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Monday, 29 February 2016

Owner-occupiers lead housing lending (dust off the Etch-A-Sketch!)

Credit growth steady

The Reserve Bank of Australia released its Financial Aggregates data for January 2016, which showed credit growth of +6.5 per cent in the year to January 2016, a steady increase on the +6.1 per cent recorded for the year to January 2015.

Total annual housing credit growth has slowed a bit from its recent peak of +7.47 per cent in November 2015 to +7.33 per cent in January 2016, reflecting in part the shift in composition of lending from investors to owner-occupiers. 

Investor credit growth is now well below APRA's arbitrary +10 per cent threshold at just +7.9 per cent and consistently slowing from +11 per cent in June, meaning that theoretically major banks could in due course start to ramp up lending into this sector should they feel the urge to do so. 

Of course, any such move would be dependent upon a range of regulatory factors, and whether APRA has the appetite to loosen its throttle.

Meanwhile owner-occupier annual credit growth recorded another significant jump in surging to a 64 month high of +6.95 per cent, with homebuyers looking to take advantage of attractive mortgage rates.

Deposit growth seems to present few headaches for banks right now. While term deposits have been understandably less popular in the prevailing low interest rate environment, total deposits with banks have expanded in a robust manner over the year to January. 

Business credit

Business credit grew by +6.2 per cent in the year to January 2016, up from +5.5 per cent in the year to January 2015. It is as yet unclear whether this is the end of the uptrend for business lending growth, or a blip in the upwards trajectory. 

Housing credit

The chart below shows how lenders in the housing market have conveniently managed to shift almost seamlessly away from investment lending to owner-occupier credit, with a bit of reclassification jiggery-pokery along the way.

In fact, the data submitted by lenders makes it look as though the chart has been drawn up on an Etch-A-Sketch.

Total housing credit continued to push beyond $1.53 trillion, growing at an annual pace of +7.33 per cent, although naturally there are marked differences between the states and capital cities, with some faring much better than others.

There have been a few pro-equities articles today discussing "plummeting" lending and investors "leaving the market in droves".

That's interesting, but it's not what I'm seeing. Don't forget that housing credit expanding at a pace of +7 per cent implies a doubling in outstanding credit over a decade.

It's all in the marketing, I guess.

The wrap

Credit growth was fairly steady in January, with owner-occupiers continuing to pick up the baton from investors within the housing sector.

A key question going forward will be whether having managed to push investor credit growth below its preferred +10 per cent threshold APRA releases its grip on investor lending at all. 

As APRA's data last week showed, the overwhelming majority of property buyers these days have substantial deposits, the question is whether tougher criteria are to be maintained surrounding mortgage serviceability. 

Another key factor could be movements in the cash rate, with interest rate cuts potentially set to stimulate demand for mortgage borrowing further, although it appears likely that lenders would hold back 10bps to15bps of a prospective 25bps interest rate cut.

Adding to the parts of GDP we already know such as net exports, the Business Indicators released by the ABS this morning including inventories (-0.4), wages (+0.5), and company profits (-2.8), each suggested that headline GDP growth for the fourth quarter of 2015 is likely to be weak. 

These GDP partials may prove to be another tack in the coffin for the next movement in interest rates being down. 

City Hall

A different view or three of the city of Brisbane, taken by my good self from atop the City Hall clock tower which was built between 1920 and 1930. 

The City Hall was originally proposed to be located over in Fortitude Valley, but ended up being plonked on the marshy bog that today we know and love as the concrete jungle that is King George Square. 

Ah, such foresight, in every possible regard!

The poor old City Hall has had a few minor structural issues lately - being built on essentially swamp land, in a nutshell it has been sinking towards the core of the earth, and it also has a bit of concrete cancer - so it was closed for a few years, but has now been open again to visitors since 2013.

City Hall was once the tallest building in Brisbane. Unfortunately as you can see quite a few other tall buildings have sprouted up since, rather obscuring the once diverting views.

One of the skinny Meriton serviced apartment towers to the right of shot below. 

Many if not most of the Central Business District (CBD) apartments are short stay lets, so don't believe all of the hype about city oversupply - short stay rents can be anywhere up to $1,500/week for 2 bedroom serviced apartments. Some oversupply, huh. 

Mostly the apartment overbuilding to date has been focussed around the West End, South Brisbane, Newstead, Fortitude Valley etc.

The best part of the climb is getting to see inside the 92 metre clock tower. 

