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Monday, 30 November 2015

Residex market update

Great Residex wrap as usual - read it here

Sydney median house prices were up by 1 per cent in October to be up by 21 per cent over the year to $1,058,500.

Sydney median unit prices were also up by 1 per cent in the month to be up by 15 per cent over the eyar to $684,500.

There has also been moderate growth over the past year for Brisbane houses (4 per cent) and units (3 per cent).

Interestingly Melbourne has now picked upp the pace, with house prices in the Victorian capital recording growth of 7 per cent in the last quarter alone to be 11 per cent higher over the year. 

On the other hand, some moderate declines were recorded in other cities and regions. 

Find out how your city or region is tracking here

Table 1 October Statistics Summary

In other news, there was a very strong result recorded for the Reserve Bank's Financial Aggregates.

More detail to follow...

Sunday, 29 November 2015

Forecasting myths


Slow Sunday arvo here, so been watching a few old golf videos. If you didn't know any better, watching old vids of Lee Trevino's swing with his awkward ducking head movement you might be disinclined to believe that he was anything more than a mediocre pro golfer, yet as a six time major championship winner he was one the sport's greatest ever competitors.

Echoing Newton's third law that every action has an equal and opposite reaction, Trevino understood that golf is a game of opposites: if you want to hit the ball up, then swing down hard, while if your club swing through the ball to the left the ball can fade or slice to the right, and so on.

"Supermex" himself was initially plagued with a chronic hook, which he in turn corrected to a fade with an open stance and an exaggerated out-to-in swing, in the process becoming a lethally effective iron player. 

Through recognising that golf is not a game of absolutes, but rather one of subtle opposites and dozens of nuanced actions and reactions, Trevino understood that the player with the "perfect swing" does not win and so set about building a swing that was repeatable and reliable, becoming one of the true champions. 

There will be good times and terrible times, you can hit amazing shots and awful shots, but with a repeatable plan, the "Merry Mex" was able to triumph - even with all that head movement!

Forecasting myths

Last week Reserve Bank Governor Stevens disclosed that he had discussed with his underlings whether the Reserve should do away with its apparently precise central growth, unemployment and inflation forecasts, in favour of publishing only their 'fan charts' and ranges in tables. 

By way of an example the November Statement on Monetary Policy (SOMP) forecasts showed GDP growth returning to 3 to 4 per cent by the year ended December 2017, with the unemployment rate forecast to decline gradually, but the fan charts show that even the 70 per cent confidence intervals are surprisingly wide. 

Noting that accurate forecasting is impossible, Stevens lamented that even if even if the central lines were to be left off the fan charts altogether, those awkward commentator folk would simply back it of the charts, which seems rather unfair.

In short, the most powerful central bank or econometric modelling can't forecast accurately what will happen over any meaningful time horizon, and neither can you!

Ponzi scheme

Also last week a macro market report hit the headlines likening the Australian property market to a Ponzi scheme. Australians would be forgiven for thinking that they've heard such warnings before, for the simple reason that they have, more or less continuously since 2001.

I haven't read the report in question, so am in no position to critique the content, but to his credit Lindsay David of LF Economics has previously made predictions that are specific, measurable and time-bound, and so his predictions can be judged accordingly. 

Co-author Philip Soos has nothing if not longevity, rolling out his crash predictions for such a long period of time that they are threatening to see off their fifth Prime Ministerial term of office (his views were expressed in some detail in the piece "Bubbling Over: The End of Australia's $2 Trillion Housing Party" which predicted a 40 per cent crash for housing values nationally). 

The last time anyone bothered to check the value of Australian dwelling stock had swelled to $5.8 trillion with the latest available data implying that $6 trillion is a shoo-in, probably before the end of the calendar year.

To be fair, on the one hand dwelling prices have indeed corrected sharply in any number of mining towns and regions: Gladstone, Port Hedland, South Hedland, Dysart, and Moranbah spring to mind, and no doubt there are plenty of others.

On the other hand figures released by Residex at the end of last week showed that Sydney's median house price has increased from $668,000 at the end of 2010 to $1,058,500 by the end of October 2015, an increase of more than 58 per cent or nearly $400,000.

Buried under the emotive rhetoric Soos has made a number of robust arguments, in particular the illusory nature of housing shortages, which are seemingly apparent when the economy is humming along, but can wondrously vanish into thin air when market downturns happen.

These simple points highlight the perennial challenges facing macro property market research reports and forecasts: market timing and granularity.


While macro research can identify downside risks and probabilities, history suggests that it is very difficult to forecast housing markets accurately over any meaningul time horizon.

Famously Case & Shiller called the US real estate bubble in July 2003 when its index read 142.99, yet the index ran all the way to 206.52 in July 2006 before reversing all the way back from whence it came to 134.07 in March 2012 (the latest Case-Shiller reading in 2015 showed the index to be 28 percent above the level it was tracking at the time of the original bubble call, while homeowners have continued to benefit from housing services throughout).

