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Friday, 27 February 2015

Kangaroo Point


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.


Invest in outperforming property:

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.


Invest in outperforming property:

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).

Tuesday, 24 February 2015

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...

Monday, 23 February 2015

Shares close to 7 year highs

The XJO has added around 5.7 percent in 2015, pushing the index close to a 7 year high.

Today the ASX 200 added 26.5 points or 0.45 percent.

Investors were cheered by a Greek bailout deal extension.

It seems likely that the first quarter will therefore see strong gains recorded for Australian household wealth.

In the property markets auction clearance rates in Sydney and now Brisbane are close to record highs, suggesting price gains in those markets, although some other markets appear to be softening.

Why do property prices rise faster closer to the city?

Inner city property prices continue to rise faster

Some time ago I looked here at the "bid rent curve" in Australia and why house prices continue to rise fastest in suburbs close to Australia's major city centres.

The Reserve Bank carried out its own detailed research into house prices to understand why this happens and why it has continued to happen over the past 30 years.  

Their findings, as highlighted today over at the great Business Spectator by Alan Kohler, were nothing short of spectacular.

Not only are house prices rising at a faster pace in inner city areas, they are doing so at an ever faster pace. 

As a result the difference between inner and outer capital city prices grows ever wider, thus disproportionately benefiting homeowners and property investors who own real estate in the inner city suburbs.

Kohler took the trouble to speak with one of the preparers of the report and found confirmation that the situation has continued to worsen of late.

Perhaps unsurprisingly, this has been particularly the case in the most populous cities, being Sydney Melbourne, but also Perth, Brisbane and Adelaide.

In short, the prime location property located close to the CBD consistently outperformed everywhere - in every capital city.

This is already fairly obvious to residents of the large capitals as inner city prices continue to power ahead.

But why exactly does it happen? 

Several reasons. One of those reasons relates to transport and infrastructure.

"The reason inner-city prices have gone up much faster than the outer suburbs, and that capital city house prices generally have almost doubled in 10 years, with Sydney prices in particular surging 35 per cent in three years, is because a lack of infrastructure investment has made it unviable to live further out.

Australia is a big country; it should have a network of fast and efficient trains linking widespread suburbs, but instead we are crowding into the inner suburbs and paying exorbitant prices so we don’t have to commute more than hour to work each day.

At least Melbourne is a fairly extensive rail network to apply the technology to, when governments eventually get around to it: Sydney and Brisbane just need more trains."

Which is pretty much an accurate summation.

There is also a generational shift at work, as Australians dig deep in their pockets to live in convenient locations.

And, thirdly, investors own a high proportion of inner city stock - and there are ever more investors in Australian property competing for a limited supply of prime land.

Friction in housing production

The Reserve Bank also noted "frictions" on housing production which have added disproportionately to the cost of producing housing in areas close to the city.

I blogged about the reasons why this happens in inner suburbs in particular in much more detail here.

Site remediation costs in brownfill areas are becoming increasingly prohibitive to development as land prices increase and regulations more stringent.

Greenfield sites by comparison are very easy to develop and provide ready substitutability for outer suburban dwellings. 

Crucially, the percentage growth in the number of dwellings is much, much greater in outer suburban locations - supply far more comfortably meets demand the further from the city one travels.

This has also proven to be true in every major capital city.

Finally, therefore, as the population of Australia's cities increase, the Reserve Bank found that this will continue to disproportionately force up the price of both land and housing prices close to the CBD.

And not only by a small margin, but by a factor of many.

Much of this is fairly self-evident, but the Reserve Bank's detailed research re-confirms what we already knew to be true - property prices close to the city have risen substantially faster over time, and as the population increases, so they will continue to do so.


Invest in property?

Rate cut bites

Auction clearances rip higher

Lest there was any doubt about what February's interest rate cut would do to Sydney's housing market we got our answer on Saturday.

Nationally auction preliminary clearance rates screamed ~10 percent higher to 78 percent at the weekend according to Corelogic-RP Data's index.

RP Data also recorded an extraordinary 88 percent preliminary auction clearance rate for Sydney.

Domain Group recorded an 85 percent clearance rate for Sydney from a smaller sample of results, one of its highest ever readings.

Tellingly, the median auction price for Saturday was a thumping result, coming in at $1,100,000 on the nose.

