Pete Wargent blogspot


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Tuesday, 31 March 2015

Stand by for an April rate cut

Rates heading lower

Iron ore futures have gotten absolutely smoked - down by 3.6 percent today to new lows - with more falls forecast. Thermal coal prices are getting smashed. Oil prices have been crushed.

Australia's commodities index has been copping an absolute shellacking, and although the Aussie dollar has declined to 76 cents, this still has not even nearly offset the decline in spot prices.

Unfortunately the latest data from the US has suggested that the first rate hikes Stateside won't be coming to our assistance quickly enough either.

Domestically, meanwhile, the latest round of data relating to capex was...well, crapex.

The Reserve Bank has consistently implied a preference towards patience but against this backdrop another rate cut seems all but certain.

Futures markets now see a cut on April 7 to a cash rate of 2 per cent as about a three-in-four likelihood.

The uppermost arguments for keeping rates on hold in April are twofold:

(i) allow the Reserve Bank to wait for another round of inflation data; and/or

(ii) wait a bit longer to see what housing markets are planning on doing.

The inflation side of the argument lacks a little conviction, given that the last print was within the target range, inflation expectations remain soft, and wages growth is mired at a survey low.

Housing markets will likely sort themselves out in time, with building approvals and home starts tracking at all-time record highs, and at least five (probably six) capital cities heading for an oversupply of apartments in time.

Today's Financial Aggregates figures showed investor housing credit growing at a somewhat slower pace in February, which may douse concerns here too, though exactly why APRA deems an arbitrary growth rate of 10 per cent to be an appropriate agitation threshold is less clear.

Implied yields on February 2016 cash rate futures contracts are plumbing new depths at just 1.6 per cent.

Summarily markets seem to taking the view that if rates must fall further then they might as well do so now - and thus markets are now betting on a cut in April 7.

Housing credit surges higher again

Housing credit leads again in February

The Reserve Bank released its Financial Aggregates data for the month of February 2015.

The data showed that housing credit continues to lead the way despite a slightly lower growth of 0.5 percent growth in February 2015, recording 7.2 per cent growth over the past 12 months.

Personal credit went backwards in the month of February continuing its soft trend (+0.5 per cent year-on-year), but business credit recorded a respectable 0.6 per cent growth to be up 5.6 percent over the year.

Part 1 - Business credit hits new high

Outstanding business credit increased to a new seasonally adjusted high of $789.4 billion.

In annual business credit growth terms this is the best result since February 2009 when Australian industry became plagued with recession-like conditions, which has been followed by a studious recovery since.

Regular readers will know that I don't rate the widely held notion that business credit is being "crowded out" by lending for housing.

I discussed some of the reasons why not here and here among other places.

My view is that (a) there are many ways to finance expansion today, and (b) as and when business confidence returns to more robust levels, so too will return more robust business credit growth. 

At the upper end of town 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!

Much of the debate on business lending lacks logic - at least according to my social media timeline - calling for a boost to the economy through irresponsible lending to property speculators being replaced effective immediately by...well, irresponsible lending to unproven start-ups and entrepreneurs.

It's not a line of argument that I follow easily - and I am a small business owner myself.

The Reserve Bank subtly revealed a few of its own views on the role of housing as security for business lending as I discussed here last week. 

Anyway, today's brighter news is that as a share of total outstanding credit, mortgages have declined back down to 65.6 per cent from 65.8 per cent in December.

Part 2 - Housing credit surges

Despite this housing credit has continued to surge, with seasonally adjusted outstanding owner occupier credit (+0.5 per cent) yet again lagging the growth in investor credit (+0.7 per cent).

Interestingly, investor housing credit growth of 0.7 percent in February 2015 was the weakest result for the investment credit sector we have seen since fully a year ago in February 2014.

Nevertheless, these continue to be very strong results indeed for housing credit.

Even on a smoothed rolling 12 monthly basis as charted below it is clear that investor credit growth has easily outpaced owner-occupier credit and has been galloping towards a level which the regulator will find uncomfortable.

That said, investor credit growth of 0.7 percent in February implies a somewhat slower rate of growth, and could feasibly represent the first sign of a becalmed market? Maybe...

The latest data relating to APRA ADI's for February 2015 was also released today which reflected similar themes, with investor credit growing at a more sprightly pace than owner-occupier lending.

A number of lenders are growing their investment housing loan book at a rate which exceeds APRA's 10 percent benchmark, most notably Macquarie and Suncorp.

