markets angle.

Part 1 - Total new capital expenditure

Actual total new capital expenditure in seasonally adjusted volume terms fell by 2.2 percent in the fourth quarter to be 3.9 percent lower over the past year.


The "expected" figures showed that Estimate 5 for the 2014/15 financial year below of $152.6 billion was 8.6 percent lower than last year's equivalent estimate, driven largely by expected mining capital expenditure plummeting by 19.6 percent.

Diagram: Financial year actual and expected expenditure - Total Capital Expenditure

The "Estimate 1" figure for 2015/16 total capital expenditure of $109.8 billion could be enough to send a shiver down your spine, but in truth represents "only" a 12.4 percent decline on the prior year equivalent figure.

The first estimate for each financial year is always low and often unreliable, as the shaded bars in the chart above shows.

As a stalwart contributor to dozens of ABS capex surveys over the years I can attest to the woolly nature of some such estimates!

Nevertheless, the outlook appears broadly to be that new capital investment may fall from ~$150 billion to perhaps ~$130 billion in 2015/16 in itself could be enough to raise a clamour for further rate cuts.

Part 2 - By industry

Low interest rates are having some effect on other industries - and non-mining investment has increased over the past year representing a rebalancing of sorts - but mining investment is now set to enter near freefall.

Concerningly, if not surprisingly, manufacturing in Australia also appears be on its its knees.

Property market tip #1 - be sceptical or wary of advisors recommending investing in manufacturing regions, for at the very least the manufacturing share of Australian employment is in a pain-inducing decline.

And that is the best case. In a number of regions manufacturing industries have died which is likely to result in an explosion in unemployment. 


The above chart, presented here in current prices terms, is key to this release.

Although the capex survey is representative rather than definitive, it shows that the rate of improvement in "other industries" at least on its own does not stand Buckley's chance of plugging the gap left by the mining investment decline which is one of the reasons why futures markets believe that the cash rate must fall again.

Part 3 - State versus state

Australians are of course well familiar with the concept of the "two speed economy".

For years we understood that the amazing fortunes our economy were being held aloft by a mining construction boom, the great bulk of investment taking place in Western Australia and Queensland.

Well, we still have a two-speed economy, but today it is working in reverse as mining investment collapses.

What can we learn from this data at the state level?

Firstly, low interest rates are doing wonders for Sydney's economy - if not booming, it is certainly thriving and is presently the king of Australia's city economies. 

Despite mining construction flailing as the prices of coal and other commodities have dived, other industry investment in New South Wales has stepped up and capital expenditure is improving.

Secondly, mining construction is Queensland is driving a capex bust in the Sunshine State which I'll look at in a little more detail in Part 4 below.


Part 4 - Queensland case study

Queensland's capital investment has gone into reverse gear, but it is instructive to drill down in order to understand the drivers of this.

I have covered on this blog on multiple occasions why employment in a number of coal mining regions was inevitably set on a path to be clobbered.

The collapse in coal prices led to an element of Australia's coal production becoming unviable with a significant number of our producers sitting too far up the cost curve.

This is one of the drivers for Queensland's economy, with the weakness of a number of other commodity prices adding to this malaise.

The key point to take away here is that low interest rates are steadily assisting most other industries in Queensland as the green line below shows, but mining regions are headed for an economic downturn as employment evaporates.

In fact, this is already happening, it being more than evident on the ground in Brisbane that "blood on the streets" in some mining towns and regions ans associated changes of circumstances have forced many to relocate back to the capital.


Property market tip #2 - as I have been warning on this blog for a long, long time, a number of Queensland's coal mining towns are likely to experience rising vacancy rates, falling rents and a crash in prices.

Don't be tempted to speculate in housing markets based upon the expectation of new coal projects passing feasibility - including Adani's proposed investment in the Galilee Basin - unless you have a very high tolerance for risk. 

And even then think twice, or three times - and still don't do it.

The proposed Adani project essentially isn't viable without a significant recovery in commodity prices so it is a huge leap of faith to expect everything to sail through to production smoothly.

On the flip side, although it is too early for it to show up in the data, turnover in Brisbane's inner ring property market has clearly been heating up, with quality stock in the inner suburbs now selling quickly.