There would be similar tales in Northern Ireland where average house prices all but tripled from £88,000 to £226,000 between 2002 and 2007 before crashing all the way back to £125,000. An obvious bubble, sure, but the timing was difficult (if not impossible) to pick. The average price today has increased again to £162,000, approaching double the average house price in 2002.

In London we have heard crash predictions for at least the past decade-and-a-half, while despite downturns and recessions house prices in some boroughs have tripled...and still there has been no crash.

Few would disagree that parts of Australia's housing market are seriously expensive, but timing the downturns is rarely as easy as it appears in hindisght.


The state level data shows that since September 2011, New South Wales (+57 per cent) and Victoria (+23 per cent) have accounted for 80 per cent of the increase in the total value of dwelling stock, while the figures for the June 2015 quarter showed that prices are declining in Western Australia and the Northern Territory.

The obvious point here being that there is no "Australian property market", rather a series of sub-markets which cover 9.6 million dwellings and demonstrate very different characteristics and fundamentals.

Having observed the history of bubble predictions Scott Sumner once concluded that: 

"If we notice market movements that seem to align with our initial forecasts we tend to pat ourselves on the back and assume the forecasts were correct. This is one of many cognitive biases that human beings are prone to. Pay no attention to bubble forecasts. They are useless. Indeed the entire bubble concept is useless."

Risk markets

Last year Soos wrote that due to it having the strongest yields Darwin has the smallest property bubble, a theory which might hold some sway in an academic vacuum, but shows a worrying lack of understanding of the real world and what caused the Top End's housing boom in the first place. 

In fact, in my opinion at any rate, Darwin appears to be the capital city with by far the greatest risk of a genuine price crash, with rents now in freefall and vacancy rates rising sharply (cf. the illusory supply shortage identified by Soos himself). 

Thin property markets such as Darwin with a relatively small population are more prone to shifts in dynamics at the margin, and as population growth switches into reverse gear by the end of this calendar year the results to the downside could be spectacular. 

Other high risk markets include any number of regional areas with a residual resources capex footprint, with mining capex now collapsing, while parts of inner city Melbourne and Brisbane are suffering from overbuilding of new apartments, with APRA's lending crackdown set to leave many off-the-plan buyers short

Even within capital city markets there are sub-markets which can be expected to experience diverging fortunes. 

For example, with the population still expanding rapidly, Sydney has a number of inner city markets for which demand is so high that any correction in prices will be met by a wave of new buyers. On the other hand, price inflation in some of the outer western Sydney locations over the past few years has been so far beyond absurd that even a 40 per cent correction might represent a neutral scenario.

Auction results

This week's auction results represent the Sydney property market dichotomy quite well. Hot...


And not...

Most auctioned properties also passed in at Parramatta, Northmead, etc....

Saturday, 28 November 2015

Must-see articles of the week!

Summarised for your convenience here at Property Update (or click image).

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Friday, 27 November 2015

Highest UK net migration on record

Record immigration

The Office for National Statistics (ONS) released its Migration Statistics to June 2015, with preliminary estimates showing which estimated Long Term International Migration hitting a record inflow of 336,000. The figures for the year to March 2015 were revised up to 336,000 too.

The latest data represents a massive increase of 32 percent or 82,000 from the revised figures to June 2014. It's also a shocker for givernment targets, which aim to have immigration down to below 100,000 by 2020.

Why and where from?

There was an increase in the net migration both from the EU (+42,000 to +180,000) and from outside it (+36,000 to +201,000).

If you've been to Britain lately you won't be surprised to hear that there has been a huge lift in immigration from Eastern Europe, the latest figures showing 50,000 immigrants from Romania and Bulgaria alone in the year to June, 84 per cent of whom arrived for work-related reasons.

Indeed, according to the ONS most immigrants came to the UK for work-related reasons (294,000), with two thirds of those having a "definite job".

Where to?

While 336,000 might not sound like a catastrophically high number for net immigration, it needs to be remembered that unlike Australia, Britain is only a small place!

Moreover, Britain is already struggling with internal demographic shifts towards London and the South East of England, a chronic housing shortage in that part of the country, twinned with diabolical traffic congestion (do a Google image search for "M25" and you'll get the gist).

The net immigration figures alone don't provide much texture, but other data released by the government today tells you most of what you need to know about where immigration is focussed.

National Insurance numbers issued to overseas nationals in the year to September 2015 - a requirement for those seeking legal employment in Britain - showed that well over half a million allocations were issued for London (40 per cent), the South East (12 per cent) and the East of England (8 per cent).

By contrast Wales (2 per cent), the North East (1 per cent) and Northern Ireland (1 per cent) attracted very few allocations.

