Pete Wargent blogspot


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Sunday, 31 May 2015

Weekend reads

Weekend reads

Catch up on the most interesting reads of the week, summarised by Michael Yardney at Property Update here.

You can also subscribe for the free Property Update newsletter here.


Sydney market accelerates

If I've read one article about a Sydney property market slowdown over the past two years, I must have read a thousand.

The latest call has been that a decline in transaction volumes must mean that the market is set to decline.

As noted here previously, the only way one could arrive at that conclusion could be if you've never been in the Sydney market (or, for that matter, never been to Sydney).

Auctions and viewings have been packed out relentlessly, with queues consistently out the door and round the corner.


The reason for the "slowdown" in volumes is a woeful dearth of stock on market, with anything half decent being pounced upon by buyers.

We have reached an awkward stalemate situation whereby owner-occupiers are unprepared to list property due to there being nowhere to move to, while investors have become unprepared to sell due to rising prices.

Of course, this will change in time with more listings expected over the months ahead.

But for now there is a major imbalance in the market, which is pushing prices northward apace.

The population of Greater Sydney is now well over 4.8 million and rising, yet there are fewer listings than in Melbourne, Brisbane and even Perth.


Only 17 per cent of capital city listings nationally are in Sydney, which is painfully low.


Yet the data sets I have analysed here previously of mortgage finance and investor lending finance shows that record mortgage volumes are being written in New South Wales at the present time.

There is no slowdown in the Sydney market.

If anything, activity that I have seen in the past few weeks has implied an acceleration.

Yesterday's median auction price in Sydney was an extraordinary $1.18 million.

Of 657 reported auctions for the week, 597 sold under the hammer, giving a preliminary auction clearance rate of well over 87 per cent.

They figures may or may not be revised down to the low-to-mid 80s range in due course, but any way you look at it, it's a boom-time market.

Scrolling through some of the example sales reveals some blistering results in the inner suburbs in particular.

This is essentially as high a range for auction results as we have seen in Australia - all-time record levels. 

"Hat tip" to the one commentator who has consistently called this Sydney property cycle accurately: Louis Christopher of SQM Research,

Fair play. I, for one, will be following his newsletters more closely in future. 

Friday, 29 May 2015

Investor credit growth above 10 per cent

Fin Aggregates soft

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

Not much joy for business credit, which was flat in the month, or for personal credit, which was negative.

Housing market credit, on the other hand, continues to be as strong as a proverbial ox, up by 7.2 per cent over the past year.

Business credit

Business credit outstanding increased only marginally from $788.3 billion to $788.5 billion in April, which was more than a trifle disappointing!

In annual terms, business credit growth ticked back to 5 percent, an equally underwhelming result.

The latest market statistics from the Australian Securities Exchange (ASX) suggest that there is still a bit happening in terms of transactions.

However, yesterday's capex figures suggest that the outlook for business investment is rather subdued.


On to the housing market, and credit growth expanded strongly both for owner-occupiers and for property investors.

Credit growth to investors was once again the stronger of the two.

In annual terms, credit growth to property investors now sits at 10.4 per cent.

I'm not a huge fan of reading too much in to one month of figures, but smoothing the figures on a rolling annual basis suggests that investor credit growth could be settling in at around the 10 per cent level (rather than accelerating further).

Property investors accounted for 34.54 per cent of outstanding housing credit, the highest level we have seen to date.

I noted at the very inception of this blog that if you want to make money from residential real estate through this new era, the best way to do so would be to anticipate where investors will be pumping up the market and to own properties there.

Inner Sydney was always my chosen region, but there are others - particularly I've noted of late, in certain suburbs of inner Brisbane.


Futures markets are now fully pricing in another interest rate cut by the end of Q1 2016 to 1.75 per cent.

New home sales rise

New home sales rise a bit

Have lost track of how many times people have called "peak" on this series from the Housing Industry Association (HIA).

It's still rising. 

And it's likely to continue doing so, driven by multi-unit sales across the eastern seaboard.

