Pete Wargent blogspot


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Sunday, 31 January 2016

Brighter days ahead for Queensland

Growth below trend

Another interesting article was written by the doyen of economic commentary Ross Gittins this weekend, in which he points out that the economy will look better once mining investment stops falling. 

The reversion in resources capital investment has long been flagged as a major downside risk for the Australian economy, or even as some kind of economic Armageddon.

As looked at in more detail here, engineering construction activity had declined by about 10 per cent in the year to September 2015 to a quarterly value of around $25.4 billion, which is now some 24 per cent down from the peak of $33.6 billion.

Yet as highlighted by Gittins, despite this ongoing contraction the economy managed to grind out GDP growth of 2.5 per cent, helped by net exports and an increase in dwelling construction. Indeed, the non-mining economy grew by about 3 per cent.

I took a more detailed look at the components of GDP growth (and the troublesome decline in the terms of trade) over the year to September 2015 here.

Mining investment won't fall forever

The good news noted by Gittins is that resources investment cannot continue to decline forever, and sooner or later the nadir will be reached.

The latest available figures showed that the decline was reasonably well advanced by September 2015, although activity still remained well above its "normal" level, particularly in Western Australia and the Northern Territory.

As you can see in the chart above the good news for Queensland is that much of the decline had already taken place by September, with quarterly engineering construction activity declining by 42 per cent year-on-year to just $4.9 billion. 

This was a substantial 57 per cent below the September 2013 quarterly peak, when engineering construction activity hit a state record $11.5 billion. 

The September 2015 National Accounts showed state final demand (a measure of activity which excludes exports) in Queensland of -0.2 per cent marking a fifth consecutive quarterly decline for the Sunshine State, driven by an ongoing weakness in private gross fixed capital formation (declining non-dwelling construction) as large scale resources projects approached their completion.

This was a significant improvement on the -1.3 per cent decline in Queensland state final demand in the June 2015 quarter, and hearteningly the largest part of the decline in engineering construction activity is now in the rear view mirror.

A great challenge for Western Australia (where quarterly engineering construction activity is still highly elevated at $10.3 billion) and the Northern Territory (miles above historic norms at $2 billion, due to the massive Inpex Ichthys LNG project), however, is that the great bulk of the decline in construction activity has yet to take place. 

Trade balance improving

It is worth noting that decline in resources construction is not in itself a bad thing: after all the whole point of constructing mining and resources projects is that they will eventually produce commodity exports (reductio ad absurdum if a decline in construction is a 'bad thing', we should never have partaken in a mining boom in the first instance).

A look at the latest International Trade figures shows that over the past three months Queensland has produced a positive trade balance of $1.2 billion per month, after churning out several negative prints in 2014. 

With the Gladstone natural gas venture now kicking into gear and the first shipments underway, GLNG exports will begin to make a welcome positive contribution in 2016, question marks over commodity price action notwithstanding.

The wrap

The figures show that the decline in mining investment still has a way to run, but eventually the downturn will be complete and the remainder of the economy will enjoy rising commodity exports.

The biggest unknown factor is what will happen to commodity prices over the years ahead.

Queensland's economy has been through a rough trot since 2013 as resources investment has nosedived, knocking it down to sixth spot in the state rankings.

However, things should begin to pick up in time, and although population growth from net overseas migration has slowed, Queensland will be one of only two states (the other being Victoria) to benefit from net interstate migration, particularly as more Sydneysiders opt to make the journey north. 

But if doom and gloom is your thing, fear not, for there will always be someone doing something stupid somewhere in the world, and in turn there will be something new to worry about: oil prices, China's property bubble, a Cyprus default, weapons in North Korea, the Ebola virus...


The week ahead!

An exciting week ahead! 

The Reserve Bank of Australia (RBA) will leave interest rates on hold at 2 per cent on Tuesday afternoon (recall that it wasn't so very long ago that a rate cut by February was 100 per cent priced in). 

With the unemployment rate having declined from 6.4 per cent to 5.8 per cent and employment having reportedly grown by +2.6 per cent in 2015, another interest rate cut does remain fully priced in, but not until the fourth quarter of 2016.

At the end of the week the RBA will also release its Statement on Monetary Policy (SOMP), within which it is expected that economic growth forecasts for 2015 will be revised up from 2.25 per cent to 2.5 per cent. 

Inflation forecasts on the other hand are likely to remain unchanged after this week's release showed that inflation is well under control. 

Also this week we will get the latest Building Approvals figures for December, which may show a bit of a bounce from last month's sharp drop, but we might expect to see the downtrend remaining in place.