Most of the 8 lenders which grew their investment loan portfolio at a pace faster than 10 percent hailed from outside the "Big Four".

This is not all that surprising giving the colossal existing size of investment housing loan books.

Westpac holds an astonishing $147,576 million of of outstanding investment housing assets on its books, representing a massive 31.7 per cent of APRA's captured total of $465,497 million.

The wrap

Personal credit growth remains in Talking Heads territory (or in Chris Rea territory, depending on your oblique lyrics reference of choice) but February saw a decent enough result for business credit growth.

Housing credit continues to go from strength to strength - if, indeed, that is the right phrase - with investor credit remaining imperious, despite a slightly slower rate of growth in the month.

As at February 2015 the share of outstanding housing credit pertaining to investors hit its highest level on record at 34.4 per cent.

That's more than a third of outstanding credit, a remarkable structural shift from just 14 per cent of outstanding credit just a quarter of a century ago.

One final point of note is that while outstanding housing credit has grown by a little more than 7 percent over the past year to $1.44 trillion, this is absolutely still nowhere by comparison to the $5.4 trillion total estimated value of Australia's dwelling stock.

Consequently household wealth has just hit record highs and the household debt-to-assets ratio is in decline.

Perhaps the role of Chinese investment capital has had a material role to play here?


Invest in outperforming property:

New home sales hit new high

Yet another new high for new home sales according to the Housing Industry Association (HIA).

The surge was driven by an 11.1 per cent jump in multi-unit sales, taking the series to an all-time record high.

Source: HIA

The detached house sales declined somewhat in New South Wales and Western Australia, and sharply in South Australia. 

There were moderate increases in detached house sales in Queensland.

Overall, a new cyclical high in private new dwelling sales, though, which bodes well for the construction industry and associated building activity.

Sunday, 29 March 2015

9 years of under-building bite in Sydney

Under-building bites in Sydney

It has long been apparent that since 2005 Sydney has not constructing enough dwelling stock to keep pace with the city's burgeoning population growth, which would inevitably lead to a surge in prices.

Only from 2014 is this finally being addressed by construction ramping up to a pace somewhat more appropriate for the massive and ongoing surge in headcount.

However, it should be emphasised that data released this week showed that the population growth of New South Wales is still tracking at 106,400 per annum, which in absolute terms is the greatest population growth in the country. 

By the time the Q4 2014 data has washed through it seems likely that Greater Sydney's population increased by close to ~90,000 persons in 2014.

Housing finance soaring

Contrary to what you might think, my analysis of the latest Housing Finance data showed that the number of owner occupiers buying into the Sydney market presently remains well below the levels seen in the preceding boom period (and in population-adjusted terms today's figures would be comparatively lower still).

However, what is certainly the case is that since the middle of 2013 the prices that Sydney homebuyers have been prepared to pay have been rising very sharply.

Meanwhile, investors became wise to the supply shortage and began piling into the market in record numbers. The volume of investor loans is now breaking new highs by the month.

Stock levels remain muffled

Despite rising prices, data compiled by SQM Research has shown that the level of stock on market remains below where it was a year ago, and far beneath the stock on market levels of the only equivalently sized Antipodean city.

We are now at last beginning to see the first impacts of new developments coming online, with a further ~25,000 apartment approvals for Sydney in the past 12 months, and dwelling completions also just beginning to hit their straps.

At the present time vacancy rates in Sydney remain significantly lower than where they were in 2004 at the end of the preceding boom period.

However, vacancy rates are finally being nudged higher around a few key construction hubs, which will put upwards pressure on apartment vacancy rates and an equivalent downwards pressure on unit rents.

These include certain suburbs in the inner west (Erskineville), the inner south (Mascot, Green Square), north Sydney (Chatswood, North Sydney), and the surrounds of Olympic Park (Homebush Bay, Rhodes), to name a few.

For all that we do need some perspective here.

Nationally, building approvals have smashed an all-time record high at more than 200,000 on a rolling annual basis. Of these, Greater Sydney has approved 25,440 units and 13,337 houses in the past 12 months. 

That's a jolly good start. Yet even if every single one of those 38,777 approvals makes it through to completion - which they won't - then in aggregate even this will barely make a dent in Sydney's inherent supply shortage.

Sure, there are doubtless dozens of vacant apartments up for rent way out at Australia Avenue. But what impact will this have on what is happening in the more popular established suburbs? Probably somewhere close to zilch, because of the diminished level of substitutability.