There were small gains for detached housing and multi-unit sales in April, driven by gains in New South Wales.

However, sales in South Australia slumped to an 18 month low.

Pound on fire!

Sterling effort

I've made the point on this blog previously that UK assets might be worth a look for investors, partly as a currency play.

It's a strategy I've been using myself, buying UK assets while the Aussie dollar has been hugely strong against the pound, at least in historical terms.

I hadn't realised the returns would be so swift, though.

Just look at the British pound go, now up to a 6 year high against the Australian dollar!

Yesterday's weak capex data in Australia, which I looked at here, paves the way for further easing in Australia and sent the pound to above A$2.00.

Futures markets are getting somewhere close to pricing in another interest rate cut by the end of 2015 in Australia, with weak investment figures suggesting rising unemployment.

The Reserve Bank is widely considered likely to wait for some time before moving again, however.

The Reserve Bank has made the point on many occasions that it would like to see the Australian dollar weaker against the US dollar, which would help our commodity export prices.

Slowly but surely, we are seeing that too, with the Australian dollar declining to around 76.5 cents from previously heady levels of well above parity.

Thursday, 28 May 2015

Sydney dwelling prices rise again

Sydney leads dwelling price cycle

Residex released its latest dwelling price indices for the month of April 2015.

Unsurprisingly, Sydney once again showed the strongest price growth with house prices rising by 3.8 per cent over the past quarter and 15.1 per cent over the past year.

Unit prices in Sydney rose by 2.7 per cent over the past quarter to be 12.2 per higher than a year ago.

Price growth has slowed in Melbourne, and has generally been fairly soft elsewhere, particularly across much of regional Australia.

Sydney rents also continued to rise, both for houses, which are up by 8 per cent over the past year, and for units, up by 4 per cent.

Average rental yields on Sydney apartments have continued to hold up at 4.6 per cent, which is one of the reasons I expect prices to keep rising for some time to come yet.

In fact, I expect to see Sydney prices snap 15 per cent higher on these indices based upon what I have seen playing out at auctions in recent weeks.

Another key driver is that there is so little stock for sale.

As for the alleged Sydney "oversupply", I'm not seeing it on a city-wide basis, except in a few pockets as documented here previously.

Construction of apartments has certainly picked up, but only a relatively small proportion of new builds are in the inner suburbs where a high concentration of people want to live.

Inner Sydney vacancy rates have declined again to 1.7 per cent.

Meanwhile, population growth has accelerated in Greater Sydney through 2014 as net interstate migration has declined to its lowest level on record. 

Over the 10 years to 2014 the Greater Sydney population increased by 623,000 to 4.84 million. The inner city is more or less full.

And at the current rate of progress, the next decade could see stronger population growth still.

No oversupply, then, only certain pockets where a glut of apartments is happening.

Traditionally at this stage in the property cycle we would expect to see investors spreading their wings into Queensland and elsewhere.

The long slow march to zero...

Crapex again

Australia's long slow march to zero interest rates continues, it seems.

Private new capital expenditure declined by 4.4 per cent in the first quarter to be 5.3 per cent lower than one year ago at $35.9 billion.

Mining capex has now fallen from $24.2 billion to $18.9 billion, and investment levels inevitably have a long way to fall yet given the scale of the boom.

The state level data shows how Queensland and Western Australia will bear the brunt of the declines.

Western Australia has held up relatively well to date, with some iron ore investment still washing through the quarterly data.

Mining still accounts for a whopping 84 per cent of capital expenditure in Western Australia on this survey.

However, Queensland is already into a very sharp decline from $12.1 billion of total capital expenditure in Q3 2013 to just $7.9 billion in Q1 2015.

While "other industries" are picking up a small amount of the slack, Queensland's mining and resources regions seem likely to be in for a tough few years ahead.

I've already listed a number of Queensland regions which I expect to endure the worst of the fallout, so there is no need to re-cap on that here.