Finally there will be the latest International Trade figures to look forward to - expect to see a another substantial deficit in December of perhaps more than $3 billion, with low iron ore prices the key driver - and recall there was a wild explosion in rural exports (legumes boom!) last month, which surely cannot be repeated in December.

The truth is still out there. Stay tuned, and have a great week! 

Friday, 29 January 2016

Total credit passes $2.5 trillion

Credit growth up in 2015

The Reserve Bank of Australia (RBA) released its Financial Aggregates for December 2015 today, which revealed credit growth picking up steadily to +6.6 per cent by the end of 2015, from +5.8 per cent in 2014. 

The key points of note included that business credit growth improved to +6.3 per cent in calendar year 2015 (from +4.3 per cent in 2014), while total housing credit growth of +7.5 per cent was another solid increase (from +7.0 per cent in the prior year). 

Notably annual growth in credit for property investors has continued to soften from a peak of +11 per cent to just +8.5 per cent, which will please the market's prudential regulator APRA. 

Naturally banks and lenders have aimed to fill the void by ramping up lending to owner-occupiers, a sector which increased strongly again to a 63 month high of +6.8 per cent year-on-year.

Total year-on-year credit growth of +6.6 per cent slowed just a little into the end of 2015, largely as a consequence of the slowdown in property investor lending as lending criteria have been tightened.

Interestingly, although bank term deposits have understandably slowed in the prevailing low interest rate environment (declining by $19 billion in 2015), current and other bank deposits expanded very substantially through the year (+$123 billion), in aggregate leaving the banks few headaches in this regard.

Business confidence (mix-a-lot)

Business credit expanded by +0.5 per cent in December following a flat month in November, to be up by a "so-so" +6.3 per cent in 2015. 

This is a middling result for business credit reflecting the mixed economic outlook.

Arguably double digit hurdle rates for business cases and investment projects remain optimistically high in the prevailing low growth and low inflation environment.

Yet the CFO community might counter that perhaps hurdle rates need to remain this high in order to reflect elevated market risk. Swings and roundabouts. 

The credit growth figures suggest that business lending growth is in considerably better shape than was the case trhough the recession-like conditions of 2009, but nowhere near the levels of confidence seen in the heady pre-financial crisis days. 

Housing: "We are all owner-occupiers now"

Housing credit continues to grow at around +7.5 per cent, with the slowdown in investor lending by and large offset by a pick-up in lending to owner-occupiers, which should in turn lead to a more sustainable market going forward. 

The great surge in lending to investors had led to a surfeit of rental properties in some locations, and resultantly a softening rental market. 

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in the middle of last year, some borrowers rather conveniently opted to change the purpose of their existing loan (as one does!).

The net value of loan purpose switching from investor to owner-occupier was approximately $34 billion in the second half of the 2015 calendar year, of which $1.5 billion occurred in December.

The wrap

Overall, there have been some interesting sub-trends, but at the headline level total credit continues to grow at a wholesome clip, and indeed December 2015 was a landmark month with total credit surpassing $2.5 trillion for the first time.

I expect to see housing credit ease back a bit in 2016 as lenders struggle to fill the hole left by investors with bona fide owner-occupier home loans. There may also be some further tightening of mortgage rates. 

Accordingly the property types to mark down to underperform include the higher-density stock which is so specifically targeted at investors.

Prospective buyers in 2016 need to look at properties with actual scarcity value and genuinely strong owner-occupier appeal.

Residex market update

December market update

Residex released its December 2015 property market report here

The best performing property type in 2015 was houses in Sydney, which increased by +1.7 per cent in the fourth quarter to a median price of $1,065,500, for a huge increase of +18.4 per cent over the year.

Sydney unit prices increased by +1.7 per cent in the fourth quarter to be up by +13.5 per cent over the year.

Residex reported that over the two years of the current market cycle, the median house price in Sydney increased by +$375,000. 

Interestingly, Melbourne house prices recorded growth of +13 per cent in 2015, which was considerably stronger than many analysts expected. 

Brisbane houses (+3.4 per cent) and unit prices (+3.8 per cent) recorded solid growth, though Brisbane is a clear multi-speed market at the present time, with some examples of a disconnect between asking prices and what buyers are prepared to pay.

Mirvac and Stockland have reported more Sydney buyers are looking at apartments in Brisbane, while other developers note that up to 40 per cent of sales are going to Sydney buyers.

Perth house prices increased by +2.3 per cent in December, but were flat over 2015, while Perth unit prices were down by -4 per cent over the year. 

Capital City Summary

Despite these solid results, there can be little price that house prices have declined in western and outer-western Sydney towards the end of the year.