Rate decision in the balance

This dynamic will no doubt give the Reserve Bank pause for thought before it cuts interest rates again, although housing markets such as Adelaide, Perth, Canberra and Darwin are relatively soft, while Hobart could use a boost after a dismal decade.

Futures markets appear split on the March decision, with an important week of data ahead.

At the close on Friday, 30 Day Interbank Cash Rate Futures contracts for March had been trading at 97.87, indicating slightly above a 50 percent expectation of an interest rate decrease to 2 percent at the next RBA Board meeting.

However, markets continue to price in two full rate cuts by the end of the calendar year.

The week ahead

Some key data releases this week, with the Wage Price Index expected to remain at around survey lows with a 0.6 percent reading forecast for Q4 (forecast range from 0.5 to 0,8 percent).

Estimate 5 for 2014/15 is expected to remain broadly similar to the prior quarter's reading of $154 billion, representing a 7.5 percent decrease in 2013/14.

The Q3 figures showed that mining is in hole but capex intentions were surprisingly strong.

Estimate 1 for 2015/16 capex could be anything in the current uncertain environment - historically first estimates have been unreliable - but it is widely expected that mining capital expenditure intentions will fall dramatically.

Also this week, the Construction Work Done figures for Q4 are expected to continue to slide in Q4 by another 1 to 3 percent.

The Q3 figures highlighted two systemic risks in particular as I looked at here.

Finally, private credit in January is expected to fall back to 0.4 percent with the latest Lending Finance data suggesting that business credit is now likely to "consolidate" (i.e. slow). 

The December credit figures as I analysed here showed credit expanding by 5.9 percent which was the strongest rate of credit growth seen in 6 years, albeit disproportionately driven by housing credit.

In December, housing credit expanded by 0.6 percent to be 7.1 percent higher over the year, with a similar result expected for January.

Saturday, 21 February 2015

Sydney land it goes ballistic (supply is atrocious)

Land prices

Over the past 15 years or so there have been many articles about an apparent "property bubble" in Australia. Some have made very valid points, others have been pure Mary Poppins stuff.

There has been further debate this week about the role of credit in asset price inflation which cited declining populations (within towns which clearly aren't actually declining) and that most tenuous of housing market measurements, the "growth" in median prices at the suburb level.

If you were to take a moment to access a subscription sales database and track any actual property resales it would immediately become evident that typically "price growth" in small towns is merely a shift in the sales mix derived from a tiny handful of transactions.

That said, I do tend to agree that many of Australia's smaller regional cities and towns have property markets which are built upon flimsy foundations, as we will likely discover in the next couple of years as the mining construction boom turns into a capex bust.

All land is not create equal

Nonetheless the behaviour of housing markets in small towns tells us nothing useful about likely trends in large and growing capital cities.

As I looked at in more detail here previously the notion that land prices were going to deflate in Sydney was always flawed, since the incumbent system allows landbankers to drip-feed land onto the market at such a leisurely pace.

Further, where the ratio of new stock to existing stock is low, the impact of new stock on the price of existing dwelling prices is diminished.

For all that, despite what is often implied by commentary, dwelling prices have not simply kept rising inexorably in Australia.

In Sydney, for example, dwelling prices declined in 2004, 2005, 2008 and from the middle of 2010 to the middle of 2012 - three distinct downturn periods in the past decade.

But with Greater Sydney's population expected by the latest projections to explode from around 4.6 million today to approximately 8 to 9 million by around 2060, it has always seemed very likely that land values were heading higher over time.

Residential land values have risen over time

Enough theoretical discourse and back into the real world. While the total value of commercial land and rural land is not increasing at a fast rate, the aggregate value of residential land in Australia is easily set to surge to past $3.5 trillion in 2015, probably to around $4 trillion by the end of the calendar year.

Over the six financial years to June 2014 aggregate residential land values increased by 37 percent in New South Wales, by 46 percent in Victoria, by 21 percent in Queensland, by 33 percent in South Australia and by 11 percent in Western Australia, having previously already boomed in Perth. 

All land is not created equal

Of course, as the population continues to expand past 23.750,000 as it did last week, as new land supply is released and developed to house the expanding headcount, and as inflation pushes the price of goods up - we do expect to see land values rising in aggregate.

However, all land is not created equal.

Some property advisors recommend investing in properties on remote regional land where demand is relatively low, and - more importantly - there are swathes of land available for release.

With the land price component of outer suburban and regional property so low, the potential for capital growth over time can be constrained.