Expected declines for mining ahead

The most alarming part of this release was not, however, the "actual" expenditure to date, but the "expected".

Total capital expenditure is broadly expected to fall by nearly 25 per cent from $149 billion in 2014-15 to just $104 billion in 2015-16.

The main driver of this is to be another sizeable decline in mining capex, from $78 billion to only $52 billion.

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

So much for the forthcoming normalisation of interest rates - markets are already beginning to look for another cut.

Chinese developers turn to Sydney

Short video piece from the Financial Times here.

NASDAQ record close

More exuberance!

Mining construction - off the precipice

Construction slides further

The ABS released its Construction Work Done figures for Q1 2015 which saw total construction work done decline by 2.4 per cent to $48.4 billion.

It's a bit of an awkward data release with a few moving parts, but let's see if I can simplify a few of the key messages here in three short parts.

Part 1 - Total construction slips

As you can see from my chart below, private sector building work is responding rather nicely to low interest rates.

Unfortunately, on the other hand, spend in the public sector is contributing very little to the cause.

Quarterly public sector expenditure fell to below $2.2 billion, which is far below the more stimulatory levels seen through the financial crisis which peaked at more than $5 billion.

The economy could evidently use some infrastructure investment, though I'm not a tall sure we'll get it.

Meanwhile engineering construction, largely comprised of resources capital expenditure, continues to capitulate, now more than 20 per cent lower over the past year to $24.8 billion in Q1, from a peak of $33.2 billion in 2012.

The net result is that total construction work done declined further in the first quarter by 2.4 per cent to $48.4 billion.

This is still a very high level of activity in historical terms, but now some 8.8 per cent lower than one year ago.

The one shining light for construction - which you will have seen with your own eyes if you live in one of the major capital cities - is residential construction, which continues to pulse along.

House building work done is picking up sharply, while the value of building work done relating to units and apartments (denoted by the red line below) continues to surge to new record highs through this cycle.

Higher density developments - which tend to be located in cities and come with associated expensive land remediation costs - are contributing a surprisingly high proportion of residential building work done in chain volume measures terms.

Major renovations work, denoted by the green line, continues to flat-line, and is basically on life support outside Sydney.

Part 2 - State versus state building

The value of building work done is being driven by activity in Melbourne, Sydney and Brisbane, in that order, which should continue to support construction employment in those cities, combined with the associated multiplier effect.

The building boom is largely bypassing the southern states, and this has been reflected in benign (Hobart) or negative (Adelaide) employment growth in the respective capitals of these states. 

Looking at the major component parts, Melbourne continues to be the undisputed king of house building, while Queensland and Western Australia saw a decent lift in activity in the first quarter of this year.

But the real fun and games are taking place in the apartment construction sector.

Sydney and Brisbane may be approaching full capacity in this industry, which a dearth of bricklayers and project managers on the eastern seaboard being reported by the Reserve Bank's liaison, despite the legions of construction workers becoming available for transfer as they are released from resources contracts (more on this below). 

Activity in New South Wales pulled back a little in Q1, but Melbourne apartment construction continues to rip to record high levels, with nearly $6.5 billion of work done over the past year in Victoria, and $1.8 billion in the first quarter of 2015 alone.

Heady times.

Clearly this is the macro level data only, but the figures clearly imply a looming oversupply of units and apartments in some locations.

Prospective investors clearly need to understand the property markets at a suburb and micro level in this respect.

Part 3 - The mining cliff

If you were hoping for good news for resources regions from this release, I'm afraid that there is none to report.

Engineering construction work done held up reasonably well in Victoria, but everywhere else of note saw sharp declines, and particularly so the main mining states.

The one exception in recent quarters had been the Northern Territory, with heavy spend related to the $34 billion Ichthys project pushing up engineering construction work done to record highs for the Top End over the preceding two quarters.

However, even the Northern Territory saw engineering construction work done decline from $2.1 billion to $1.7 billion in the first quarter, with some delays to the planned 2017 start-up date having been reported related to Inpex.