It's at this stage of the cycle where the wheat will be separated from the chaff, and those who paid thousands over reserve in outer and western Sydney suburbs could feel some pain in 2016.

On Monday data provider CoreLogic-RP Data will report that Sydney home values increased by +0.5 per cent in January.

Alibaba and the Q4 facts


There is a lot of conjecture about whether China's reported economic growth of +6.9 per cent is real or made up. Some like to argue that growth is nearer 2 or 3 per cent, as indeed is their right.

In that context, a quick look through Chinese e-commerce group Alibaba's latest quarterly results for December 2015. 

Being traded on the New York Stock Exchange (NYSE), the numbers should be somewhat less rubbery, if not exactly water tight.

Alibaba's key operating metric is Gross Merchandise Volume (GMV) which increased by +23 per cent over the year to a quarterly GMV of RMB964 billion (which, by the way, is a staggering US$149 billion).  

Annualise those numbers and the scale of the business is mind-blowing. Let's work with US dollar figures henceforth...

Summary financials 

Skipping along to the summary financials, quarterly revenue was up by +32 per cent year-on-year to US$5.3 billion, while mobile revenue soared by +192 per cent to US$2.9 billion.

Looking instead at the pretty pictures from the quarterly preso, the group had a milestone quarter with the number of annual active buyers blazing up to 407 million. Quarterly free cash flows of a monumental US$3.7 billion were generated.

Active buyers of 407 million were up from 334 million one year ago.

Revenue growth (+32 per cent), GMV (+23 per cent), "EBITDA" and net income all recorded impressive results.

The wrap

Solid numbers. The Chinese economy isn't slowing in the conventional sense - rather it is changing. 

The middle class is growing, and so is consumption. Looking at the growth and profile of buyers, some wealth and Alibaba's reach is evidently flowing outwards to rural areas and villages. 

Alibaba's share price has retraced since the beginning of 2015, as much a recognition that GMV growth could not continue at the same breakneck pace as anything else, and there are some evident and valid concerns about increasing scrutiny into counterfeit sales or "fakes". 

Alibaba has also flagged some potential for slowing sales in the market place, which will translate into a slightly lower share price. 

Overall, though, consumption is clearly growing in China, underscored by these financial results. 

Export prices tumbled in Q4

Commodities struggling

There has been some slightly more upbeat news for some commodities in recent days. 

The gold price is back up to US$1,115/oz, iron ore has ticked up a little to US$41.50/tonne, and perhaps most notably the oil price gained another +3.7 per cent overnight to sit back at US$33.47/barrel. 

Still no joy for base metals though, and the big picture for the last quarter was a continuation of the decline. 

Export prices tumble

The ABS released its International Trade prices data yesterday, which showed that import prices ticked down by -0.3 per cent in the final quarter of the year largely driven by cheaper petroleum, to be up by +2.4 per cent over the calendar year (from a reported +3.5 per cent in Q3).

Australia's major import items based upon contribution are road vehicles, petroleum, machinery & equipment, and telecommunications equipment. 

Export prices just kept sliding, down by another -5.4 per cent in the final quarter of the year to be -10.3 per cent lower over the year. 

The falls in the export price index over the fourth quarter were driven by declines in the prices of metal ores (-8.8 per cent), coal (-6.3 per cent), petroleum (-15.8 per cent), non-ferrous metals (-9.6 per cent), cereals (-9.1 per cent), meat (-4.9 per cent) and gas (-4.2 per cent).

Which is to say, more or less everything, and the annual figures tell a similar story.

Australia's main export items are iron ore, coal, gas, and gold, while meat has enjoyed a large uplift in the Asian export market in recent times. 

In short we may be selling things in ever greater volumes as the production phase of the mining boom ramps up, but the prices we are getting for them are coming back down to earth with a thud.

Thursday, 28 January 2016


Another 2.9 per cent gone for Shanghai stocks during today's trade, the index now being down by 46 per cent since the beginning of June last year. 

There has been some talk of Chinese authorities cracking down on capital outflows, but it will be a devilishly difficult job to stop the flood.

This is particularly so given that Chinese investors also fear a devaluation of the yuan, a natural trigger for capital flight. 

The increase in capital outflows from China has been beyond staggering.

In the first six months of 2014, around US $26 billion left China. Net capital outflows from China in 2015 topped a eye-watering US $1 trillion!

Noted Timothy Hobill Cole of GFIN Financial:

Indeed so, a bullish trend for at least certain Australian asset prices.

Rental growth slows

Rental growth slowing

Yesterday's Consumer Prices Index revealed some interesting trends in rental growth to December 2015.