It has been estimated that Sydney needs some 130,000 new dwellings. I'm not so sure about that, but I do know that it will take more than a few strong months of building approvals to redress an imbalance which was nearly a decade in the making.

Dwelling prices rising

Unsurprisingly, CoreLogic-RP Data records Sydney home values as rising strongly. Its "Daily Home Value Index" has historically tended to record a mid-year dip which invariably leads to misplaced excitement, so we might expect to see prices on this chart dwindle across the next month or two.

This weekend was the busiest auction weekend ever in Sydney with more than 1,100 properties scheduled to go under the hammer ahead of the traditional Easter break.

All the way back in August 2013 Australian Property Monitors (now under the Domain banner) reported that the auction market had shifted seamlessly from "red hot" to "white hot".

This weekend's preliminary result busted all previous records with a massive 87.5 percent clearance rate reported. Domain circumvented the auction heat/pigment conundrum by simply declaring the market as the hottest it has ever seen. Reported Sydney Morning Herald:

"The Domain Group senior economist, Dr Andrew Wilson, says he's "absolutely astonished". "This could not have been rationally predicted - the highest clearance rate on the biggest auction day ever. This is the hottest of hot auction markets ever."

The good Doctor Wilson has courted a little controversy with the introduction of his divisive "Countdown to Sydney $1,000,000 median house price" counter. Based upon current market trends, Dr. Wilson sees this as being 442 days away, though after this weekend's auction frenzy the $1 million median house price may hove into view sooner still.

Rates to fall further

With sub-trend economic growthsteadily rising unemployment and inflation appearing to remain relatively contained, debate has shifted from not "if" but "when" Australian interest rates will be dropped further. 

Meanwhile Chinese port iron ore prices nudged new lows on Friday, with major producers refusing to blink while pumping out millions of tonnes of oversupply,

The US Federal Reserve seeming likely to push out its own interest rate hikes will do little to help the currency cause.

Futures markets are fully pricing in two further cuts and more to the cash rate by the end of the calendar year in Australia. 

Commentators are split on whether the next cut will be delivered as soon as April 7, with some arguing that the Reserve Bank (RBA) will be keen to await another round of inflation data

Others have argued that Sydney's hot housing market itself could delay further cuts, with the RBA stressing the importance of maintaining lending standards.

As for what might happen to Sydney dwelling prices over the next 18 months or so, it's impossible to call accurately, but absent an as yet unseen restriction on capital flows, prices are evidently set to rise. 

Data providers show gross yields on Sydney apartments as sitting between 4.4 and 4.6 per cent as at the last available reporting date. 

Given that futures market implied yields suggest that we're likely to see the lowest nominal mortgage rates we have ever seen over the next 18 months, it seems unlikely that yields will be a metric which acts as an impediment to the Sydney investor stampede just yet.

A simple model shows that if gross rents were to rise by 4 per cent over the next 18 months and investors were prepared to bid gross yields all the way down to 4 per cent, then apartment prices could surge by as much as 14 to 19 per cent higher across that time horizon, adding a further $100,000 to the median apartment price. 

Naturally, were such a price boom to occur, reversals could then follow.


It has been a quiet week or two for data releases, but hold onto your hats because the first 16 days of April are set to bring a huge data dump our way (for want of a better phrase).

As always, I'll analyse all key data series here as they are released to the market.

Saturday, 28 March 2015

US rate hikes pushed out?

GDP decelerates in Q4

The US Bureau of Economic Analysis released its third Q4 GDP estimates overnight.

After the rip-snorting result in Q3 where real GDP was estimated to be rising at some 5.0 percent, the third estimate for Q4 showed real GDP to be tracking at a more sedate 2.2 percent.

The increase in Q4 real GDP reflected positive contributions from consumption ("PCE"), non-residential fixed investment, exports, state-&-local government spending, and residential fixed investment.

However those gains were partly offset by negative contributions from federal government spending and private inventory investment. Imports - which are a subtraction in GDP calcs - also increased.

When charted in billions of chained 2009 dollars, the steady recovery in the US economy is apparent.

In recent months the headline rate of US unemployment has tumbled to just 5.5 percent, we have recently seen the strongest US jobs gains in 17 years, and US job openings ("JOLTS") are at the strongest level since 2001.

Refer to the links embedded above for analysis of each data release.

When will the Fed hike?