This is a challenge which is set to face Australia too in the decade ahead, with projections showing that net immigration will become even more focussed on four capital cities plus south-east Queensland.

As cities mature this dynamic can become self-sustaining as immigration creates the requirement for new infrastructure, retail outlets and dwellings, an in turn, more employment. Last year I wrote about Zipf's Law and the distribution of population across cities here.

The Tinkerman strikes again (circus)

None of the above will do much for the housing crisis in London and the South East, of course, but fear not, for the "Tinkerman" Osborne has got plans up his sleeve! Including these:

(1) Following on from the announcement of a buy-to-let tax grab earlier in 2015, the latest wheezes announced in the spending review include a 3 per cent SDLT hike for landlord purchasers (the UK doesn't have the word "rort", but it will probably need it after this, as owner-occupiers suddenly decide to consider becoming landlords immediately after settlement). 

While this will win applause from some sectors, the likely outcomes will be another punishing squeeze on London rents, and a surge of buyers rushing madly to "get in" before the April deadline. After April, there will then be a sharp decline in Buy-to-Let purchases, a reversal in the sector, and probably further rent rises;

(2) Osborne also announced plans to build 400,000 new homes, which is laudable, though there will be a 20 per cent discount on 200,000 starter homes for first time buyers under 40 (inflationary, and keeps new home prices artificially high);

(3) Restrictions on Help to Buy Shared Ownership will be removed effective April (oh yes, inflationary);

(4) Right to Buy extended to Housing Association tenants; and

(5) The Chancellor also announced a Help to Buy scheme for London in the Autumn spending review (in tandem with recent stamp duty tweaks, inflationary for the lower price brackets, particularly on new builds). This will be a new equity loan scheme which will allow buyers to borrow up to 40 per cent* of the value of London borough homes up the value of £600,000). 

Strewth, what a circus! Net result in my best estimate: yet higher house prices for London (particularly sub £600k), declines in the buy-to-let sector elsewhere, and probably rising rents.

*The previous Help to Buy rules allowed buyers to borrow 20 per cent of the home value, but loans for homes in London boroughs or the City of London will be "twice as generous" at 40 per cent, and will come with a five year interest free period. Should go well. Or not.


Thursday, 26 November 2015

Capex crunch

Capex crunch

Total new capital expenditure was crunched in the third quarter, declining by a seasonally adjusted 9.2 per cent to $31.4 billion to be 20 per cent lower over the year and well below the Q2 2012 peak of $42.6 billion.

Quarterly mining capital expenditure predictably bore the brunt of the fallout, declining to $15 billion, also way below its 2012 peak of $24 billion, although the end of the resources construction boom hits some associated industries too (e.g. transport).

Curiously enough on a rolling annual basis total new capital expenditure has increased in New South Wales (+6 per cent) and Victoria (+7 per cent). 

However, total annual capital expenditure in Queensland has halved since 2012 as major resources construction projects wind down, while activity in Western Australia is now following a similar trajectory.

Activity in the Northern Territory is being held aloft at historically high levels by the Ichthys LNG project.

The outlook

Is there anything positive at all to glean from these miserable looking numbers? Possibly. 

The first chart above suggests that the decline in capital expenditure could now be more than half way through its nosedive (if you can call that a positive), assuming that activity broadly declines to where it was before the beginning of the mining boom. 

Secondly, there was a decent lift in the expected capital expenditure figures for other selected industries to $56 billion which meant that the "Estimate 4" total expected capex figure increased by 4 per cent to $120.4 billion.

The Estimate 4 figure was towards the more positive end of the range anticipated by the market.

The limited scope of this survey does overstate the impact of mining  - and understate the importance of other industries - and there is some sign of confidence and investment plans improving even if this still represents a 21 per cent decline from the equivalent estimate in the prior year.

Given that this is a survey relating to the third quarter, there is also some potential for a "Turnbull bounce" in confidence to improve expected investment in the next quarter's survey.

There is not much positive to say about the outlook for mining investment, though, with the Estimate 4 figure crashing by more than 34 per cent over the past year.

So while the Australian economy may not be technically in recession, it will no doubt already be feeling like one in many resources regions, with further declines to come unfortunately. 

US growth revised up


The US Bureau of Economic Analysis reported in its "more complete" estimate that the US economy grew at a healthier pace in the third quarter than had previously been reported. 

The estimate for GDP growth was revised to a 2.1 per cent pace from the 1.5 per cent advised previously.

That said, the accumulation of inventories is a factor which may temper expectations of growth for the remainder of the year. 

With business spending revised up and consumer spending solid enough this release adds to the ongoing debate, particularly as to whether this will give the US Federal Reserve the confidence to at last hike interest rates, perhaps as soon as next month. 

It's been a long recovery and a long time coming. 