Be careful about investing in outer suburban or fringe city areas where land is not a scarce commodity. 

A $200,000 outer suburban house may comprise only $50,000 of land value, so even in the unlikely event that outer suburb land values boom by 50 percent, the total value of the investment only increases by $25,000.

Why is this the case? Because outer suburban housing is readily substitutable with more fringe housing.

For obvious reasons, I believe that inner ring suburbs of capital cities will outperform over time.

As I looked at on Thursday here, capital city land prices soared by 4.7 percent to a record high over Q3 2014 to be 10 percent higher over the preceding twelve months.

There is in aggregate comparatively very little upwards pressure on regional land prices and thus they only increased marginally, and broadly in line with inflation by 0.7 percent in Q3 2014.

In its own assessment the Housing Industry Association (HIA) cited the role of chronic undersupply no fewer than six times in its one short media release, including in this short excerpt:

"There are clearly pressures building in terms of the available residential land supply

Acute supply bottlenecks are affecting Australia's residential land market.

The number of transactions fell while price growth accelerated. Turnover decreased by 16.7 percent in the quarter while at the same time prices grew by 3.3 percent.

These are the classic hallmarks of a market which is fast running into supply problems.

The process of delivering new land supply and infrastructure is too slow and too expensive. Policymakers have to intervene to ensure Australia's long term housing needs are met."

Sydney land it goes ballistic (supply is atrocious)

My chart packs tell me to expect that the Greater Sydney population is likely to increase by 80,000 to 90,000 persons across this financial year.

Given that this rollicking rate of population growth brings massive demand for the land within a relatively small radius of the city, as recorded on this blog over the years I have unerringly expected to see prime location Sydney land values to appreciate over time.

Well-located land supply in the present system never stood a snowball's chance of keeping pace.

Sydney land prices boom 20 percent in 2014

In this context it is no surprise therefore to note that it was land values in Sydney that really boomed in 2014 with land prices jumping by an rip-snorting 19.7 percent to $390,000.

This median price has surged well ahead of Melbourne - a city which has released greater land supply over time - at $245,000, and Brisbane at $237,950.

This 20 percent boom in land prices is the fastest annual rate of Sydney land price growth in a decade.

In some suburbs such as Kellyville land price inflation is bordering upon out of control, with prices rising 38.2 percent in 2014 alone, up to $912 per square metre.

Median prices in Glenmore Park rose by 30.6 percent, in Riverstone by 20.2 percent, and in Pitt Town 26.4 percent.

The median price of land in the south west soared by 25 percent to $350,000, while prices in Sydney's west, where lot sizes can be larger, rose by 8.3 percent to $410,500.

Extrapolating existing trends Dr. Andrew Wilson of Domain Group expects Sydney's median land prices to increase by another $40,000 in 2015 until "the chronic undersupply of residential development land is effectively addressed".

Via Medianet:

"Sydney’s median residential land price increased by 19.7 percent over 2014 and the city clearly remains the most expensive of all the state capitals, according to data from the Domain Group. 

The December quarter median land price of $390,000 was well ahead of Melbourne at $245,000 and Brisbane $237,950.

Dr Andrew Wilson, Senior Economist, Domain Group, commented; “Sydney’s annual land prices increased at the fastest rate in over a decade and recorded stronger growth than the booming house prices which increased by 14% over the same period.

Dr Wilson continued; “With Sydney residential land prices now rising faster than booming house prices, the task for first home buyers is becoming increasingly difficult.

“Furthermore, the First Home Buyers grant will reduce to $10,000 from January 2016, when based on current trends, outer suburban median land prices will have increased by at least another $40,000. 

“The first home buyer market share in Sydney is set to remain around the current near-record lows until chronic undersupply of residential development land in Sydney is effectively addressed.”

Land is a factor of production

It was this simple dynamic which led me to own most of my property portfolio in cities such as London *where house prices are now a ridiculous 13 times median earnings) and Sydney - and importantly, never to sell a single property when every year there are myriad predictions of dramatic market corrections - because the long term trend in prime location land values is up.

In short, supply does matter. Always.


Friday, 20 February 2015

Regional employment hurled off capex cliff

Regional unemployment escalating

The ABS released its Detailed Labour Force figures for January yesterday, which rarely receive any coverage at all in the media.

This seems a little unusual given the great hullabaloo after the main data is printed.