The key question, then, is not if but when the US Federal Reserve will begin to hike interest rates. The Fed's Janet Yellen noted overnight that the Fed will likely begin to hike rates this year, but gradually.

Reuters provided a neat summary of Yellen's luncheon thoughts here. Interestingly, Reuters analysis showed that the speech was evidently spiced with a dovish tone.

If this proves to be correct and US rate hikes don't materialise until later in 2015, this may serve to add further pressure on the Reserve Bank of Australia (RBA) to cut rates again.

Domestically our cash rate future markets are fully pricing two more interest rate cuts before the end of this calendar year.

Murmurings in the media suggest that rates could be on hold in April as the RBA awaits more data - specifically on inflation and the housing market - potentially teeing up a rate cut for the May meeting.

Weekend reads

Summarised by Michael Yardney over at Property Update here.

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Baby boom boom

Births booming

I looked at the latest Demographic Statistics here this week, which showed that Australia's population increased by 354,600 in the year to September 2014.

Commsec charted the trend in births to dispel the myth that folk have stopped having babies due to cost of living pressures.

In fact, over the past 24 months the total number of births has been at record highs.

Moreover, the greatest number of births continues to take place in the most populous states, which also have the most expensive housing markets.

That said, in other developed countries it has been observed that as wealth increases fertility can decline. 

It would therefore not be a surprise to me to see fertility rates tail lower in Sydney and Melbourne from their present levels of ~1.9. 

Friday, 27 March 2015

Household wealth hits record highs (the importance of buy and hold)

Time in the market!

Some skilled investors with a proven track record and finely honed money management skills are able to accelerate investment returns with adept market timing.

Most average investors either can't or don't achieve this.

The simplest way for most average investors to build wealth for their retirement is to continue to buy quality assets which they can hold onto forever - such as, for example, index funds, managed funds and well-located property - and then do so.

If markets do experience a slump, such as they did from 2008, then this can be an appropriate time to add further quality assets to your portfolio at mouth-watering prices when fear abounds.

This approach has some added benefits including minimising transaction costs and capital gains taxes, while shares and investment property in Australia are tax-advantaged assets in other respects too.

Instead of buying and selling, this approach to investment focuses on buying more quality assets and accordingly the rebalancing of a portfolio. 

Or timing the market?

For some people, there will also be an obstacle to investing, of course.

Since "fear sells" we have been hearing from some media outlets for years and years...and years...that the world is going to end and that we should be selling our homes, short-selling the banks, hoarding tins of spam, and whatever else.

This, in effect, is engaging in the "market timing" approach - that is, through waiting for the next inevitable market correction before taking any action.

In all markets corrections are inevitable, of course, the problem is that it is almost impossible for mere mortals to predict when they will come, although it always does seem uncannily easy in hindsight.

While share markets may appear to be highly unreliable and only move higher steadily over very long periods of time, this is in part illusory. 

The vital point of note is that over the years shareholders have continued to benefit from a bonanza of tax-advantaged dividends while "nervous nellies" who have continued to sit out of the market for years have not. 

Consequently, on an accumulation index basis Australian share indices continue to push record highs.

When the opportunity cost is measured over years, waiting it out can be a very expensive game.

Buy and hold for the long term?

While the superannuation industry has its many well--documented foibles, spruikers and ticket-clippers, the super system does serve one critical purpose for Australians in that it forces a high proportion of Aussies who might otherwise fail to do so to save and invest for their retirement using a long term focus.

The only thing that matters for you, of course, is that you have a workable financial plan for you, regardless of which asset class you prefer or strategy you take.

The ABS data showed yesterday that since the Q1 2009 nadir aggregate Australian household wealth has recovered very strongly by some a rollicking 54.4 per cent or some $2,777 billion to a new record high.

Household wealth to record highs

As the ABS released its Finance and Wealth data for the December 2014 quarter yesterday, let's take a brief look at what we can learn.

Firstly, in Q4 2014 household wealth increased by $189 billion or 2.5 percent to a new record high of $7,889 billion.

Total net worth was mainly made up of land and dwelling assets ($5,386 billion), financial assets ($3,961 billion), offset by household liabilities of $2,087 billion.

Cash and deposits are at all all-time high of $903 billion representing some 22.8 per cent of financial assets, which is now well above the decade average of 20 per cent.