With the unemployment rate falling to just 5 per cent the first rate hike is likely imminent. I recently looked at the latest US payrolls and unemployment data in a bit more detail here

Wednesday, 25 November 2015

Construction trends (off-the-plan mess)

Construction weakening

Total Construction Work Done in Australia has declined by 3.7 per cent over the past year in seasonally adjusted terms. Let's take a look in two short parts at what this actually means.

Part 1 - Total construction

Total construction work done in the third quarter of 2015 declined by -3.6 per cent to $49 billion on a seasonally adjusted basis. 

Despite a lift in residential building work done (+2.0 per cent), there was a decline in non-residential building (-1.9 per cent), and as widely expected engineering construction fell sharply (-7.3 per cent) to be -11.7 per cent lower over the year.

The green shaded area which records construction work done in chain volume measures terms shows that the unwinding of the resources construction boom has a way to run yet. 

Quarterly engineering construction work done has declined from a peak of $34 billion to around $25 billion, but given the weakness in commodity prices - and given that in the same quarter a decade ago activity was just $13 billion - the decline surely has a long way to go.

The decline in engineering construction this quarter was driven by an overdue reversal in Western Australia, and to a lesser extent a decline in Queensland, as mega-projects begin to wind down. 

Activity in the Northern Territory continues to track at a historically exceptionally high level of $2 billion, accounted for primarily by the massive Ichthys LNG project.

While non-residential building and major renovations have contributed little of significance to the rebalancing of the economy, new house building and "other residential" building (apartments, units, townhouses) have effectively done everything that could have been expected of them in response to low interest rates.

Total building work done of $24 billion represents a solid 6.4 per cent increase over the year, with no thanks to the non-residential sector.

These high level numbers should present an idea of some of the challenges facing the economy given that housing starts are projected to decline from pretty much now, while the decline in engineering construction may only be half way done. 

Even now I'm still not sure anyone really has a satisfactory answer for what is going to fill this gaping hole while commodity exports ramp up. Given the expansion of Australia's population the obvious answers should come under the heading of "infrastructure" but if there's a coherent plan for that being discussed anywhere I haven't heard of it.

Part 2 - Building work by state

Victoria has been the king of building work through this cycle, with New South Wales following in second place, these states being home to the two capital cities with the strongest dwelling price gains.

Indeed, Melbourne is a fine illustration of why it is important for market analysts to pay close heed to both demand and supply factors when forming their views. The Victorian capital has been building both houses and units like billy-o since 2010 - the source of a thousand crash predictions - yet vacancies and stock on market are both falling, and the market seems to be gathering momentum again.

While there has been a reasonable response from the house building sector since 2012, approvals data shows that this market is running out of puff for the cycle, and has probably all but peaked already.

On the other hand the "other residential" sector continues to surge to record heights (this has been visible in the largest cities to anyone with a working pair of eyes...always knew those gauges were dodgy!), the new high rise building boom being the defining dynamic of this market cycle.

Building work in this sector is at historical highs in Victoria, New South Wales, Queensland, and Western Australia, with over-building of high rise apartments evident in parts of Brisbane and Melbourne.

Risks apparent

If you've been following this blog for the last couple of years, you will appreciate that the systemic risks in the housing market are obviously apparent and buried within this final chart. Would-be market shorters should dig deeper here.

There have long been indicators of overbuilding in the high rise markets of inner city Melbourne and Brisbane, with a high proportion of new build sales being made offshore, especially to China.

The storm clouds were gathering for off-the-plan buyers well before APRA's intervention, but recent tightening measures to lending procedures could well be the factor which nails on the correction for this sector. 

How many buyers who put down trifling holding deposits will fail to settle if lenders demand a 20 per cent deposit prior to completion? Perhaps up to a third could be in trouble, and will be juggling personal finances as we speak. 

Could get messy. 

Who pays the interest?

Mortgage interest

When it comes to the question of who pays the mortgage interest, the answer is that New South Wales and Victoria do: well over half of the national interest payable in fact.

While this might seem surprising, in fact the share of interest paid by the largest two states has declined over the past two decades.

The reason for this has been the expansion of both the population and mortgage sizes in Queensland (its share of the mortgage interest pie increasing from 15 per cent to 19 per cent) and Western Australia (its share increasing from 9 to 13 per cent).

The changes elsewhere have been negligible when viewed from the national level.

Despite the Australian population having increased by well over 1 million persons (or about 4.7 per cent) over the past three years, total interest payable has declined by nearly 22 per cent thanks to the slashing of interest rates.

Boots on the ground

Property correction?

It seems that there is to be weekly property market opinion in the share market newsletters these days, the associated angst a possible indication that dollars which might otherwise have been invested in the stock market have been worming their way into Aussie property in recent years. 

It is true that there have been some stinking recommendations in the property advisory space over time, often in the hapless guise of mining towns and some off-the-plan developments, and of course these are mentioned with regularity.