At the national level rental growth of just +1.2 per cent is the slowest we have seen since 1995, which makes a good deal of sense given the great surge in the number of investors and the construction response to rising dwelling prices. 

Essentially this is the opposite of what happened in 1985 when investors exited the market following restrictive changes to tax legislation.

City by city

In most quality locations, rental growth is simply following the cycle, slowing in response to a surge in both construction and the number of investor-owned dwellings.

Annual rental growth remains positive in Sydney (+2.3 per cent), Melbourne (+1.7 per cent), Brisbane (+1.0 per cent), Adelaide (+1.2 per cent), and Hobart (+1.1 per cent).

It is a truism to say that there are diverging trends within those markets, particularly noteworthy being slowing rents in high density and high rise apartment complexes.  

Rental growth has turned negative in Perth and Darwin, following an enormous surge through the mining boom, while Canberra has actually recorded moderately negative rents for the past three years. 

Long run trends

It pays to be wary about analysis calling "plummeting" rental growth, but it is true that the rental market will generally need to slow in order that the high levels of investor stock can be absorbed. 

Eventually stronger rental price growth will return, but only once investor finance has pulled back, and the cycle does take time to work through. 

The long run data shows the cyclical nature of rental growth by capital city. 

Looking at rental growth by year it is clear that while rental price growth been strongest in Sydney over the past five years, over the past decade the resources states have seen the greatest increase in the cost of renting, some of which is now unwinding.

Wednesday, 27 January 2016

Inflation is well under control


There are usually a few different interpretations of the all-important inflation figures knocking around after the data is first released, and today's Consumer Price Index figures for the fourth quarter of 2015 proved to be no exception.

The headline result of 0.4 per cent inflation for the quarter was boosted by the ever-rising price of smokes (up by a wheezing +7.4 per cent following the September 1 tobacco excise sting), and came in slightly above market expectations of 0.3 per cent.

This took the annual headline inflation result to 1.7 per cent. Technically speaking, this may be higher annual inflation than the results we saw in the preceding few quarters, but headline inflation does remain well below the 2 to 3 per cent target range.

There was at least some jolly good news for consumers: the indices for wine (-2.2 per cent) and ladies shoes (-5.7 per cent) were down over the year, while fruit prices ticked down in the quarter too.

On the other hand there were notable increases in the cost of domestic and international holiday travel.

Core inflation under control

More crucially for monetary policy implications, the preferred core or underlying inflation figures came in at 0.5 per cent ("weighted median") and 0.6 per cent ("trimmed mean", which strips out volatile items) respectively, taking the annual results for these readings to 1.9 per cent and 2.1 per cent.

Thus the average of these underlying inflation results for the year to December was 2.0 per cent, at the bottom end of the target range.

Annual underlying inflation has slowed from 2.7 per cent in December 2013, to 2.3 per cent in December 2014, and now to just 2.0 per cent in December 2015. At the very least you can say that there are few strong inflationary pressures here.

Currency markets rather liked this outcome, a Goldilocks result if you will - not too low or any imminent risk of deflation, and not too high either, affording ample scope for further interest rate cuts if they are needed.

Some inflation has been imported

A key point of interest for me was that the non-tradables inflation component - which is a decent enough proxy for price pressures in the domestic economy - sagged to just 2.3 per cent. We have not seen a lower reading on this gauge since before the Sydney Olympics. 

As you can see in the chart below, annual inflation on tradables was up to 0.9 per cent for the year to December, in spite of cheaper petrol prices (there was a huge drop in the oil price last quarter, and petrol prices fell by -5.7 per cent), representing the flowing through impact of the lower Aussie dollar. 

With plenty of slack remaining in the labour force and wages growth subdued, at this juncture it seems pretty unlikely that there will be strong residual inflation after the currency impact has flowed through. 

The wrap

In summary, there does not seem to be great deal of inflationary pressure around, with core inflation just nicely tucked in at the bottom of the 2 to 3 per cent range.

This essentially leaves room for the Reserve Bank to cut interest rates again later in the year should it be deemed that the economy needs further help. For next week's meeting, at least, the cash rate appears certain to remain on hold at 2 per cent.

Finally, the charge is often levelled at me that I focus too much on macro trends instead of providing practical advice to readers.

If that is so, it's because I believe that there are only so many ways to say "spend less than you earn, and invest the difference in property, shares, and setting up your own business".

But, anyway, here are a few pointers for free:

Clearly with the declining dollar now may not be such a great time to be jetting off to Hawaii, so consider instead loading up on a tank of now-cheaper fuel and driving to the Sunshine Coast for a break this spring.