Drivers of wealth gains

The increase in household wealth in the final quarter of the year was driven largely by holding gains in land and dwelling assets (+$101 billion) and financial assets (+$53 billion) as dwelling prices and share markets push higher.

Superannuation fund assets also increased by $53 billion in the final quarter as share markets recorded further gains.

Of course. with the population of Australia growing as I analysed here yesterday, we do expect aggregate household wealth to increase steadily over time. 

However, it is instructive to note that in per capita terms average Australian household wealth has bolted higher over the past 7 years or so to a new record of $333,000 as at Q4 2014, notching another solid increase of $6,800 in the final quarter of 2014.

Debt to assets ratio declines

The Finance and Wealth series has endless potential to imbue readers with chart fatigue, so I won't go down that path today.

However, before signing off it was pleasing to note that the ratio of household debt to total household assets has continued to decline to 20.7 percent, which is some way below the respective 2009 and 2011 peaks of close to 22 percent.

Just as importantly, mortgage serviceability has improved markedly since 2008 thanks to low interest and borrowing rates.

According to the ABS, the interest payable to income ratio has been in a "gradual downward trend" since the global financial crisis, now sitting at 10.4 percent, way down from above 16 percent at the ratio's peak.

The wrap

Market analysts expect household wealth to continue rising in the period ahead, with asset valuations being pushed upwards by low interest rates while cash and deposits holdings are expected to decline.

In particular, superannuation funds are expected to move some of their presently elevated cash holdings into the share markets.

Meanwhile dwelling prices are also rising in the three most populous cities, but are flat or declining in most other major conurbations.

Overall, this was a happy data release, with household wealth per capita breaking record highs and more gains expected.

Delinquency rates tumble to 8 year low

Delinquencies lowest in 8 years

According to the latest report from Moody's, only 1.19 percent of Aussie mortgages are 30 days past due, the lowest level in 8 years.

This is grand news for Aussie households and reflects the Reserve Bank's conclusion that generally financial stress in Australia is low at the present time. 

Greater Sydney 30 day plus delinquency rates withered to just 0.9 per cent.

Meanwhile delinquency rates remain low in Greater Darwin (0.4 per cent), Perth (1.1 per cent), Melbourne (1.1 per cent) and Brisbane (1.2 per cent) as homeowners enjoy record low borrowing rates.

Source: Moody's

Delinquency rates are a little more elevated in the southern states capitals of Hobart (1.3 percent) and Adelaide (1.5 per cent), where unemployment has been a more pressing issue.

However, Moody's warned that delinquency rates are rising in some regional areas, particularly in the mining and resources states.

This is reflected in the above graphic which reveals regional delinquency rates as being more elevated than those of their respective capital city in every Australian mainland state.

Queensland - beautiful one day...


I know, I know, I should have closed the door...

Fuel in Queensland is forecast to get cheaper for the next three days.

Thursday, 26 March 2015

Sydneysiders stop leaving Sydney


Commentary on demographics and property is a nightmare to read sometimes! Par example...

(i) "Sydney is building a massive oversupply of property...".


Why must commentary swing wildly from one extreme viewpoint to another based upon one quarter of figures (which is rarely a good idea with ABS data at the best of times)?

Last quarter population growth in New South Wales slowed because, well, it always slows in Q2.

Not because house prices are too expensive. Not because everyone is suddenly moving to Queensland (?). But because migration into Sydney is lower in the June quarter. We have 25 years of data to show that. I was a one-time migrant to Sydney myself years ago - you never migrate to Sydney in Q2!

I have charted below the 10 year population growth versus dwelling completions data for New South Wales which should tell us whether or not we need to be alarmed.

OK, we have one strong year of commencements underway - we might just about get up to ~50,000 New South Wales dwelling commencements with a following wind when the December figures are released.

But just take a look at what's been happening with dwelling completions since 2006...yikes! It is nonsense to claim that there is an oversupply of property in Sydney.

Now sure I wouldn't recommend buying an off-the-plan unit in one of the few pockets of Sydney oversupply right now. But then, I wouldn't recommend doing that any time, so that's nothing new. 

(ii) "Everyone's stopped having babies due to housing affordability..."


In the year to September 2013 there was an all-time record high number of births at 312,200. In the past 12 months to September 2014 the number has been almost as strong at 303,000. I may or may not have even contributed one birth that number myself (well, not directly, but y'know what I mean).

We have never before in Australia's history seen more than 615,000 babies born in the space of two years, and we clearly haven't stopped having babies due to housing affordability. Quite the opposite, it's a baby boom!