Yet in contradiction to reports of a property market slowdown in 2016, I've heard scuttlebutt from more than one source that major lenders are being inundated with mortgage applications this month, with processing times and backlogs reportedly piling up to to 3-4 times their normal level.

Refinancing will doubtless account for a good deal of this activity following the recent tightening of mortgage rates, but the real question will prove to be: how much?

Let us not forget that stock tipping newsletters have picked more than their fair share of howlers. I won't list them all (doing so would probably crash the internet, and anyway, I don't have the bandwith), but here are a few standout belters.

Oil and gas company Senex Energy (SXY) may have a sexy stock code, but there's been nowt sexy about the share price, last traded at 15.5 cents having absolutely capitulated over the past year or three.

And here is the chart for department store group Myer (MYR), last traded at $1.065 having floated at an IPO price of $4.10, which even at the time at the back end 2009 looked far too inflated a multiple of earnings. Summarily, a calamity.

Meanwhile regenerative medicine company Mesoblast (MSB) got blasted itself last week following a disastrous listing on the NASDAQ which saw the price crash yet again by another 50 per cent or so from $3.41 to a last traded at price of $1.58. Another catastrophic loss.

This has been merely an hors d'oeuvre, and of course there have been countless others (and I must confess it wouldn't kill me if I never read another bottom-picking article on the subject of whether or not to buy Fortescue Metals).

Speculating a small amount of your money on individual stocks can be fine, of course, and sometimes even quite good fun, but putting too much weight on flighty stock tips is not a plan for becoming wealthy over the long term (particularly stock picks for which no special insights are provided into the companies being promoted).

Strategy is important 

My graphic below charts the simple arithmetic of portfolio losses and shows that a 50 per cent drawdown requires a stock to recover and then increase by 100 per cent in order to get back to break even, while a stock which declines in value by 90 per cent ain't never coming back (technically it could happen, but it would need to increase by 900 per cent in order to do so).

This basic principle of investing is where Warren Buffett's famous "Rule #1: Never lose money!" hailed from. Buffett's Rule #2 is to "See Rule #1", for once you lose a substantial percentage of your money, it becomes proportionately more difficult to make it back.

Supermarket sweep (the institutional imperative)

Some years ago my mate Andy's cousin Dave went to live in Amsterdam, and upon his subsequent return to the UK went through the usual drill of identifying what had changed in his absence (in short, thousands more migrants from eastern Europe, and a glut of Tesco supermarkets). Dave noted in passing that Tesco and other retailers appeared to have flooded the country with superstores, convenience stores and mini-marts, which would end in tears. 

Famously Warren Buffett's Berkshire Hathaway had made a £1.5 billion investment in Tesco, but by his own admission "dawdling and thumb sucking" instead of exiting the investment following a series of profit warnings resulted in a drastic loss of US$444 miilion, one of the biggest losses in Berkshire's history.

Now I am certainly not claiming here that my mate Andy's cousin Dave is smarter than Warren Buffett. That would admittedly be drawing a rather long bow, and in fact most people I know who have gone to reside in Amsterdam have returned with suspiciously slower neural pathways plus an inconvenient nicotine addiction. 

Yet arguably simply by having "boots on the ground" perhaps Dave did have an insight into Tesco's core market that analysts at Berkshire did not? Or is this narrative simply an illusion, another classic case of hindsight bias?

No doubt the key operational metrics and ratios looked outstanding on paper for an investment in Tesco - the financials clearly stacked up very nicely for growth - but it transpired that the institutional imperative had ultimately led to a wave of accounting scandals (the collection noun for accounting scandals always being "wave", of course) that had overstated profits.

It was subsequently revealed that internal control and audit failures had failed to uncover dubiously aggressive accounting entries. Tesco, Sainsbury's and Morrison also saw their share prices getting smoked in 2014.

This does beg the question that if the world's greatest ever investor is capable of making fundamental investment errors (both on entry and exit) of this magnitude, perhaps lesser mortals giving stock tips are too. 

Boots on the ground

Not dissimilarly, in the imperfect real estate market successful property investment requires intimate local knowledge, and not only a review of whether a property stacks up "on paper".

Most property agents are genuine experts in their local area, and the switched on operators with their ears to the ground will generally also have a solid understanding of development approvals in the locality and the supply pipeline. 

It is probably fair to say that only a relatively narrow echelon of the best advisers also have a tight handle on what is happening in the wider economy (let's face it, for many in the property space "macro" might as well be a reference to the local grocery store).

Indeed the fate of mining regions represents perhaps the definitive example of why an understanding of both macro and micro market factors can be so important. If you undertake an internet search for "2012 property hotspots" you will find a long list of recommendations for investment in mining towns and regions, with implied expectations of both double digit yields and pretty much exponential price growth.