With a diameter of 5 metres I believe it's the largest clock in Australia (could be wrong on that, maybe that one in Melbourne? Or actually, that one isn't 5 metres, is it? Anyway, I stand to be corrected), though the lift shaft probably isn't one for claustrophobes, being the original lift installed for use by workmen in 1929.

The clock tower design is based upon that of the Campanile in Venice, but the enormously loud bells don't chime at weekends, mainly because the hotels in the CBD complained that they were losing custom as a result.

Incidentally the original foundation stone laid in 1917 has a time capsule locked inside it within a zinc cylinder, including copies of newspapers of the day. Not so sure that people are still doing that sort of thing today, though...lob a copy of the Courier Mail under 12 Creek Street perhaps?

Well worth a visit!

Sunday, 28 February 2016


Ain't no mountain

Two Aussie friends of mine Nina and Karl went to the UK for a holiday last year and were considering climbing one of the highest "mountains" over there, Snowdon in Wales (we don't really have mountains in Britain as such, think of a large hill with some very steep edges). 

However, they weren't properly equipped for what can be a dangerous climb in parts, plus they have two fairly young children.

As it can be quite a hairy ascent with some potentially lethal sharp drops, they decided against it and took the tourist railway to the top instead (UK moutains aren't that big, eh).

It wasn't that Nina felt the kids bolting off the edge of a cliff was a likely occurrence - the nippers are both old enough to know better than that - rather that the consequences of a careless mistake or unforeseen accident were too terrible to contemplate, and thus they felt that they could not take on such a risk.  

Widowmaker trades

It's been an explosive week or two to say the least in property-related media, with some diabolical stories coming to light about young investors who were advised by property seminar types to use massive leverage in order to speculate in illiquid and extremely high risk mining town properties.

Having been born in and spending my early years in a frequently depressed coal mining region, I've always been dead set against the idea of property investment in mining towns - plain cuckoo if you ask me - the real killer blow being that when the cyclical downturn inevitably comes, not only do prices collapse, there is nobody willing or able to rent the darned dwellings either.

As such, the most misguided part of the entire strategy was that it was enthusiastically promoted based upon obviously unsustainable cash flow returns running into thousands of dollars per week in some cases, in essence trying to turn residential property into something it is not: an income asset.

Having initially claimed credit for the successes of their clients, those recommending extremely high risk mining town strategies are now attempting to distance themselves from the whole sorry saga, deleting promotional articles from their websites and so on.

Of course it has been relentlessly tough on the poor souls who paid thousands of dollars for such dud advice, with bankruptcy the only realistic choice for some.

This is not to say that their aren't risks of my preferred approach of investing in the largest capital cities too - there certainly are - but they can be better managed with a long term outlook provided that you are sensible, keep prudent buffers to manage cash flow, and understand exactly what your strategy is.

It can also help a bit if you know what you are doing.

Hometrack index

In this context, for years I've discussed on this blog that I believe the best long term bets in UK property to be the capital city London and its "satellite" university city Cambridge (I'm not big on regional locations as a general rule, but the restrictive UK green belt policy has put enormous pressure on land values in the crowded south east of England). 

The latest UK Hometrack figures showed that Cambridge yet again leads the way with +13.9 per cent growth in the year to January 2016, following on from +10.4 per cent growth in the year to January 2015.

Price growth has been almost unbelievably strong for so long now that a correction must fall due eventually, most likely as and when mortgage rates revert higher. 

London has also continued to record extraordinary results with another +13.4 per cent growth in the year to January 2016, following on from +12.2 per cent growth in the year to January 2015, though I expect that the more expensive boroughs will soon feel some fallout from stamp duty reform.

Make no mistake in a period when inflation has been stuck around zero, these returns have been enormously strong, and indeed they have been over the past couple of decades.

Most of Britain's coal mines have long since been shut down, including those in my home region of South Yorkshire. Yorkshire had a total of 56 operational collieries in 1984, the last of which was closed down only in December 2015.

For that reason the closest we have to a "mining town" in the Hometrack 20 Cities Index is Aberdeen, where as you can see above the crash in oil prices has seen price growth flip from double digit levels to sharply negative growth in a very short space of time.

In former coal mining towns, house prices in some cases even collapsed to zero, with the government even offering loans for folk to buy houses for a solitary British pound and then renovate them back into an inhabitable condition.