The chart above tells its own story, and there is little else but woe ahead for a number of mining town economies. 

The ongoing capitulation of house prices in the Pilbara and Moranbah have been well enough documented, but there are many more echo-corrections in the post across regions which have been propped up through the once-in-a-century mining construction boom. 

My chart packs have shown here previously that the pipeline for mining capital expenditure is desperately weak, and there will be further data to report on expected capital expenditure declines later this morning.

Capex related to Ichthys still has a way to run, granted, while Adani is hoping to proceed with its $10 billion thermal coal project (despite the minor inconvenience issue that at today's prices the project can barely be viable).

But these monster projects aside, weakening commodity prices will ensure that mining investment is heading all the way back down where whence it came, which is why we call it a commodity cycle.

The wrap

This negative result will breathe very little life into the GDP result for the first quarter, while a further decline in Australia's terms of trade will also act as a drag.

Economic growth may not be stone dead flat in Q1, but it seems unlikely to be a great deal better than that, which could drag the annual result down to well below 2 per cent over the first half of this calendar year.

With inflation forecasts having been revised down and further macro-prudential tools now being deployed by lenders, futures markets see every chance that the next move in interest rates will be down again to below 2 per cent.

Perhaps the twist in the tail here is that macro-prudential tools on lending to property investors mean lower interest rates for longer?

Wednesday, 27 May 2015

China stock bubble

Bubbling hot...

A quite impressively ridiculous stock market bubble is frothing up on the Shanghai Composite in China.

The market is up by more than 50 per cent in this calendar year to date, and as the index approaches 5000 it is well over double the level it was at in May 2014 when the index was in the low 2000s range.

In the last six days alone the index has added nearly 15 per cent, with a number of alarming statistics being reported about who is piling into the market and with what level of (in)experience.

The history of stock bubbles suggests that the market could be absolutely anything from here, but when the tide does eventually turn, the correction will likely be swift and painful.

Indeed, even these lofty heights are not uncharted waters for China. 

The long term chart shows that the stock bubble ended in tears last time, and in all likelihood it will do so again this time...eventually.

Tuesday, 26 May 2015

Global cycle

Advanced economies advance

I've looked regularly at many of these constituent numbers before, of course, including particularly for the US - (where unemployment has declined to a 7 year low) - and the United Kingdom, which is creating jobs at a rip-snorting pace.

Advanced economies and their respective unemployment rates seem to be making some progress, albeit at a snail like pace in the case of the Euro area.

From the Reserve Bank chart pack.

Unemployment Rate – Advanced Economies graph

Darling Harbour revitalisation

Construction well underway

A couple of views of the huge structural changes around Darling Harbour from this weekend.

First, looking out from on the middle of the swinging Pyrmont Bridge over to the site of the new Convention Centre and International Hotel, being constructed by Lend Lease.

And secondly, the first of the gargantuan commercial towers at Barangaroo on the old Hungry Mile, being constructed by the same developer.

Staying at Darling Harbour myself this weekend I noted at the weekend that Lend Lease also put 581 units on the market from its Darling Square development, which sits towards the Tumbalong end of the area.

Unsurprisingly, this second release sold out in five hours flat, thereby netting $600 million in revenue for Lend Lease.

For the record, 1 bedroom apartments "started" from $800,000, 2 bedders from $1.225 million, and the penthouse sold for a stonking $10 million.

Reportedly, only a third of buyers were from offshore, while at least half were said to be owner-occupiers.

The Darling Square development will comprise around 1500 apartments in total. 

Inner Sydney vacancy rates fall

Stable vacancies in Sydney

Sydney vacancy rates remained stable in April 2015 according to the Real Estate Institute of New South Wales (REINSW) media release.

Inner Sydney vacancy rates tightened from 1.9 per cent to 1.7 per cent.

And middle ring Sydney suburbs also saw vacancy rates tighten from 2.3 per cent to 2.1 per cent.

This was offset by an increase in vacancy rates on the outer from 1.7 per cent to 2.0 percent.