Moreover there is a good deal of evidence locally of buyers agents at work and a gentle stampede of interstate investors being drawn in by the Pied Piper of record low borrowing rates.

Summarily, Queensland has a two speed property market in addition to its two speed economy.

Part 5 - Sundry thought

A final point is to note for today is that while the macro picture tells one story, at the industry level there are plenty of other interesting sub-trends.

Even in current prices terms, for example, capital investment in tobacco and beverage manufacture has capitulated, perhaps a win here for the advocates of the Tobacco Plain Packaging Act 2011 which came into effect in 2012.



The Wrap

Overall, a relatively weak set of numbers which tilt the balance back in favour of an interest rate cut, with markets pricing a March cut by the close as a 56 percent likelihood.

As the iron ore price resumes its decline after the Chinese New Year break, those odds appear likely to sneak higher.

Two more rate cuts are fully priced in by Q4 2015 and implied yields on cash rate futures on December contracts running as low as 1.715 percent.

As resources export volumes ramp up the new two speed economy appears likely to be driven forward by capital city financials and services based industries, and record low interest rates will create a number of opportunities for investors, with share markets looking set to surge past 6,000 despite a likely weakness in the resources component.

Meanwhile, record low borrowing rates are already set to send some property markets into orbit - but there will be also be some serious fallout in many regional areas.

In fact, this is already playing out as the regional employment data is beginning to reveal.

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Invest in outperforming property:

Brisbane@allenwargent.com
Sydney@allenwargent.com

Sydney rents and prices continue to rise

Residex release

I noted three weeks ago that Residex was holding back its January 2015 property market data until "the January growth numbers are firm and we are confident they reflect the actual outcome for the month."

You can read that a number of ways, but my take was that the Sydney data was reflecting a market that was continuing to demonstrate strong capital growth rather than one which was slowing, as a number of experts have been predicting.

The numbers are now out and, sure enough, Sydney house prices increased by +4.1 percent over the last quarter, with unit prices also surging by +3.0 percent.

House prices in Sydney have boomed by +19.97 percent over the past year, units by a slightly more sedate +11.56 percent.

At the current rate of progress house prices in the harbour city will reach $1 million within a year.


Brisbane house prices increased by +1.7 percent over the past quarter.

Over the past year growth has, however, been relatively soft in Adelaide (+3 percent), Perth (+3 percent), Hobart (+0.5 percent) and Darwin (-6 percent).

Growth has also remained soft in most regional areas.

Sydney growth continues

What the experts missed about the Sydney markets was that - in prime locations at least - supply is still barely only keeping pace with demand, and therefore rents have continued to surge, thus holding up yields.

House rents have soared +10.2 percent higher over the past year to $650/week and unit rents by +4.9 percent to $540/week.

Note that this dynamic does not happen where there is an "oversupply" of dwellings, as some commentators have been arguing.

As a result median rental yields on Sydney apartments have held up at above 4.6 percent which keeps investors coming back for more.

Meanwhile 3 year fixed mortgage rates have continued to decline to incredibly cheap levels, now available from just 4.18 percent.

As a result, Sydney's market will likely continue to show price growth through 2015 as expected.

How much further prices will run is not known, and this largely depends upon how low investors are prepared to bid gross yields.

While I'm not suggesting this would be a "good thing" for the Sydney market, a simple model based upon the above Residex figures shows that if investors were prepared to force gross rental yields on units all the way down to 4 percent, then - even if median unit rents were to remain stone dead flat - median unit prices would surge +15 percent higher from $612,500 to above $700,000.

Wednesday, 25 February 2015

Construction holds up well thanks to Ichthys

Total construction holds up

As I looked at here earlier today soft wages growth of 2.5 percent may have added to the case for another rate cut, but this was more than offset by than a better-than-it-have-been release for Construction Work Done in Q4 2014.

Construction work done in chain volume measures terms fell by only a seasonally adjusted 0.2 percent in the fourth quarter to be 4.8 percent lower year-on-year.

While more than $50.3 billion of construction work done is historically speaking a huge figure, this is now some 7 percent below the Q4 2012 peak of $54.2 billion, with further declines assured.