Yet commodity prices "never always go up" - sooner or later either supply ramps up in response or demand slows, and if heaven forbid both happen together...well, all bets are off!


The ABS reported today an estimated 32 per cent improvement in Australia's trade deficit in the third quarter. with the seaonally adjusted trade deficit of $7,438 million a moderately favourable revision to the monthly numbers reported (which I looked at in detail here, and specifically exports here). The trade deficit for the second quarter was revised out to a wild $10,946 million).

This implies that GDP growth in the third quarter may benefit from a chunky +1.3ppts contribution from net exports, and could in turn see a solid headline result. I do wonder if GDP growth for the second quarter might be revised down to zilch, though.

Today the ABS will release its latest Construction Work Done figures which we can expect to show a decline in Engineering Construction. 

It will also be interesting to see how the contribution to the economy from the residential construction boom is shaping up, particularly at the state level.

The latest report from the Housing Industry Association (HIA) projected that total housing starts will begin to decline to 200,000 for FY2015/16, to 173,500 in FY2016/17 and then 165,000 in 2017/18. Renovations on the other hand are expected to increase. 

Tuesday, 24 November 2015

Land values

Land values rise

Residential land values soared by more than $1 trillion dollars in Australia over the three years to June, and by more than half a trillion dollars (+15 per cent) in the last year alone. 

Since 1989 the total value of land in Australia has surged by well over $4 trillion, with residential use accounting for nearly $3.5 trillion or more than 85 per cent of the increase.

Since dwelling prices over the long run are ultimately a derivative of the land value which sits underneath, I always recommend capital city properties as those with the greatest potential for price growth.

Particularly I look at those located within easy commuting distance of the Central Business District and with a high percentage land value content, which typically means steering well clear of high rise tower blocks.

Since 2012, the biggest paper gains for property speculators have been seen in Sydney, with the total value of residential land in New South Wales spiralling by more than 53 per cent in just three financial years. 

Victoria has also seen land values increase by 35 per cent over the same time period, with broadly similar gains in land values across the next three most populous states in the 20 -22 per cent range.

Of course, population growth accounts for some of the increase in residential land values, and so too does the prosperity of the local economy, the lower cost of capital, and the relative scarcity or availability of the land in question. 

Monday, 23 November 2015

Alley-oop QLD

The strength of the New South Wales economy has been well documented in recent times.

ANZ's Stateometer which covers 16 economic indicators shows that NSW has hit a record level on its index, with the economy sitting in the top right corner of the top right quadrant, being both above trend and accelerating. 

ANZ notes that the big improver among the states has been Queensland, with a solid lift in employment conditions driven by the services sector.

Link here.

Open Sesame?

Alibaba & the 4,000 rural villages

Not sure you can even call "China might doing OK" a counter-contrarian viewpoint these days since pretty much everyone is seemingly on board with China's economy being in a worse state than reported meme.

Certainly most media has been consistently predicting slower consumption growth for the Chinese economy of late.

In this context I thought it would be interesting to take a look at the Chinese e-commerce company Alibaba Group's latest actual quarterly earnings, and here they are for Q3 2015:

If group financials are not your thing - and who could blame you for that? - here's what they mean.

Alibaba's key operational metric Gross Merchandise Volume (GMV) - meaning the total gross value of goods transacted across its platforms - increased in the third quarter to RMB713 billion, which at an exchange rate of 6.3356 equates to a quarterly GMV of US$112 billion, for a 28 per cent increase year-on-year. 

By the way, that's an annual figure of around US$450 billion!

This was a stronger result than had been expected, but it is worth noting that the prior corresponding period (Q3 2014) figures showed year-on-year growth of a whopping 48.7 per cent.

As for revenue, these figures were also better than expected at RMB22.171 billion (US$3.488 billion) for a year-on-year increase of 32 per cent.

Those are the key metrics in numbers, but if pictures are more your thing, here are the pictures...

Diluted Earnings per Share (Non-GAAP) increased by an impressive 30 per cent year-on-year, while a strong free cash flow of US$2.1 billion was generated for the third quarter.

Alibaba reported that it expanded the presence of its ecosystem from cities into an additional 4,000 rural villages in the September quarter alone. 

Since last year's IPO the share price has increased from its listing price of $68 to around $80, although this is well below the post-float euphoric peak of $119.

Now granted, Alibaba's continued growth may not be representative of all consumer activity, and clearly China is not home to a magic carpet economy where a genie can grant a company such as Alibaba 50 per cent annual revenue growth in perpetuity (no wait...that was Aladdin's Lamp).

Whatever, where reported quarterly revenues are showing year-on-year growth of 32 per cent to US$3.5 billion, could it just be that the Chinese consumer and his smartphone are having a happier time of it than many would have you believe?