Last month's Hometrack release showed that Cambridge and London have recorded exceptional price growth even through the great recession and beyond. 


It's a colossal week ahead for local news, an absolute monster!

Being the end of the month, we will get to see the private sector credit figures from the Reserve Bank of Australia - wherein we can expect to see credit growth of around +0.5 per cent - as well as the usual monthly house price data which will likely reveal moderate gains.

Annualised housing credit growth has been tracking at around +7.5 per cent through the back end of 2015, but with investor credit having been strangled to some extent by regulatory intervention it appears likely that this figure will pull back a bit over the months ahead.  

There are also the December quarter GDP partials to be reported within the Business Indicators and Balance of Payments releases, including company profits, inventories, public demand, and net exports, culminating in the GDP result for the final quarter of calendar year 2015 which will be released on Wednesday.

Expect the Australian National Accounts to show that the economy grew by around +2.5 per cent in 2015, with net exports (including of services) having made a modest contribution in the December quarter, offset by the significant ongoing drag from resources construction. No inspirational signs of life in household consumption just yet either.

There are a raft of other interesting releases to come through the week, including Building Approvals and Retail Trade (+0.4 per cent expected for the month) for January 2016. 

Dwelling approvals are forever and inevitably low in the quiet holiday month of January, so the strength or otherwise of this result will be significantly impacted by the seasonal adjustment applied. There has been a lot of volatility lately from the "lumpy" approvals of high rise apartments. 

There is also the International Trade in Goods & Services balance to look forward to. Coal shipments and LNG volumes were up in the month of January, but the trade deficit nevertheless has the potential to blow out to $4 billion or even some way beyond, despite a bit of a rebound in the iron ore price.

Last but certainly not least the Reserve Bank of Australia will announce that it will leave interest rates on hold at 2 per cent on Tuesday, but analysts will continue to watch closely for hints of any easing bias indicating a likelihood of further interest rate cuts later in the year.

Strewth, it's going to be quite some week! Stick around for analysis of some of that...or preferably all of it!

Saturday, 27 February 2016

Students push NZ immigration to the max

Immigration recession!

No actual recessions have transpired in Australia through the financial crisis or beyond.

In fact we haven't had a recession for a quarter of century now.

The media just loves to use the "R" word, though, so the next best thing is to create a bit of new terminology to satisfy the lust: recessionary capital expenditure, balance sheet recessions, income recessions, a "global freight recession" (whatever that means - haven't even worked out how this one is defined yet). 

The latest contender could be an Australian Kiwi immigration recession!

The most timely figures released by Statistics New Zealand showed a net gain of +6,100 migrants into New Zealand in the month of the January 2016, with a few Kiwi residents leaking back across the Tasman to the land of the long white cloud.

This takes net immigration into NZ up to +65,900 in the year to January 2016 which is the highest figure on record.

I wouldn't buy the narrative that this has been driven by an amazing NZ economy which has outshone ours in Australia, though.

In fact there is anaemic wages growth in the NZ economy and a dairy industry downturn which racked up a staggering $4.9 billion of cuts to income through 2014/15, with an incredible 85 per cent of NZ dairy farmers operating at a loss.

In truth, a few parts of the NZ economy are evidently active: for example, there has been an Auckland housing boom and a raft of associated construction.

Meanwhile the third largest city in NZ is also in the process of being rebuilt after a devastating earthquake in 2011, the seismic activity leading in turn to economic activity.

However, the surge in New Zealand migration has largely been fuelled by a relaxation of student visa rules, resulting in a huge surge in migration from India of +15,200 in the year to January, around three quarters of whom travelled on student visas.

We can expect to see similar trends unfolding in Australia over the next few years, with a huge ramp up in Asian international students already underway.

It seems likely that migration into NZ has partly been primed by increased mobility, with the relatively high cost of living in some Australian capital cities encouraging more Kiwi residents to return home.

Aussie departure lounge

The total number of permanent and long term migrants from Australia increased further in January, although the annual rate of growth in total Australia migration to NZ has slowed steadily over the most recent four months from +9.9 per cent in September 2015 to +8.6 per cent in January 2016.

After accounting for movements in the other direction the result was a net annual migration from Australia to New Zealand of +1,300, which was the fourth month in a row to record a net annual migration of more than +1,000.

Although net annual migration of +1,300 from Australia doesn't sound like much, this represents a marked shift from a few years ago with the Aussie mining boom in full swing when up to a net 40,000 Kiwis per annum departed for Australian shores on a long term or permanent basis.