If you're a partial to a smoke, now is definitely a time to consider giving away the gaspers, with excise being levied relentlessly on the habit.

This doesn't all mean that you can't have some fun though: with the price of plonk falling by its largest percentage amount in 34 years and fruit prices also down, you could make yourself a thrifty fruit punch, perhaps even in some inexpensive stilettos, if that's your thing?

Finally, it may at last be a good time to lock in that root canal appointment you've been putting off, with dental services costs rising at their equal slowest rate in well over three decades.

Ads up again

Job advertisements improve

The latest data from the Department of Employment shows jobs vacancies up by +1.1 per cent in December and a solid +9.4 per cent over the calendar year 2015, to a seasonally adjusted 166,200.

In a short summary:

Between them New South Wales, Victoria, and Queensland accounted for some 81 per cent of the vacancies, which bodes well for imminent employment growth in those three most populous states.

The picture elsewhere is soft, with the internet vacancy index (IVI) showing vacancies down over the year in most other states and territories (and the ACT up on a small sample size).

In terms of sectors the biggest percentage gains in vacancies were for medical practitioners and nurses (+31.5 per cent), and transport & design professionals and architects (+24.1 per cent).

At the national level, then, a solid +9.4 per cent seasonally adjusted increase keeps things moving in the right direction, which is in keeping with Ross Gittins' view that the labour market will likely continue improving steadily in 2016, with the economy expected to have a decent year.

That said, the survey is still tracking some 46 per cent below previous peaks, so there is a long way for this recovery to run. 

NSW stamps surge past $1bn in December

Record stamps

December 2015 was another record month for stamp duty receipts in New South Wales, with $1.18 billion of transfer duty raised in a single month from 23,963 transactions.

The record monthly result comfortably eclipsed the previous record set of $796 million in stamp duty raised in September 2015.

The latest data released by the Office of State Revenue (OSR) revealed that the stamp duty revenue for December was an astonishing 65 per cent higher than the prior year equivalent figure.

Over the calendar year the New South Wales state government, raised a record $8.7 billion from stamp duty receipts, a huge revenue windfall for the state budget, and a 30 per cent increase from receipts in calendar year 2014. 

The New South Wales stamp duty bonanza was sparked by cuts in interest rates, leading to rising house prices and an increase in transaction levels, particularly from property investors.

Combined with asset sale proceeds (Transgrid) the Sydney property boom cycle is set to deliver a surplus, with stamp duty revenues collected totalling hundreds of millions of dollars above 2015-16 Budget forecasts. 

Sydney is forthwith set to benefit from the unleashing of a massive $70 billion infrastructure boom. 

Tuesday, 26 January 2016

Regional NSW turning a corner?


A point that I've looked at a few times on this blog post mining-boom has been the diverging fortunes of Sydney and regional New South Wales. 

Unemployment rates in some parts of the state have been rising, particularly in the coal mining regions, while in Greater Sydney unemployment rates have been declining.

But the December 2015 Detailed Labour Force figures, which I looked at in more detail here, confirmed that regional New South Wales is at last adding jobs again.

As a result, unemployment is now falling in the state's regional areas as well as in Sydney, which is lovely to see.


Monthly data at the regional level is volatile and not seasonally adjusted, but the highest unemployment rate reading seen in the Hunter Valley region was a concerning 12.8 per cent in March last year. 

The coal mining industry has been through a tough time as the commodity price has crashed.

However, more recent data suggests that the peak coule well now be in for unemployment in the region, while the Newcastle & Lake Macquarie region has also recorded an improvement. 

Double digit unemployment rates in the Hunter region have been enough to cause instances of declining rents and prices in towns such as Muswellbrook, Singleton, Maitland, Scone, and some others. 

The good news for the labour market in these locations is that the unemployment rate now appears to have stopped rising.

Sydney labour market leads nation

The voices calling for a significant Sydney property market correction seem to have grown increasingly shrill in recent times.

Certainly there have been reports of sentiment coming off and at last an easing rental market in some of the outer western and south-western suburbs.

I haven't been west of Glebe in years myself, tbh, so am only going on what I hear.

But in the suburbs we're interested in there has been little to report to date.

Unemployment rates have remained steadfastly low. In fact, if anything unemployment rates are tightening even further. 

Meanwhile mortgage arrears are at their lowest level on record, and mortgage buffers have moved comfortably to their highest ever level.

According to data reported by Rate City while mortgage rates for investors have been tightened somewhat following APRA's intervention, the average rate for owner-occupiers with a 20 per cent deposit has declined since June to just 4.35 per cent.  