This decent result reduced the implied odds of interest rates being cut on Tuesday next week to ~42 percent, but markets still see another cut in the cash rate to 2 percent as close to a cast iron certainty by the middle of the year, with two cuts fully priced in by December 2015.

Let's spin through the figures in three short parts, where we shall see that Melbourne continues to construct far too many high rise units and apartments.

Part 1 - Construction by sector

Private sector building is picking up valiantly in response to low interest rates and rising house prices, but a lack of public sector spend as denoted by the moribund red line below is adding to the general malaise associated with the death throes of the mining construction boom (as denoted by the green line).

Engineering construction declined by only 0.6 percent in Q4 to be 12.1 percent lower over the year as we shall look at in Part 3 below.


The driver of building work done gains was exclusively a 12.7 percent year-on-year boost to residential construction, with non-residential building (largely comprising office blocks) acting as an irritating drag.


Drilling into the residential construction figures and we find that this boom is being pushed forward almost entirely by an unprecedented boom in the construction of attached dwellings - that is, units and apartments as circled below.



There is no sign here of the so-termed "renovations boom" (aka. "alterations and additions").

Sure, there is a bit going on in terms of major renovations in Sydney and Melbourne.

However, a "boom" is where numbers go up and contribute significantly to GDP growth...not when they flat-line for a decade before tailing back, thus acting as a drag on GDP.

Part 2 - State versus state

Moving down to the local economy level and it is no surprise to see that the two cities which have economies benefiting from the boom in residential construction are Sydney and Melbourne.

The strong economic multiplier associated with residential construction has helped these economies to flourish and created employment opportunities, and indeed, it is also these two largest capital cities which have also seen dwelling prices rising over the past six years, with almost everywhere else having done zip in real terms.


There is a flip side to this, of course, and that is that while Sydney desperately needs to construct thousands of dwellings to address a potentially chronic housing shortfall, Melbourne does not.

Indeed, as I have looked at here previously, Melbourne has possibly been over-building houses.


What is not in question is that Melbourne is most definitely overbuilding high rise apartments of 4+ storeys.

These things can take time, of course, but this will ultimately lead to a stagnation of rents and ultimately stagnating unit prices in this sector of the market as the oversupply takes hold.

As the chart above implies, Sydney has long since built out most of its prime usable space and constructs few houses relative to its population growth, with a fair proportion of them springing up in in awfully sparse fringe suburbs.

The below chart shows that Sydney has got its act together in respect of building units and apartments through this cycle - largely around the airport, the inner south and a few urban activation precincts which surround transport hubs - but this still won't meet the huge underlying demand over the next decade as the residential construction boom passes its peak in due course.


Brisbane, and to some extent Perth, are also cities which are in the process of building plenty of high rise stock. 

My advice is unequivocally to steer clear of off-the-plan high rise stock, since in aggregate there is clearly a looming oversupply.

Part 3 - Mining cliff deferred

Finally, there are evidently folk in Australia who are hoping for a mining bust in the belief that a recession somehow help us (or more specifically, them) to benefit from a "reset".

It has been a hollow victory to date with lower interest rates sending the ASX 200 soaring towards 6,000 and the highest index reading since May 2008.

Meanwhile dwelling prices are also comfortably set to break new highs over the year ahead as homeowners enjoy record low mortgage rates.

In the event a number of mega-projects such as Gorgon and Roy Hill in Western Australia - and more lately Ichthys in the Northern Territory - have temporarily suspended the decline of mining construction, so the Spumante will have to remain on ice for another three months.

The bulk of the mining capital expenditure decline, however, clearly remains in the post.


After some astronomical overruns and cost blowouts taking the total expected construction cost way beyond $50 billion, the Gorgon project is now reportedly 90 percent complete, so the brief respite for Western Australia appears likely to be be short-lived.

The INPEX Ichthys project is a huge $35 billion affair and the Northern Territory has seen an unprecedented $4.5 billion of engineering construction spend in the past two quarters months alone which has helped to stem the downward slide in resources construction nationally.

The next round of capex intentions surveys for Q4 have now been aggregated and will be released tomorrow morning - despite today's upbeat news, the smart money is still on "a horse named bust".