(iii) "Adelaide is going to have a house price boom because it's cheaper than Sydney..."


South Australia hasn't added a single job on a net basis for more than half a decade (and, just to re-cap, dwelling prices tend to rise when strong demand is outstripping supply). 

With no jobs growth at all in evidence, net overseas migration into South Australia is likely to dry up fairly sharpish, while there is already a negative impact of net interstate migration from South Australia aka. a "brain drain" to other states with superior employment opportunities.

I'm not sure how one concocts a property boom out of that.

Demographics Q3 released

Meanwhile, back in the real world, the ABS released its Demographic Statistics for the September 2014 quarter. The Aussie population continued to increase strongly to a new high of 23,581,029 as at 30 September 2014.

Natural population increase continues to do what it does (sadly, more of us dropped off the perch to offset the baby boom - the circle of life...), but as I have noted previously from the Overseas Arrivals and Departures figures, net overseas migration is now entrenched in a downturn phase.

A total of +203,900 people migrated into Australia in the year to September 2014, which is still a historically strong figure but well off the peak of more than +315,700 seen back in December 2008.

The net result was a population increase of +90,293 in the September quarter, which of course is much stronger than the seasonally weak Q2 2014 figure of +68,246, but is also 10 per cent lower than the prior comparative period.

Over the year to September 2014 the total population increase was a massive +354,605, although this is now the softest annual result since the December 2011 quarter.

Immigration slowing in mining states

More interestingly, let's take a look at the state by state figures. Unsurprisingly net overseas migration slowed by 28 per cent in South Australia year-on-year - although annualised net overseas migration remains in positive territory, net immigration is now tailing off in South Australia due to a dearth of new employment opportunities.

In fact, net overseas migration slowed across the board, and this has been particularly the case in the mining states.

Sydneysiders have stopped leaving

The game-changer is the net interstate migration data. The Sydney housing market has just about functioned over the years because typically tens of thousands of people have departed the state each year for cheaper and sunnier climes. Well, not any more! 

Net interstate migration from New South Wales has declined to the lowest level on record, and based upon this quarter's data is set to continue declining yet further.

On a net basis fewer and fewer people are departing Sydney and Melbourne, where they feel relatively secure in their jobs, which is inarguably adding ever greater pressure to inner suburban property prices in the two largest cities.

Annualised net interstate migration into Queensland bounced a little to +5,942. Balancing the ledger, net interstate migration remained sharply negative in South Australia, and has now also been negative for two consecutive quarters in Western Australia, which is some turnaround from the heady days at the peak of the mining boom.

I expect to see net interstate migration into Queensland remain in positive territory as Brisbane continues to add jobs and folk seek a cheaper and sunnier lifestyle in the Sunshine State.

New South Wales leads population growth

Finally adding in the impact of natural population increase - births and deaths - the strongest total population growth was unsurprisingly seen in New South Wales (+106,400) and Victoria (+102,000) - the impact of fewer residents opting to leave the two most populous cities being evident.

Population growth remains substantial but is slowing in the resources influenced states of Queensland (+69,400) and Western Australia (+53,700).

However, as detailed here recently, jobs growth in the capital cities of Brisbane and Perth has done very well to date to offset declining employment in struggling regional towns and cities, particularly in the resources sector.

Population growth remains relatively weak in absolute terms in South Australia (+14,300), Tasmania (+1,600), the Northern Territory (+2,800) and the Australian Capital Territory (+4,400).

The long run data shows how heavily focussed population growth has been upon the four most populous states, and most notably the four capital cities therein. 

Over the past 10 years there has been massive population growth in New South Wales (+884,000), Victoria (+923,000), Queensland (+891,000) and Western Australia (+602,000).

Population growth in New South Wales is imperiously strong, now tracking at some 17 per cent above its decade average. 

Market prices cuts

The Aussie dollar has declined fairly sharply since September.

However, the Reserve Bank has highlighted on several occasions that it would like to see the currency lower than where it is now, particularly against the US dollar.

Some noises yesterday from the Federal Reserve in the US that due to low inflation interest rate hikes could be pushed out until 2016, which will not help the cause.

Here in Australia futures markets appear to be pricing more rate cuts, with implied yields on March 2016 cash rate futures contracts plumbing the depths at just 1.67 percent.

I don't pretend here to have any special insights into the timing of potential interest rate cuts.