At the end of the week the Reserve Bank will release its December credit data which will give a further idea of to what extent lending to owner-occupiers has been able to offset an inevitable decline in investor lending. 

Off again...

Here wo go again.

That's another 6.4 per cent down for Shanghai stocks to a 13 month low, as the market becomes more concerned about capital outflows.

It was the biggest daily decline seen since January 7, with sharp falls across all industry groups.

Not all that far left for the bubble to revert now, about another 25 per cent or so...

Australia Day


Welcome to the 16,209 newest Australians who took their citizenship pledge today on January 26.

The greatest number of new citizens were situated here in Queensland, where 4,312 new Australians were welcomed from 115 countries at some 76 different ceremonies across the state.

In total 16,209 new citizens were welcomed from 154 different countries at 391 citizenship ceremonies across Australia. 

Rosie Batty struck a chord as Australian of the Year through 2015 for her selfless determination, and delivered her valedictory speech yesterday. 

The new Australian of the Year was announced as former Army Chief David Morrison.

Happy Australia Day! 

Sunday, 24 January 2016

Inflation: ongoing softness expected

The week ahead

Australia Day breaks up the week ahead (woop!) but there are nevertheless a few potentially absorbing snippets of news for us all to look forward to. 

These include private sector credit to be reported at the end of the week by the Reserve Bank, with a moderate increase in lending expected and a market forecast of 0.6 per cent credit growth for the month of December.

There are also the fourth quarter GDP and employment cost figures from the US due out this week.

Perhaps more interestingly, domestically we will be furnished with the consumer price index (CPI) or inflation figures for the fourth quarter of 2015, which appear likely to present something of a mixed bag.

Inflation preview

While there have been some obvious cost of living increases which will contribute to inflation in December, happily overall price pressures are expected to remain relatively benign.

The cost of holidays both at home and overseas, the ever-rising price of tobacco (should be cut from the consumer price index, huh...), and the persisently rising cost of purchasing a house will all be inflationary contributors to the consumer price index for the fourth quarter of 2015.

Although the price of automotive fuel at the bowser has not fallen anything like as sharply as the price of a barrel of crude oil, lower fuel and transport costs will likely pull down the headline inflation figure to somewhere around just 0.3 per cent for the quarter.

Incidentally, the official line for why fuel prices have not fallen as quickly as the price of crude oil is a widening of the refining spread for Singapore oil (heh).

With housing rents declining in Perth, Darwin, and Canberra, and a proliferation of investors in the market through the past calendar year, nationally rental price growth will remain subdued.

All factors considered, a headline result of around 0.3 per cent would take the annual result to a most benign 1.6 per cent for the year, which is clearly well below the bottom of the target 2 to 3 per cent range.

This would also tie in relatively closely with what has been found by the most recent TD-MI inflation gauge, which was a 0.2 increase in December for a 1.7 per cent annual gain. 

If such a result is reported on Wednesday, then this points towards ample headroom for further easing in interest rates, if this was deemed to be required through 2016. 

That said, with the outliers effectively stripped out the core inflation result could prove to be anywhere up to 0.6 per cent for the quarter, with a possible downside risk to that figure.

This would still put the underlying readings at around 2.2 per cent year-on-year, which is towards the bottom half of the target range.

Those with variable rate mortgage debt should naturally hope for a soft inflation reading when the release is due out on Wednesday.

So, stay tuned for that, and remember to have a great week!

Cycles gonna cycle...

Doom and gloom!

Does it seem to you that there are an awful lot of doom and gloom articles around at the moment? It certainly seems so to me!

The reality is, if you want to find folk predicting an imminent apocalypse, then there will always be plenty on hand to provide that service for you....and I do mean, always! 

Indeed, in the internet age it is perfectly possible to find a daily newsfeed of misery, if that's the sort of thing which floats your boat.

It's all too easy to make relentlessly bearish prophecies as we have seen over the last dozen years or so, for if the calls don't come true then there is very little accountability, and the timescale simply gets pushed out for another year or three. 

The fact is that economies and markets move in cycles, so in that sense we actually are always heading for the next boom or the next bust, at some point in the future.

Timings are forever uncertain, but booms will always be followed by downturns (or even sharp corrections), which will always be followed by recoveries.

I have always believed that whether you invest in shares, property, small business, or all of the above, the trick is to find quality long term investments which can perform well for you through the cycles, and not to have all of your eggs in one basket.

That way you don't have to waste too much of your precious time listening to the media poobahs and soothsayers.

Nobody can see the future with any accuracy, but you can at least put the odds in your favour. 