The Wrap

This was a solid result as compared to what might have been, and on balance shifts the odds very marginally in favour of interest rates staying on hold on Tuesday next week.

Sydney property owners must be licking their lips, with possibly another month or two for the full impact of the last rate cut to flow through to the rampant mortgage market, yet with two more cuts still fully priced in to cash rate futures markets by the end of the year.

Residex reported its January 2015 figures this week which showed quarterly house price growth of 1.7 percent for Brisbane, and Sydney's market accelerating, the harbour city recording quarterly house price growth of 4.1 percent.

The medium term outlook for Melbourne's property market is somewhat less rosy. 

A market can get along with overbuilding for so long, but - at the risk of crying wolf - this will eventually pull gross rental yields down to unacceptably low levels. 

With 3 year fixed mortgage rates available from an unbelievably cheap 4.18 percent investors will certainly accept lower yields than they once did, but there is only so far that these things can be pushed before something gives.

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Invest in outperforming property:

Brisbane@allenwargent.com
Sydney@allenwargent.com

Wages rise 2.5 percent

Wages growth remains soft

The ABS released its Wage Price Index for the Q4 2014 quarter today which showed wages rising by 0.6 percent over the quarter to be 2.5 percent higher over the year. 

Wages growth of 2.5 percent is historically low, but well ahead of the rate of inflation which was only 1.7 percent over the past year (or an average of 2.25 percent on the trimmed mean and weighted median readings).



The headlines will likely reflect slowing wages growth, particularly since public sector wages growth at 2.7 percent was stronger than private sector wages growth of 2.5 percent on a seasonally adjusted basis.

Although wages growth has slowed from the heady mining boom years, Australian wages are still rising both in real and nominal terms.


Wages growth has slowed dramatically in Western Australia as the mining construction boom recedes.

This was particularly so for private sector wages growth of just 2 percent which is the slowest growth on record in WA.

Wages growth in the Australian Capital Territory slowed to just 1.7 percent driven by cuts in Canberra while Northern Territory wages growth now appears to have stabilised over the last 6 quarters at a more sedate 2.8 percent per annum.

Generally the trend is towards slower wages growth.


The 1, 5 and 10 year wages growth figures show just how much wages in Western Australia benefited from the mining boom.


The Wrap

Overall a soft set of numbers, but an unsurprising release, the impact of which was outweighed today by a better-than-expected Construction Work Done set of figures, which I'll step through later.

In other news, Domain Group's Dr. Andrew Wilson has constructed a new housing market analysis tool - the "Countdown to Sydney $1,000,000 median house price".

Wilso's tool projects that Sydney's median house price will surpass seven figures in 474 days, 11 hours and 7 Minutes time (approximately).


FTSE record high

Low rates are inflating global share markets

New record highs for the Dow Jones Industrial Average (DJIA) in the US overnight, closing up yet further at 18,209.

And now the FTSE 100 will also lead to obligatory "partying like its 1999" headlines in the British tabloids as it closed at a new record. 

When I was at Uni in the late 1990s  there was a good deal of debate taking place as to whether the FTSE could ever reach 7,000, the index surging to a tech bubble inspired peak of 6,930 by the turn of the century.

Cohabiting in a student flat in freezing Sheffield in the north of England there was also lively debate as to how Australians as depicted on Neighbours could seemingly be employed as waiters and casual barstaff yet afford to live in enormous detached houses on Erinsborough's sunny Ramsay Street (cf. Jarrod "Toadfish" Rebecchi who worked in the coffee shop in 1997, became a barman in 1999 and later became one of the hotel staff at "Lassiters").

A decade-an-a-half on and the FTSE has finally broken a new record high of 6,943.63, although market valuations are a notably little less stretched this time around. 


Total returns

There is a good deal of misinformation surrounding share markets, and it is important to recognise here that total returns have been a good deal stronger than implied by the capital return index.

If dividend returns are included in the returns this would add nearly 2,500 to the capital return index since 1999, and as such an equivalent total return index for the period since that time would sit comfortably above 9,300.

Alas, the world moves on and I've long since lost touch with the latest Neighbours news and views - according to the internet "Toadie" has been a lawyer since 2003, although it is unclear from my research whether he still lives on Ramsay Street.