Turnbull bounce...for real? (Capex)

All very interesting, of course, but the real excitement this week lies closer to home in the quarterly capital expenditure figures for the third quarter, which are due to be released on Thursday.

The June 2015 data (which I looked at in more detail here) showed that actual new capital expenditure had declined by more than 10 per cent year-on-year. 

After a catastophic Estimate 2 for 2015/16 capital expenditure, Estimate 3 improved by around 10 per cent to just shy of $115 billion, but even this "upbeat" result estimate represented a huge decline of more than 23 per cent from the Estimate 3 for 2014/15 (with estimated mining investment down horribly by more than 37 per cent! And people were recommending property in mining regions...ouch).

Again, a picture tells a better story here, and particularly the gaping hole that a similar result could potentially leave in the Aussie economy over the next year.

Since the result last quarter we have a new Prime Minister (as is generally the way in Australia these days) and unlike the last PM this one is said to be inspiring confidence in consumers, while business conditions are also now alleged in some parts to be above their long term average.

Will this be reflected in the updated capex estimates for 2015/16, or is the economy doomed to the fate of further interest rate cuts next year? 

Given that we know for certain that mining investment is going down the gurgler, and manufacturing isn't big enough to make much of a difference at the national level, a decent result for "Other Selected Industries" would see the Estimate 4 for the 2016 financial year increasing to above $120 billion, while a "bullish" result would be in the region of ~$125 billion. 

This will be a hugely significant survey for Mr. Turnbull and the Australian economy. Don't miss it!


The Sydney auction market is crumbling apace in the outer western suburbs, where recent investors must be sweating bullets in response to some of the numbers being reported (or perhaps not being reported might be more accurate). 

At the other end of the scale there was a ripping preliminary auction clearance rate of 82.6 per cent for the Eastern Suburbs (CoreLogic-RP Data).

Sunday, 22 November 2015

How much money is there?

Multiplying like rabbits

One of the occupational hazards of middle age is that from the mouths of babes can spout seemingly simple questions which are devilishly difficult to answer. 

This troublesome issue was highlighted in a wittily observed Bigpond advert a decade or so ago, in which a hapless father answers to his curious son that the Great Wall of China was built by "Emperor Nasi keep the rabbits out."

The difficulty in answering an apparently straightforward question such as "how much money is there?" is twofold. Firstly, this is because the answer depends on what you mean by "money". And secondly since the money supply is a moving target, by the time you have scraped together a coherent answer more money will inevitably have been created. 

How much money is there?

For those of us with bank accounts today, generally we don't come in to direct physical contact with most of our money. Instead, we just see a number on a screen which changes daily.

The latest figures from the Reserve Bank of Australia (RBA) showed that the total there is more than $65 billion of currency and $250 billion of current deposits - for a total of just over $315 billion which is represented by the green line in the chart below and known as the "M1" measure of the money supply in circulation.

It's an arresting thought that in the years since I was born there is more than 30 times more M1 money knocking around in Australian circulation.

Of course, as the above chart shows, the green line is only a small and increasingly insignificant part of the money supply, partly because today most of us use alternative forms of payment, including credit cards and EFTPOS.

The red line in the chart above (known as "M3") - which includes term deposits, certificates of deposit, and various other deposits from building societies and credit unions with banks - totals well over $1.8 trillion, the dollar value of M3 money in circulation having increased by more than 45 times over the same time period.

Adding the green shaded areas in the graphic above (currency and current deposits, or "M1") to the blue shaded areas (the aforementioned other deposits) gets us to "M3", while there is a broader measure of money still, which funnily enough is known as "broad money" - it includes certain other borrowings denoted by the red shaded area.

All up the money supply comprises $1.83 trillion of broad money in circulation.

Boiling frogs

One thing that we all learn in childhood is that if something that a lot of people want is scarce, then it tends to go up in value. Unfortunately, however, the supply of money has been anything but scarce. 

While 6.3 per cent growth in M3 money over the past 12 months (following on from 8 per cent in the preceding year) may not sound like all that much, due to the power of compounding these cumulative increases in the money supply have snowballed into an enormous expansion.

This, of course, is why folk have tended not to leave large sums of money in their bank accounts earning low returns for too long, and often instead aim to invest in inflation-busting businesses, "hard assets" with intrinsic value such as gold and silver, or well-located residential property with a high land value component. 

Over time we expect the price of quality assets in high demand to appreciate, while the value of any associated debt is surprisngly quickly inflated away. Only one decade ago the broadest monetary aggregate ("broad money") showed $784 billion of money supply in circulation, an amount which has comfortably doubled and then some to $1.83 trillion today.

Summarily there is well over double the amount of money chasing a limited supply of desirable assets. These figures are in themselves powerful enough, but in truth even the money supply in circulation represents only one part of the tale.

Credit where it's due

The other part of the story is that of "credit", being loans, advances and bills discounted to the private sector (but excluding loans made to other financial intermediaries).