Of course, we haven't had a recession in Australia for about a quarter of a century now. But as I'm British by birth, I do at least know a little bit about recessions and market downturns - they aren't much fun, but then they do offer opportunities too.

Indeed, Britain has just been through its darkest recession and associated property 'crash' in decades.

Hometrack shows London strength

The latest UK Hometrack 20 Cities Index was released this week and it showed that while property prices in some locations have struggled badly since 2007, others have continued to perform tremendously well.

As you can see in the chart below, my favourite picks - namely Cambridge and London - continue to sit at the top of the tree.

The oil price shock has seen formerly solid growth in Aberdeen quickly turn negative, from +13.5 per cent a year ago to -1.4 per cent today, perhaps to a very small extent mirroring the throes and woes of Australian mining towns.

This chart gives a fine visual representation of the importance of real estate location as well as asset selection.

It is no surprise here to see the "twin cities" as Hometrack now labels them (markets in Cambridge and London have performed in near lockstep, despite the fact that the city of Cambridge is located some 45 minutes from the capital by train) leading the capital growth charts yet again in calendar year 2015:
  • Cambridge +14.4 per cent 
  • London +13.3 per cent
Since the preceding market peak, while most regional city markets have seen close to zero price growth - and significantly negative growth in real terms following an engineered burst of post-financial crisis inflation - the capital city and its proximate University city have seen exceptionally strong growth.
  • Cambridge +49.6 per cent 
  • London +47.3 per cent
As for the period covering the market trough to current prices, these two cities have absolutely shot the lights out:
  • Cambridge +78.4 per cent
  • London +74.3 per cent
The Council of Mortgage Lenders (CML) reported this week that UK mortgage lending has now hit a 7 year high, with an all-too-predictable surge in buy-to-let lending before stamp duty hikes and tweaks to interest deductibility kick in.

Sydney - 2015 land values

One of the reasons that despite cyclical corrections it has been such a difficult proposition to be on the short side of Sydney property over the years has been the ongoing escalation in land values, driven in part by strong population growth.

Data from the NSW Valuer General showed that 2015 again saw substantial increases in median land values across great swathes of the city.

Apart from the Blue Mountains, where the median land value increased by only +5 per cent in 2015, residential land values in Sydney showed significant growth right across the board. 

One of the LGAs I have been targeting in recent times - see herehere, and here for example - has been Randwick, particularly due to the introduction of a new light rail route which will open up the south eastern suburbs of the city.

Note the enormous leap in Randwick land values in 2015 as investors latched on, though in fact almost everywhere in Greater Sydney saw another year of thumping gains in land values. 

That said, not everyone can afford inner suburban capital city property, so those without the budget need to be more thoughtful and considered. 

In May 2014 Property Observer ran a piece on where first homebuyers should look to buy (see link). My recommendation was that first time buyers should look at Blacktown, with lenders accepting relatively small deposits at that time and plenty of upside potential for the suburb.

The results have been rather spectacular, with median value of residential plots booming by close to +48 per cent in the last 12 months alone. 

At the risk of stating the obvious that particular ship has now sailed, while auction clearance rates in Blacktown, the outer western, and south western suburbs suggest that prices in those locations were already in correction mode by the back end of 2015.

As such, land values were materially higher across practically every metropolitan location at the end of the year as compared to the beginning of it.

Long term outperformers

Over the longer term, however, land value ratios and the nature of compounding growth ensure that the best performing properties will be those which sit on land with genuine scarcity and are in the highest demand. 

The highest dollar value gains in 2015 land values were seen in Randwick (+$297,000) and Waverley (+$290,000), with Bondi continuing its outstanding run since 2008. 

Substantial increases in land values were once again seen in the eastern suburbs, the inner west, the nothern beaches, and the lower north shore in 2015, with the highest land values situated in the east and the inner north.

Perhaps not surprisingly the smallest dollar value increases in Greater Sydney median land values were seen in the Hawkesbury (+$42,000), Campbelltown (+42,000), Penrith (+$32,000), and the Blue Mountains (+$11,000).

Overall in 2015 land prices rose by another +22 per cent in New South Wales - despite declines in eight regional areas, including Muswellbrook and Cobar - with aggregate residential land values in the state rising close to $1 trillion. 

Early on-the-ground reports from OFIs suggested a level of market confidence returning to Sydney buyers this weekend, and this was certainly evident at some opens in Brisbane.

Knight Frank forecasts 10 per cent price growth for Sydney in 2016, which sounds rather too optimistic to me, but then I've underclubbed my Sydney predictions for three calendar years in a row now. 