Tide to turn

It's difficult to predict the timing of the peak, but this trend probably won't last.

Although New Zealand's wild labour market data showed a headline rate of unemployment declining to 5.3 per cent in the December 2015 quarter (see here) the participation rate is falling, declining by fully 1 per cent over the year and sinking for three quarters consecutively.

Meanwhile annual wages growth in NZ has fallen to its weakest level in nearly six years at just +1.5 per cent. 

The equivalent figure is +2.2 per cent in Australia

Locally in NZ, ASB senior economist Jane Turner noted that:

"This trend has been slowing with the Australian labour market improving while NZ's is slowing. Furthermore, recent policy announcements may, at the margin, convince some New Zealanders residing in Australia to stay put in order to gain citizenship". 

That's pretty much it.

Cuts both ways

Increased mobility has other impacts too, with the number of short term visitors heading to Australia from New Zealand soaring to record highs.

On this side of the ledger, total visitors from New Zealand to overseas locations zoomed to a record high 2.42 million in January 2016, with visitors to Australia up by +47,400 to 1.14 million.

The was the highest ever number of trip by New Zealand residents to Australia in a single year, up by +4 per cent from the January 2015 year. 

Overall, population growth into Australia has switched significantly over recent years from New Zealanders and Brits towards immigrants of Asian origin. 

As such Australia's Department of Immigration and Border Protection (DIBP) forecasts net overseas migration into Australia to increase for the remainder of the decade, from +177,200 in 2015 to +237,900 in the year to June 2019.

As in New Zealand, international students form a key  part of projected Australian population growth.

In fact, there are many similarities between the economies located either side of the Tasman: weak commodity prices, a residential property boom focussed in the main cities, a boom in international students from Asia, a generally soft labour market, weak wages growth, and Reserve Banks looking down the barrel of further rate cuts.

A few Kiwis leaking home won't make much difference to Australia's economy on the whole, with most settlers now hailing from Asia.

In any case, the trend looks set to roll over in 2016. 

Weekend reads

Must see articles of the week, summarised over at Property Update here (or click image)!

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End of mining boom clonks weekly earnings

The ABS released its Average Weekly Earnings figures for the period ended November 2015 this week, and the impact of the end of the mining construction boom was visible throughout the data.

On the plus side mining construction won't continue to fall forever, as I looked at earlier in the week. 

However, this won't be much consolation for those regions which have been impacted most severely.

Average weekly full time earnings for all workers rose by +1.7 per cent over the year, and average earnings for all workers by +1.5 per cent. 

Growth in male earnings was particularly weak over the year to November 2015, reflecting the mining malaise. 

On other hand, average weekly earnings for femaled increased much more strongly, up by +2.9 per cent.

It is difficult to read too much into these figures, since they can be skewed by changes in composition of the workforce.

With a smattering of luck, they might imply that the non-mining economy is tracking a fair way better than the mining economy.

Certainly the state level figures suggest this, with full-time earnings softening in Western Australia and Queensland, two of the states most impacted by the mining slowdown.

Overall a soft set of numbers, with average earnings rising only steadily, although some way ahead of the cost of living increase for employee households, which increased by only +1.1 per cent in calendar year 2015.

Friday, 26 February 2016

10 year home values forecasts

According to Moody's, home values are forecast to continue rising solidly in Sydney and Melbourne over the next decade. 

Moody's sees annual price growth of more than +5 per cent returning for Perth by 2017, but subdued growth for Adelaide over the next two years, while Darwin prices are expected to decline in 2016.

Of the capital cities, Brisbane is forecast to fare best over the next two years with home value growth of around +12 per cent.

Where are the jobs?

Where are the jobs?

The Detailed Labour Force figures were released for January 2016 this week. 

This data series is not seasonally adjusted, and the January figures are forever all but certain to be weak, but the more indicative annual figures showed a slower pace of employment growth at +287,800 down from a suspiciously strong annual growth of +303,900 in the previous month. 

The big gains in employment have been in industries such as health care, professional services, and retail. 

It is fairly well known that total employment growth over the past year has been strong in Sydney (+104,500) and Melbourne (+59,200).

The figures also show that after half a decade of stagnation, total employment has lifted in regional New South Wales (+38,400). 

One of the drivers for this has been a rebound in employment in the Hunter Valley, following a sharp decline from the 2013 peak as the coal mining industry was hit hard.