A cut by May is priced as very likely, but the next  RBA Board Meeting and Official Cash Rate announcement will be on April 7.

London housing boom cooked

UK housing market continues to slow

The latest Office for Nation Statistics (ONS) data from the Old Dart showed house price growth slowing to +8.4 percent year-on-year in January 2015, with a small seasonally adjusted decline being recorded in the month itself (-0.2 percent).

The average mix-adjusted house price in the UK as at January 2015 was £273,000.

The ONS mix-adjusted UK house price index at 207.4 is threatening to nudge against its highest ever reading of 207.7 recorded in August 2014.

However, although the index is now a comfortable 12 percent above its pre-economic downturn January 2008 peak reading of 185.5, as usual there is material variation evident between countries and regions.

House price growth by country

House price growth was driven by England (+8.5 percent), Scotland (+7.8 percent), Northern Ireland (+7.3 percent) and Wales (+4.9 percent), in that order. 

Overall the house price recovery now seems to be lacking momentum following the Mortgage Market Review (MMR).

The green line denoting the Northern Ireland boom, boom, boom and bust never ceases to amaze.

London boom running out of puff

In truth the UK housing market recovery has largely been a London story...and even within "the Smoke" there have been significant variances by postcode.

The average mix-adjusted London price increased by £8,000 in January 2015 to £510,000 on a seasonally adjusted basis, which is more that  double the average price of a house ex-London and the South East.

However, for some time it has been our contention - and you don't hear buyers agents say this too often - that the London boom is running out of puff for this cycle, with sentiment moderating considerably since the middle of calendar year 2014.

Over the past year mix-adjusted prices are up by +13 percent in London, +9.8 percent in the East and +7.6 percent in the South East, underscoring the excessively London-centric nature of the boom through this cycle.

The recover" in prices elsewhere has generally been sedate at best, although ex-London and the South-East prices were up by +6.5 percent in the year to January 2015.

Over the past 12 months price growth was slowest in Yorkshire & the Humber (+3.6 percent), the West Midlands (+4.3 percent) and the North West (+4.6 percent).

Wednesday, 25 March 2015

"Low levels of financial stress...more than 2 years of mortgage buffers"

FSR tackles housing

The Reserve Bank had a good look at the housing market today in its latest Financial Stability Review.

Evidently the housing market is multi-speed with some relatively weak housing markets (including Canberra, Adelaide, Perth, Hobart and Darwin) and some stronger ones (mainly Sydney, and to some extent also Melbourne).

There is plenty of competition around from mortgage lenders at the present time with some lenders offering discounts of up to 100bps from their advertised rates.

Unsurprisingly, when combined with rising prices in some markets and expectations of future price gains, this has led to an increase in aggregate mortgage demand, particularly from investors, although also from owner-occupiers in Sydney.

Financial stress declines

The good news is that according to the Reserve Bank low interest rates have seen the levels of household financial stress declining considerably.

Non-performing household loans are extremely low in the current low interest rate environment, at just 0.6 percent as at Q4 2014 down from 0.9 percent in 2011.

Low interest rates have clearly made the servicing of household debt much easier.

Applications for possessions of housing stock have continued to decline in the four largest states, and have even stopped rising in Tasmania.

Great to see.

Moreover, thanks to a unique mechanism to Australian mortgages whereby repayments may continue to be scheduled at the same level even if interest rates are cut, Australians have built an enormous aggregate mortgage buffer.

The latest figures show an extraordinary aggregate buffer (as measured by balances in offsets and mortgage redraw facilities) of some 16 percent of outstanding loan balances, which is the equivalent of more than 2 years worth of scheduled repayments at the current level of interest rates.

And the buffers are evidently continuing to grow, at least in aggregate.

The Reserve Bank also noted that households are generally saving considerably more than was the case before the financial crisis, while debt-to-income levels "have remained relatively stable for the past decade or so".

Interest payments to income ratios have also declined by nearly 50 percent since their pre-financial crisis peak, largely thanks to repeated interest rate cuts.

Risk markets

The Reserve Bank noted that - quite rightly - stricter mortgage criteria have been applied to some mining town markets and inner city unit markets.

The inner city unit market in Melbourne deemed to be a particular risk (as I detailed here previously).

The Review noted that mortgage arrears in mining towns have picked up over the last 6 months, which makes the decline in overall non-performance rates all the more remarkable.

APRA will also be keeping a close eye on the level of interest only loans.