Saturday, 23 January 2016

Real Estate Talk: 2016 trends

Catch me on this week's Real Estate Talk show here (or click image) where I discuss what I expect to see playing out in 2016. 

Friday, 22 January 2016


Sydneysiders could certainly be forgiven for wondering what all the fuss is about when the talk turns to a slowing economy, for locally most metrics are continuing to fire.

Better still, fuelled by record stamp duty receipts the harbour city is all set to embark upon a massive infrastructure boom.

Figures tucked away in data released this week showed that New South Wales has an unprecedented $26.1 billion of building work in the pipeline, measured in current prices.

Note that this is not all residential building work, with $9.3 billion of non-residential building projects by value in the pipeline. 

Former Minister for New South Wales Barry O'Farrell certainly seemed pretty pleased with the findings - he even Tweeted a copy of my chart this afternoon. 

Interest rates still to fall?

Construction activity down to $49 billion

We saw earlier in the week how a building boom has helped to generate significant economic activity this year, particularly in Sydney, Melbourne, and to some extent, Brisbane.

Why, then, are markets still pricing in lower interest rates in the guise of one or possibly even two further interest rate cuts in this cycle?

One of the key reasons is to be found in the Construction Activity figures which were released on Wednesday this week. 

While quarterly residential building activity has picked up strongly by +11.9 per cent over the year to September 2015 to $15.5 billion, ultimately there is a limit to how far this boom can run.

What is more, non-residential building has declined by -3.7 per cent to $8.6 billion, while engineering construction - essentially mining and resources works - is set to decline considerably from here. 

Engineering construction declined by -9.9 per cent over the year, and has pulled back considerably from a quarterly peak of more than $33 billion to $25.3 billion in Q3 2015.

Construction in this sector declined by -6.3 per cent in the most recent quarter alone, yet activity levels are still tracking at about triple the levels we saw around the time of the Sydney Olympics.

In other words, as a number of resources mega-projects transition into their less labour-intensive production phase, construction activity still has quite some way to fall yet before it returns anywhere close to a historical average.

Thus either significant public sector funded building projects or other infrastructure works will need to kick off over the year ahead, else further interest rate cuts may be required.

Or perhaps all of the above!

Thursday, 21 January 2016

Unemployment trending down

Employment trends

Greater Sydney's oustanding and well-documented jobs boom continues apace with another +92,800 positions added in the year to December 2015 according to today's Detailed Labour Force release. 

Greater Melbourne also looks to be in good nick, having added +51,900 new jobs.

Happily after years of zero growth, regional New South Wales has suddenly come to the jobs party as the positive sentiment ripples outwards from Sydney, at last adding +77,800 new positions over the year, with decent employment gains in the Hunter Valley, Shoalhaven, the Illawarra, and to a lesser extent Newcastle.

Unemployment rates in the coal mining regions of New South Wales appear to be falling, after earlier spikes. 

On the other hand, employment in regional Victoria has declined, with impressive annual gains in Geelong (+8,300) and Shepparton (+4,900) more than offset by declines in Bendigo (-7,300), Ballarat, Latrobe-Gippsland, and elsewhere. 

After a tough few years of transition as the mining boom peaked, Brisbane is now adding jobs at a healthy pace, with total employment increasing by +34,400 over the past year.

While I don't want to jinx it after half a decade of jobs growth close to zero, but the red line over the past four months suggests that things might even be turning a corner for the labour market in Adelaide!

The Australian reported today that there may yet be a lifeline on offer to save Holden's Elizabeth plant from its expected 2017 closure, which would potentially be wonderful news for the region.

That said, 'thousands of jobs might not go' isn't exactly a compelling case to invest in property there just yet - personally I prefer to aim for big open goals or 'one foot hurdles' in imperfect property markets rather than bets on such uncertain outcomes.

Totting up the cumulative employment growth in one chart shows that Sydney, Melbourne and Brisbane have between them added +323,200 jobs over the past two years, which is well over two thirds of the total employment growth for the 24 month period. 

Unemployment declines

At the capital city level the raw original data reported shows that unemployment rates are trending down in Greater Sydney, Melbourne and Brisbane, as measured on a 12mMA basis.

On the other hand, the trend remains up for now in Greater Adelaide and Perth, while the outlook in Greater Hobart seems to have dimmed a little, with job creation stalling and total employment declining a little in 2015.

Looking at the monthly data, Greater Sydney's unemployment rate of just 4.6 per cent reflects a strong economy.

Meanwhile Greater Brisbane's unemployment rate of 5.2 per cent is another solid improvement on the 5.5 per cent seen one year ago and well down from 5.8 per cent in December 2013.