However, regional Victoria has seen emploment decline over the past year (-5,200), with cities such as Bendigo among those experiencing falling emloyment.

The remainder of the employment growth in Australia over the past year has largely been accounted for by Brisbane (+39,800) and regional Queensland (+33,200).

Queensland's economy is very much a two-speed affair.

There have been significant declines in jobs in cities such as Townsville and particularly Mackay, where employment has been in decline for three years, now taking Mackay house prices down sharply too.

These job losses have been offset by gains in regions which are benefitting from the lower dollar, including Gold Coast, Sunshine Coast, and Cairns, as well as Toowoomba, which has continued to experience decent jobs growth.

Since the above figures are not seasonally adjusted, the chart below looks at employment growth over a range of timeframes. 

It shows how over time employment has largely been created by the most populous cities plus regional Queensland. 

Capital city unemployment

At the capital city level, the rolling annual unemployment figures show that there has been a downtrend in unemployment in several cities, although Adelaide's unemployment rate remains too high for comfort.

The January figures tend to show a seasonal spike, but Greater Sydney's unemployment trend has been tracking steadily down for 23 months.

Brisbane also recorded its usual January spike, and since Greater Brisbane covers a huge area the headline unemployment rate is dragged up a little by the naturally higher unemployment rates of Ipswich and Logan.

The trend will be the important thing to watch, and this has been tracking down over the past 12 months.

Thursday, 25 February 2016

Capex steady (mining a race to the bottom)

Actual capex steadies

Today's Private New Capital Expenditure figures showed total actual capital expenditure holding up surprisingly better than expected, with a quarterly seasonally increase of 0.8 per cent to $31.9 billion.

The market had expected to see a decline of several per cent, in keeping with the trend.

Of course, the trend remains still quite clearly down, despite this significantly better than expected headline result. 

Mining capex has declined by a monstrous 24 per cent over the past year, yet despite a steady improvement in the December quarter investment from other industries hasn't really budged all that much yet. 

Following what we have already seen in the engineering construction data, Queensland capex is down by more than 48 per cent over the past two years, leaving many mining regions desolate in its wake.

Several other states saw an uptick in actual capital investment in the December quarter. 

Expected capex weak

The fifth estimate for 2015/16 capex came in at $124 billion, a little better than expected, although still 18 per cent below the prior year equivalent figure, entirely due to the mining capex collapse. 

The first estimate for total capex for 2016/17 was a miserable $82.6 billion.

Estimate 1 is generally well understated, but this figure is down by some 20 per cent on the prior year equivalent estimate.

The outlook for non-mining industries now seems to be improving, up by 9 per cent, the lower dollar driving a moderate improvement in the manufacturing outlook.

For mining investment, however, this is now simply an epic race to the bottom, with the first estimate for 2016/17 an almighty 36.2 per cent below the prior year estimate.

The big picture is that mining investment could fall by two thirds across the 2016 and 2017 financial years.

In one sense it will be a relief when we finally get there, but investment plans elsewhere don't appear to have lifted as strongly as had been hoped.

Futures markets are pricing at least one interest rate cut in this calendar year and are toying with two.

Analysts are focussing in on May as a likely month for the Reserve Bank pulling the trigger for the first time.

Construction declines


Well, there has been a firestorm this week as the mainstream media went property market crazy following the screening of this week's episode of 60 Minutes

A hedgie researcher from the US raised more than a few shackles with his property market predictions and the leaking of a report he'd written for institutional clients.

To be fair, he was only doing his job, and the media pounced on his findings, and in any case much of what he said was accurate, as I'll explore below: stock levels are indeed elevated in Sydney's west and north-west, and many Central and regional Queensland property markets have already been proven to be unsustainable. 

That said, hedgies are macro guys, and it would be a mistake to believe that they have greater insights than local analysts. 

For example, I thought that the outlandish claim that "mortgage debt is something like 3.8 times GDP" must be a straight out misquote, but when quizzed on the erroneous stat by Forager Funds he stood by the figure as one quoted from CoreLogic-RP Data.

It's hard to imagine that a local analyst could make an error of such magnitude - once can only guess this was a botched reference to aggregate residential property values to GDP, but even then this ratio would be dated.

In any event, if there's one thing we did learn again this week, it's that Aussies don't like hearing that their homes are overvalued!