Note in the chart below the massive surge in credit growth following the deregulation of the financial system in 1983 which lasted all the way through until the early 1990s "recession we had to have".

While there is not necessarily a link between the expansion of the broad money supply and growth in credit, the data over the long run suggests that a relationship between the two clearly exists, albeit a complex one.

As explained by a Bank of England research paper last year, the way in which most money is created in a modern economy is through banks making loans. When a bank creates a loan, it also creates a deposit in the borrower's bank account (and in turn it follows that if a bank lends me money to buy your house, then that after the settlement you will have more money in the form of a deposit).

Thus, contrary to what you might intuitively expect, deposits are not created by households saving income, but by banks creating money through loans, although of course there is ultimately a speed limit as to how much banks can lend.

The above chart shows what has happened to the amount of "narrow credit" (a measure which excludes securitisations) sloshing around Australia since 1976, which is to say that it has expanded at an even more furious pace from $36 billion to nearly $2.4 trillion, thereby increasing by an astonishing factor of more than 66 times. 

While back in the year I was born housing accounted for only 24 per cent of ourstanding credit (refer to the red shaded areas in the chart below), today that figure has expanded to 61 per cent, with housing credit growth continuing to outpace the growth in lending to businesses.

There are a number of identifiable reasons for this trend, but probably the most significant of these is simply that banks love to lend against housing - for even if you default on a mortgage you cannot easily take the house with you, and in any case the land that it sits on isn't going anywhere.

There have been many predictions of falling house prices over the last decade, but a bet against housing has essentially been a bet against the above chart, which shows that over the past ten years the stock of outstanding housing credit has more than doubled, from approximately $700 billion to $1.5 trillion.

Of course, the price of all residential property has not increased as a result of this flood of credit. There is no scarcity of land in many mining regions, for example, and the demand for it has been declining in recent years, resulting in spectacularly crashing prices in many cases. Outer suburban Sydney property is now correcting sharply in some instances due to similar dynamics.

It would be true to say, however, that suburban land values in capital cites have generally been increasing strongly over time.

The outlook for credit growth

Onthe subject of speed limits, the regulatory body APRA recently decreed that it would like to see lenders growing their investor mortgage books at a pace of no faster than 10 per cent per annum, and for this reason we can expect to see banks instead pushing products in their largest and most profitable market sector, being owner-occupier housing credit.

The private sector credit figures arguably represent one of the more significant indicators of what is happening in the domestic economy, and for this reason I analyse the data on this blog at the end of each calendar month. 

As I looked at in more detail here at the end of last month the series showed that while commodity prices may be tanking over the year to September annual business credit growth moved up to a 79 month high of 6.3 per cent, while housing credit growth had also accelerated to a 60 month high of 7.5 per cent.

Now sure, 7.5 per cent is certainly a lower level of growth for housing credit than we have seen in cycles past - mainly because we are starting from a higher base - yet if sustained it would be enough to more than double the stock of outstanding housing credit to beyond $3 trillion within the next decade, which is food for thought (gulp).

Whether or not banks can continue to expand owner-occupier credit growth will be one of the key housing market narratives to watch over through 2016. I'll analyse all the key figures here, of course. 

Saturday, 21 November 2015

Must-see blogs of the week

Summarised here by Michael Yardney at Property Update (or click image).

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Friday, 20 November 2015

UK property surge

UK property update

There are a range of different indices and reports relating to UK property these days - and the latest indicate a property price increase in 2016, with some forecasters anticipating that prices will rise until 2020.

Firstly, Rightmove's Asking Prices Index, which is not seasonally adjusted, recorded its smallest November decline since 2011, which "sets the scene for higher prices in 2016", recording a year-on-year increase of +6.2 per cent (London +8.1 per cent, East of England +10.4 per cent, South East +7.2 per cent).

The latest Office for National Statistics index, widely considered to be the most reliable, showed the average UK house price rising to a new high, being up by +6.1 per cent over the year to September.

London prices increased to a new high of £531,000. 

Meanwhile the Hometrack 20 Capital Cities Index showed annual price gains moving up to +9.4 per cent and set to reach 10 per cent by year end. 

While there has been a recent acceleration from a low base in large regional cities such as Glasgow, Edinburgh, Liverpool and Manchester, as anticipated here the strongest gains since the 2007 peak have been seen in Cambridge (+44.7 per cent) and London (+44.4 per cent). 

Regional cities have lagged the capital city London (plus its Cambridge and Oxford satellites) by a wide margin. 

Many of these indices are backward-looking, but the latest mortgage approvals data have pointed the strongest mortgage demand since 2008, with volumes up by 19 per cent over the past year. 

With consumer price inflation nowhere to be seen and interest rates stuck at the effective zero lower bound further price gains are forecast.