I have been warning on this blog since its very inception that many of Australia's regions have been carried along on a once-off decade long mining construction boom, which simply would not and could not last forever.

It has taken a bit longer than  many of us thought, but we're now into the capex decline, and we had better look out because it is going to be steep.

Let's take a look at a few of the more interesting trends in four short parts.

Part 1 - Total employment

The detailed labour force figures are not seasonally adjusted and therefore we do expect to see dips in the month of January.

However, the figures for regional New South Wales look especially weak with total employment declining by 23,000 back to Q3 2007 levels, which is a lot of years for no employment growth, seasonal adjustments or no.

The major driver in the state appears to be coal mining contractor positions being cut.

This is not particularly surprising since much of Australia's coal production surely cannot be viable at today's prices, as discussed previously here.

This will be reflected in higher unemployment rates in the Newcastle/Lake Macquarie region and the Hunter Valley.

For different reasons the data for Greater Adelaide also appears particularly weak, with employment declining further to be some 27,000 lower than where it was in Q4 2012.

Total employment in Adelaide is below where it was 65 months ago, with the main drivers possibly including job losses in the Elizabeth region,

Elizabeth now has the highest reported capital city rate of unemployment in Australia (33.3 percent unemployment) with Smithfield-Elizabeth North (24.0 percent) and Davoren Park (20.1 percent) also seeing unemployment rates rise sharply and consistently over the past four quarters. 

Christie Downs (20.1 percent) has also suffered from rising unemployment.

The total employment growth chart in a columnar format below underscores the same story.

Part 2 - Unemployment rates

Monthly unemployment figures are volatile, but smoothing them on a rolling annual basis shows that while Greater Sydney and lately Greater Hobart may have experienced generally improving labour markets, Greater Melbourne, Perth, Adelaide and now Darwin appear to have been deteriorating.

The unemployment rate in regional New South Wales has soared to 8.5 percent, the highest level since 2002, indicative of substantial coal mining job losses.

Greater Adelaide recorded an unemployment rate of 7.9 percent, its highest reading in 13 years.

A selection of regional unemployment rates smoothed below on a 4mMA basis to reduce the wild volatility shows that coal mining regions are struggling, while Moreton Bay North is also dragging up the Greater Brisbane averages.

The most alarming jump in the month was seen in Logan-Beaudesert - a weakening employment trend recently flagged by Michael Matusik among others - where the unemployment rate recorded for January 2015 soared to 11.9 percent, the highest level it has seen since 2001.

Monthly figures can be volatile, but on a 4mMA basis the unemployment rate in the Logan-Beaudesert region trended up to a concerning 9.3 percent. 

The main driver of this trend appears to have been the reported unemployment rate in Logan Central which increased over the past four quarters from 19.6 percent to 21.0 percent.

Part 3 - New South Wales

The divergence between unemployment in Greater Sydney and regional New South Wales is quickly becoming a gulf.

On a rolling annual basis regional New South Wales unemployment rate has crept up to 7.0 percent, but the latest reading of 8.6 percent suggests that it may be heading significantly higher.

The coal mining regions feature heavily in the unemployment statistics at the present time.

Unemployment rates in inner ring Sydney on the other hand remain low. 

Property investors may consider the eastern suburbs which have lagged in this cycle and are set to benefit from new light rail infrastructure, but should be wary of the inner west where prices in a number of suburbs are blowing off at an extraordinary pace (and I say this as someone who owns investment properties in Sydney's inner west).

Part 4 - Queensland

Finally a short look at Queensland. While regional Queensland unemployment is heading higher than that of Greater Brisbane the trend does not look as pronounced.

This is partly because regional Queensland has a number of regions where unemployment is relatively low, including some of the largest tourism markets and Toowoomba.

However, every third person you meet in Queensland seems to be someone or know someone who has lost a mining contract position of late, and there is undoubtedly a good deal of  "blood on the streets" in a number of coal mining regions.

As previously noted, Logan-Beaudesert also appears to be struggling, while employment in Moreton Bay North also looks to be somewhat depressed, dragging up the Metropolitan averages.

Unemployment rates remain low in Brisbane East, Brisbane North and in the Brisbane inner city.

The Wrap

Regional unemployment is rising, and in some regions it is rising very sharply. 

This trend in mining-influenced regions seems likely to accelerate through 2016 as the capex bust gathers momentum.

Expect to see interest rates dropped to 1.75 percent by Q1 2016, in line with cash rate futures market pricing.


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