Construction declines 

Yesterday's Construction Work Done figures showed a seasonally adjusted decline of -3.6 per cent to be -4.3 per cent lower over the year. 

The volume of residential building work done has increased very strongly to be up by +11.5 per cent in 2015, but engineering (effectively resources) construction was down by -14.7 per cent. 

Resources construction bust

Total engineering construction has now been declining for three years, and sits 31 per cent below the December 2012 quarterly peak, perhaps implying that there are another couple of years of significant declines in the post. 

Quarterly engineering construction remains very high in Western Australia at more than $9 billion, so the largest percentage declines going forward will be seen here and in the Northern Territory.

In Queensland engineering construction work done has already declined back to 2008 levels at $4.7 billion, some 40 per cent below where it was a year ago and 59 per cent below the peak. 

I have previously noted that this can be a positive for Queensland, given that most the pain is now in the rear view mirror. 

However, this is not to downplay the severe impact that this decline has had on many of Queensland's regions, particularly the impact of coal mining job losses. 

You argue all day long over the use of "bubble" terminology in relation to Central Queensland's property markets and mining towns, but in equities parlance the "P" was no longer supportable by the "E".

Building work thrives

Private sector building work done increased impressively by +11 per cent in 2015, overwhelmingly driven by the residential property sector, and particularly units, townhouses, and apartments.

This has now been an uptrend for three years, helping to some extent to offset the declines in the mining construction sector.

The greaters gains in building work done over the past three years have been in New South Wales (+42 per cent) - in part thanks to an infrastructure and dwelling deficit that is now being well addressed - Victoria (+21 per cent), Queensland (+11 per cent), and Western Australia (+11 per cent).

Construction of units, townhouses and apartments has soared, particularly in the largest three states.

In some sub-regions there is a looming glut of high rise units and apartments, which should in turn lead to cooling rents and prices. 

The quarterly figures show that residential and non-residential construction should make a fair contribution to GDP for the fourth quarter.

The wrap

Overall, another soft set of numbers, largely as expected.

Engineering construction work done is now 31 per cent below its 2012 peak, and there is still a long way to go before the reversion is complete. 

That said, 2016 may be see the worst of the decline wash through. The non-mining economy is growing at about 3 per cent, so the overall economy should look better when mining construction eventually stops falling

Large states lead job ads

Trend job advertisments increased by +7.9 per cent over the year to January 2016 according to the Department of Employment.

The seasonally adjusted result for the month of January was flat, however the Department urged a little caution over interpretation of the numbers since August due to advertisement processes in transition.

The trend has been of a labour market in recovery since the middle of 2013, but a slow one.

Over the past year job vacancies increased strongly in New South Wales (+14.8 per cent), Victoria (+12.9 per cent), and Queensland (+4.0 per cent), which may bode well for further employment growth in those states. 

There has also been an annual jump in the Australian Capital Territory.

The largest annual percentage gains have largely been seen in services industries, such as medical practitioners and nurses (+32 per cent), carers and aides (+19.3 per cent), and a wide range of professional occupations and managers. 

Source: Department of Employment

Wednesday, 24 February 2016

Mining and construction wages sliding

Wages growth slow

The ABS released its Wage Price Index data and it was another slow quarter across the three months to December 2015 with +0.5 per cent growth following on from +0.6 per cent growth in the September quarter. 

This took annual wages growth down from +2.3 per cent to +2.2 per cent in the fourth quarter, which is the most lacklustre result since this data series commenced in 1997.

Over the year to December public sector wages grew at a considerably stronger +2.6 per cent than the +2.0 per cent recorded for the private sector, where the resources construction slowdown continues to bite.

The mildly positive news is that there should be little in the way of inflationary pressures on this evidence, thereby allowing interest rates to stay low, and slower wages growth should hopefully also help to keep some downward pressure on unemployment. 

Wages growth of +2.2 per cent also remains double the increase in the cost of living for employee households, which (apparently) increased by only +1.1 per cent in the calendar year. 

The downside to weak wages growth is that, um, we don't get very good pay rises! 

Which is not so terribly good for consumption growth. 

Wages and construction wages slide

Even without looking at the figures you'd likely suspect that mining (+1.5 per cent) and construction wages (+1.6 per cent) have been soft as the resources construction bust continues on its not-so-merry way, and your suspicions would be confirmed as correct.