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Some key data releases are due out this morning and tomorrow morning. 

Tuesday, 24 February 2015

Sydney housing shortfall remains unaddressed

Sydney housing shortage will remain unaddressed

Some years ago I raised the point that Sydney's housing market would eventually tee off for the simple reason that immigration was soaring yet we were building very little in response.

Although following an uplift in prices building approvals have finally picked up in 2014, as things stand supply will still not keep pace with demand in Sydney over the next decade and as a result rents will likely continue to rise. 

Here's why.

Population growth in New South Wales is hugely strong, currently tracking at more than 109,000 per annum.

The Greater Sydney population growth figure for 2014 looks likely to be very, very strong.

Even in the five years preceding this, Greater Sydney's population expanded by 326,568.

That is a lot of new demand for housing.


For the best part of a decade, Sydney got away with not building a great deal, in part because 20,000-30,000 people per annum were departing the state for cheaper and sunnier climes.

But then they stopped leaving.

As Sydney now appears to have the most robust economy in Australia - and thus is creating job opportunities - net interstate migration from New South Wales has fallen to its lowest level on record across three full decades of data.


As dwelling prices have increased, Greater Sydney is at last approving some units and apartments, with around 25,000 approvals over the past year, although not all of these will make it through to completion.

However, major developers have indicated that they are planning to have their apartment stock off their books by Q4 2016, which in turn implies that the cyclical peak in residential construction will likely be upon us sooner than we think.


As for detached dwellings, Sydney has also approved an absolutely pathetic number of houses over the past dozen years.


Although today's ABS Construction Work Done release will probably confirm record Australian housing starts in 2014, that the construction boom will soon pass its cyclical peak was affirmed this week by the latest HIA forecasts.


Although housing starts in New South Wales are forecast to increase by 11.6 percent to an impressive 51,624 in 2014/15, the figures will then fade again to 45,000 in subsequent years.

Summarily in the absence of new strategies, Sydney's housing shortage will remain unaddressed. 

Sydney housing shortfall of 190,000 over the next decade

On a similar note, here's today's Daily Telegraph:

"SYDNEY is facing a housing crisis with a staggering 190,000 shortfall in homes needed to house the growing population over the next 10 years.

An exclusive report obtained by The Daily Telegraph has revealed Sydney councils have failed to approve new dwellings fast enough to meet demand, and were now partly responsible for the sharp rise in up home prices in Sydney.

More alarming was the finding that over the next decade, families would struggle to find anywhere to live, with an estimated shortfall of almost 20,000 homes a year being ­approved at current rates.

The research report commissioned by the Property Council of Australia and based partly on data from the Australian Bureau of Statistics, revealed an average of 17,002 homes have been approved by Sydney’s 43 councils each year for the last 10 years.

But that in itself represented a shortfall of 51,000 homes since 2004, based on long-term government targets.

The Property Council’s Missing the Mark report concedes approval rates have improved in the last three years, assisted by “lower borrowing costs, smarter policy settings and ideal market settings”. 

But far more homes and higher approval rates are needed to keep pace with projected population growth across the metropolitan region and, on current trend, the city will be 190,000 homes short by 2024, the ­report says.

“Sydney councils need to turbocharge housing supply because right now homebuyers and our economy are paying the price,” NSW Property Council executive director Glenn Byres said. 

“Home building is critical to the state’s economy — and supports tens of thousands of tradespeople and other workers.

“If we fail to keep pace with demand, we drive up prices and make housing less affordable for the next generation of homebuyers.”

The greatest shortfalls have occurred in central Sydney, the city’s north east, inner west and central west, the Property Council report said.

NSW Planning Minister Pru Goward agreed more homes needed to be built.

“The Greater Sydney Sydney Commission is being ­established to bring local councils together to plan for ­Sydney’s growth,” she said.

“The days of ‘not in my backyard’ have to be behind us. 

We all need to work together to plan sensibly so Sydney’s newest families can have the roads, parks and daycare centres they need. 

Sensible urban renewal is the only way we are going to be able to deliver homes near jobs, reduce commute times, and improve access to green space."

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Invest in property?