However, the RBA concludes that generally "indicators of overall financial stress remain low".

Supply and property investing

Record approvals

There has been a lot of debate about tax policies and under-building in Australia.

Yet thanks to a heady combination of rising dwelling prices and low interest rates, building approvals are actually at record highs in Australia.

Notably over the next few years we are now set to construct more units and apartments than has ever been seen before in this country.

The supply response appears to be working. 

This has vital implications if you are considering investing (or "speculating" in the apparently favoured parlance of the day) in a unit or apartment in any one of half a dozen of our capital cities which is likely to experience pockets of oversupply over the next couple of years.

Of course, over the long term these figures are small fry and over time the new dwelling stock will be comfortably be absorbed by population growth as I looked at recently here.

Indeed, my contention is that the Intergenerational Report may have deliberately under-cooked the long term net overseas migration figures for the reasons I looked at here.

That said, over the short term a number of our capital cities will see clusters of apartment oversupply and investors need to be cognisant of what this could mean, including sliding rents, vacancy periods and, in some cases, yikes, declining dwelling prices.

Coorparoo gentrifies

I recently looked at West End and South Brisbane as two adjacent areas where apartment construction is going ballistic.

There are a few more regions around Australia as detailed here previously where unit supply is ramping up apace, but these are two premier examples.

I took the pocket camera out to another Brisbane suburb yesterday where a goodly level of construction is set to get underway - albeit not on anything like the same scale - Coorparoo. 

This "mixed-use" suburb is around 4km from the Central Business District and conveniently located on a train line - and there are certainly some quality investments to be found here.

There is also set to be a fair amount of new supply due to come online both here and in certain adjoining suburbs.

Don't overpay...

As a general rule when a development says that 1 bedroom apartments "start from" $359,000 and 2 bedroom apartments "start from" $459,000 (if my eyesight is any good, that is), typically this will refer to the most inferior apartments in the block and possibly those without parking spaces...although I can't say for sure in this instance.

Much of the new apartment stock will likely be sold offshore to Asian investors, of course, but these prices should act as a guideline for investors who are potentially looking to buy established 2 bedroom apartments in the vicinity.

If you are investing in a house with a high land value content this is one thing - but if you are looking at an apartment then the above figures should offer you a very strict set of guidelines as to how much you should be prepared to pay.

Construction of expensive new apartments can underpin prices for a time. However, particularly in an area where there is an elevated of new supply investors need to source apartments which you can always let out easily.

This becomes more challenging when there is a higher volume of new supply around. Look for spacious apartments in smaller or boutique blocks, ideally with a view and some outdoor space, such as a balcony. And don't overpay.

Below is a photo of the old Myer Coorparoo complex, for which "DA" has been approved for a new retail, commercial and residential development. This will include some 442 new apartments across 18 levels.

The wrap

An area such as this is close to the city will become far more popular - and more populous - over time, and it is gentrifying quickly.

But investors need to be sure that they don't overpay for generic unit stock which lacks scarcity value and may become difficult to let in time as vacancy rates creep higher.

In particular, investors need to understand that population growth does not in itself drive property price growth, as I looked at in more detail here.


And coming up...

Some cracking ABS releases are due out on Friday including Q3 2014 Demographics.

I expect to see that a slowing in net long term migration which has long been evident in the Overseas Arrivals and Departures data will lead total Australian population growth to have slowed materially through 2014.

I also expect to see population growth slowing significantly in the mining states, while Sydneysiders and whatever people from Melbourne are called these days (Melbournites? Melburnians? Mexicans?) opt to stay put, placing massive pressure on infrastructure and housing markets in those two cities.

In short, the strongest population growth in 2014 will be seen in the two most populous cities due to a structural shift in interstate migration patterns.

The Q2 2014 Demographics release has already showed that net interstate migration from New South Wales is at the lowest level on record across decades of data, which migration into the sunshine state of Queensland has slowed.

Even within Queensland we are seeing a shift of population away from some mining regions but employment growth in the capital city of Brisbane remaining relatively robust.

Also due out from the on Friday and Q4 2014 Finance and Wealth data, which is effectively a subset of the Australian National Accounts.

I expect the Finance and Wealth data to show that - while household net worth as a percentage of a annual net disposable income has not recovered to its heady pre-financial crisis peak - with dwelling prices and stock market valuations rising we will almost certainly see record aggregate household net worth as at Q4 2014, and in all likelihood beyond.