Generally, the rental market remains fairly tight in Sydney.

As you can see above I haven't quite gotten access to the full data series yet, but I'm working on it (Central Coast and Albury data for recent months are notable absences).

Generally vacancy rates have also tight on the south coast, such as in Wollongong, although vacancies rose 0.8 per cent in the month to 1.8 percent.

There was also a 0.3 per cent increase in the Illawarra to a still very tight 1.3 per cent.

Newcastle and Hunter

There was a large spike in vacancy rates in Newcastle (from 3.4 per cent to 4.6 per cent).

Similarly the Hunter saw a rise from 3.1 per cent to 3.9 per cent.

This reflects job cuts in the region, partly related to coal mining, which have seen unemployment rates heading north of 8 per cent.


It has been a hugely, massively popular event for Sydney this year.

So much so that hotel costs were doubled on Saturday. Hmm!

More here.

Monday, 25 May 2015

ANZ half year results

ANZ half year results

ANZ reported its half year results to March 2015 earlier in the month (where does that time go, eh?).

Operating income was up 7 per cent for the half to $10,230 million.

Statutory profit attributable to shareholders was up by 3 per cent to $3,506 million, while the preferred cash profit measure was up by 5 per cent to $3,676 million.

The reconciliation of 1H14 to 1H15 cash profit by division revealed solid growth in both Australia - where profits were up by 8 per cent - and New Zealand.

ANZ declared a fully franked dividend of 86 cents per share. 

We may well be entering a period of "slower growth", particularly for banks, yet reported return on equity (ROE) still came in at a tub-thumping 14.7 per cent.

Credit quality and provisioning

Provisions charges were down 3 per cent or $510 million for the half.

Overall asset quality was reported as having improved compared to the March 2014 half, with gross impaired assets down $912 million or a material 25 per cent to $2,708 million as at Q1 2015. 

Total credit impairment provisions were $4,028 million as at Q1 2015, with a reported decrease of $285 million (7 per cent) compared to the prior comparative period.

This reduction was driven primarily by individual provisions from an improvement in portfolio credit quality. 

The total credit impairment charge of $510 million decreased by $18 million or 3 per cent compared to the March 2014 half.

Slower growth environment

ANZ acknowledges a likely outlook of slower growth ahead, but expects low interest rates to support a benign credit quality environment, despite the possibility of external shocks.

With curbs on lending expected and increased capital requirements, ROE looks likely to slow, and we might expect to see the market pricing in lower growth rates in due course.

Indeed, this has already been happening in the sector to some extent.

The bank has a market cap of around $89 billion at these prices.

Sydney stock on market free-fallin'...

Supply and demand

It sounds overtly simplistic, but one of the major reasons that Sydney dwelling prices are rising and will continue to do so for the foreseeable future is that...well, there are more buyers than sellers.

Obvious really, innit?

It's a point I touched on briefly in my article here on Business Insider, which, by the way, is still the #1 trending article over at "BI".

Kindly please feel free to click on the link yourself...

Sydney stock droops further

Cameron Kusher of CoreLogic-RP Data tweeted his latest stock listings figures this morning.

It will come as no surprise to anyone who is active or looking to buy in the Sydney market right now to hear that stock on market has plummeted.

Total listings in Sydney declined to just 17,097, an enormous 22.3 per cent year-on-year decline.

No wonder everything priced at $1.5 million or under is selling so fast with there being so little stock on the market.

On the other hand, stock levels are rising sharply in Perth and Darwin, where the polar opposite dynamic is unfolding.

Market share of stock

As a share of total capital city listings Sydney stock has withered to a paltry 17 per cent share.


Compare this with the level of mortgages written as I have shown in my chart packs here previously, whereby New South Wales has consistently accounted for an enormous share of the market by volume over the past year.

In March 2015 more than 35 per cent of owner-occupier mortgages by volume ($6.5 billion) were written in the Premier State.