Brisbane@allenwargent.com
Sydney@allenwargent.com

Investing in single industry towns

Read my lead article on Property Observer today here.

The formula for success

The formula for success

Well, who knew what you might learn from a visit to the gym on Adelaide Street?


The formula for success is simply..."hard work"!

While floundering on the treadmill yesterday afternoon, this got me thinking whether this is actually true?

If the formula for for success was only "hard work" and not a load of complex (or indeed meaningless!) algorithms then, simply, the hardest workers in the world would be the most successful people, and vice-versa.

And I don't think that quite fits.

Certainly, there is an important role for perspiration, but there should also be a key role for planning, patience and persistence too.

3 rules for success

Over the years I have thought about and studied investment and business success more than I care to admit, to the extent that I have written a book on this very subject, to be released later in 2015.

I concluded that for investors and small business owners there are 3 golden rules which all successful folk in these fields have been able to master, consciously or otherwise.

1 - Pleasure-Pain

The first golden rule is the Pleasure-Pain Principle.

What we link pleasure and pain to in our lives determines our actions and behaviours, and thus to a great extent, our results.

Flipping back to the analogy of the gym above, I do wonder sometimes at personal trainers who take new clients through an effective "boot camp" in order to "get them into shape" as quickly as possible.

While hard work may indeed be what an unfit person ultimately needs to put in, if they leave their first session at the gym feeling exhausted and sick, they are unlikely to link any pleasure to the experience and enthusiasm is likely to fade quickly.

It is probably better to start out at a lower intensity and simply enjoy the benefits of exercise to begin with.

This is particularly so because as humans we will invariably go to greater lengths to avoid pain than we will to achieve ultimate pleasure.

How else might this principle impact our lives?

From a personal finance point of view, if you see credit card statements as something to be avoided and quickly dispensed to the waste paper basket, it is likely that you see money management as a pain to be avoided.

The good news is that personal finances and investment can become a source of pleasure as they steadily improve.

From a business or career perspective, Mark Twain once said that the trick in life was to "make your vacation your vocation" since then you would never feel like you were undertaking a day of work in your life.

The implication of this is that it may be worth considering what your true passion is, and whether you should follow a career or set up a small business in that field.

If setting up a small business seems too risky or daunting, building an investment portfolio to secure your financial future first helps greatly.

I don't have the space to explain the Pleasure-Pain Principle in full here (you wouldn't read my book then, anyway!), but a full understanding of why we act in the way that we do is a key step along the challenging road to emotional mastery.

There is certainly no way I would write books (or indeed this daily blog!) if I didn't enjoy the process.

Yes, hard work is important - but the real key to success is finding a vocation that does not really feel like hard work because you have a genuine passion for that field.

2 - 80/20 Rule

The second golden rule is Pareto's Law, more commonly known as the "80/20 Principle" - that most of outputs are derived from only a few of the inputs.

Most of your results will be gleaned from only a minority of your decisions. It's an arresting thought.

The implications of this for small business owners are many.

Most of your revenue will be generated from only a small number of your products, and perhaps only one of them.

Perhaps up to 80 percent or more of your profits will come from only 20 percent or fewer of your customers.

On the other hand 80 percent of your complaints will likely come from 20 percent of your customers (and it's unlikely to be the same 20 percent).

What this does not mean is that you should make a few big decisions and casually ignore the rest of what it going on in your life.

Used correctly the 80/20 Principle is a far more empowering concept than that. 

The 80/20 Principle holds that you should learn to recognise where you are seeing the most effective results in investment, in business and in your life, and double down on these strategies by doing even more of what works.

How can you reach more people with your key product? How can you replicate your most successful investment strategies?

From an investor's perspective this clearly does not mean that you should ignore the important benefits of diversification. 

What it does mean, however, is that you should consider how you can make an investment plan which is effective, sustainable and repeatable.

3 - Compounding

The third golden rule is the principle of compounding or snowballing results - growth upon growth - frequently referred to as "the most powerful force in the universe". 

I wrote here previously about 5 practical tips for compounding results.

The Wrap

Look out for my third book hitting the shelves in Australia around September or October time.

In the meantime, a veritable slew of economic data is due out across the next 72 hours, so stay tuned...