Meanwhile the $5.9 billion of investor loans was all but double the level of any other state, with Victoria's $2.97 billion paling into insignificance by comparison.

Sydneysiders - pretty please. with sugar on top - we need more listings.


The most interesting releases this week will be the preliminary Construction Work Done figures for Q1 2015, and the all important capex release for the same period.

Stay 'chooned'...

Super passes $2 trillion

$2 trillion and beyond

APRA released its superannuation data for the March 2015 quarter, which showed total assets sailing past $2 trillion.

This equated to an increase of 14.3 per cent on the March 2014 figure with total assets boosted by both contributions and returns.

Rise of SMSFs continues

The number of self managed super funds (SMSFs) continued to rise over the past year from 525,410 to 550,706, with total self-managed assets under assets continuing to snowball from $539.5 billion to $594.8 billion.

That said, as a share of the $2.09 trillion of total assets, SMSF assets slipped back a notch.

Meanwhile two of the major banks have banned lending to SMSFs for residential property, which may in turn impact that sector of the market.

The annual rate of return for entities with more than four members was a healthy 13.0 per cent, as compared to a give year average rate of return of 8.0 per cent.

Asset splits

Of the $1.35 trillion invested via entities with more than four members, 52 per cent was invested in equities (split as follows: 24 per cent Australian listed equities, 22 per cent international equities, 5 per cent unlisted equities).

Fixed income and cash accounted for 19 per cent, cash 13 per cent, and property and infrastructure 12 per cent of assets respectively.

The remaining 4 per cent was parked in other assets, such as hedge funds and commodities. 

Sunday, 24 May 2015

The United Colors of Meriton

Approvals record highs

Troublingly, the supply of available shovel-ready land for residential usage in Greater Sydney has plummeted to almost zero,

Consequently, the detached house building upturn is set to peak at miserably low levels for a capital city the size of Sydney.

On the other hand, with financing costs falling to record lows and dwelling prices rising, a good deal of formerly industrial land which has been rezoned for apartment construction is now seeing multi-unit buildings sprouting up all over the show, like urban wastelands sprinkled with "Grow More".

This property cycle is unique in Australian history - for the first time it is being totally dominated by multi-level unit construction, and not only in Sydney.

Unarrested development

In short there is a huge amount of construction underway in Sydney at the present time. OK, so I can post charts until I'm blue in the face (sometimes I do, it's not pleasant), but what does this apartment boom actually look like?

I took the ol' camera out and about over the weekend and captured a few images, just for you, lucky blog readers.

It had been projected that there would be in the region of 25,000 new inner city units constructed in Sydney through the five years to 2018 with the inner south region leading the way.

Zetland, Green Square, Mascot, Chippendale, Waterloo and Rosebery are all set to feature prominently. Indeed, they are already (I previously took a squiz around Mascot Square here).

Let's look at a some more of the hubbub. 

"Zeta" at Rosebery by Meriton is now well underway...

Rosebery is another major hotspot for new apartments.

And how! 

I worked as a courier around this area way back in the 1990s in my backpacking years (longer ago than I care to mention) - back then, the notion that the region could be a major player in the residential space was utterly inconceivable!

Yet, lookie here...

And how's about this little nugget from Meriton? A glimpse into the future of Sydney...

And below, Zetland.

Not exactly the most "pumping" of locations, it must be said, but in reality these newer suburbs rarely are until they are more established with entertainment precincts. 

Perhaps everyone was just at the Supa Centa, I can't say for sure!

And Moore Park, looking suspiciously like the "Ordos of New South Wales".

Maybe it's busier during the week, to be fair. Cough.

I think that'll do for today.

Lend Lease (LLC) and Mirvac (MGR) are also merrily in on the act, with this unprecedanted apartment construction cycle expected to be wrapped up in full by 2018. 

Suffice to say there is lots and lots of this going on. 

There is also a fair amount of commercial construction and renovation taking place across inner Sydney, perhaps to be the subject of another blog post soon.

Hey, ka-boom!