The sectors within which wages are improving include financial services (+2.8 per cent) and education and training (+2.6 per cent), the latter being a sector thriving in the lower dollar environment and following the simplication of visa rules for surging volumes of international students

At the state level the strongest annual wages gains were recorded in Victoria (+2.4 per cent), the Northern Territory (+2.4 per cent), and South Australia (+2.3 per cent).

Queensland (+1.9 per cent) and particularly New South Wales (+2.1 per cent) have been adding jobs at a furious pace according to recent data, but wages growth suggests that not employment gains are not necessarily in healthily paid positions.

The weakest annual wages growth was seen in the Australian Capital Territory at +1.6 per cent. 

Finally, tracking back to the beginning of the data series shows that the strongest wages gains over the past 18 years have been seen in...Western Australia. 

The wrap

Overall, another weak quarterly headline result for wages growth, a trend which appears likely to continue for quite some time to come. 

Tuesday, 23 February 2016

High LVR loans have been declining for years

High LVR lending falls again

60 Minutes was an interesting talking point this week, wherein some American geezer claimed that he "could" have got a 95 per cent mortgage using a "fake income" by pretending to be a "gay couple".

OK. Given that he didn't actually get a mortgage written, it is a little perturbing how often people choose to believe what random punters say in preference to the actual data, but such is the nature of confirmation bias.

Household debt is high, no doubt, and some lending has been reckless, particularly in mining towns, but by the same token not everything that is claimed on the internet or elsewhere is true.

For example, some years ago bearish commentators got sucked in to believing erroneous figures which claimed that an incredibly high percentage of lending was 100 per cent mortgages.

Of course, the data sources quoted advertised loans rather than actual loans written, a rookie error that surely wouldn't pass the sniff test.

Another favourite trick is to tap a few notional numbers into a mortgage calculator and use this as "evidence" of irresponsible lending, conveniently neglecting to mention the key words "may be able to borrow". Clickbait ahoy!

It's one of the reasons I write blogs - not to get a readership, mainly just so I can stop annoying my missus by regurgitaing every blasted "fact" that I read in the media and on the internet.

APRA exposures data

Back in the real world APRA released its latest ADI Q4 2015 property exposures data today, which showed that the share of new loans whereby lenders extended a 90 per cent or more loan-to-valuation ratio (LVR) has continued its long and steady decline from more than 18 per cent in the March 2008 quarter to under 10 per cent in the December 2015 quarter.

The share of loans whereby an 80 to 90 per cent LVR loan was advanced has also declined significantly over the last eight years from 20 per cent to only 14 per cent, meaning that the overwhelming majority of loans see a deposit of 20 per cent or more used. 

I'll just clarify that.

In aggregate high LVR lending has been in decline for years, while low-doc loans and other non-standard now loans represent just a small and rapidly declining fraction of new loans and total residential mortgage market exposures.

Within the "big four" major banks 90 per cent plus LVR loans have fallen even more sharply from 21.6 per cent in 2009 to just 9.1 per cent, while 80 to 90 per cent LVR loans have declined from 22 per cent in 2011 to only 14.2 per cent. 

Lending shifts to homebuyers

If there is anything suspicious in the APRA figures related to lending standards, I believe it is in the incredibly smooth transition from investment loans to owner-occupier loans. 

The market has barely skipped a beat in recording remarkably similar headline quarterly data while the percentage share of loans conveniently swings from investors to homebuyers. 

Draw your own conclusions from that, but I'd hazard that some of these homebuyers may well be would-be investors sneakily veiled behind a Scooby-Doo mask.

The 60 Minutes segment claimed that household debt is "exploding", and indeed the above chart shows that the total stock of outstanding credit has more than doubled since 2008.

However, the aggregate of outstanding household debt nearly always rises in an inflationary economy with rising household incomes and a strong population growth.

The truth is that after accounting for record high mortgage buffers and offset balances, the figures show that the household debt to income ratio is unchanged in Australia since 2008. Australia has a unique mechanism whereby loan repayments often continue at the same level when interest rates fall, as they have been since 2011.

60 Minutes also claimed that "half" of all loans are interest only.

The true figure as revealed in APRA's figures today is 39 per cent - still too high for comfort, granted, but this mostly reflects tax strategy rather than that people "can't afford to pay the debt back", and the interest-only loans figure should theoretically now decline following the crackdown on investor lending.

The truth according to the Reserve Bank of Australia (RBA) research is that on average homeowners are miles ahead on home loan repayments, by fully two years which is an unprecedented margin. 

Construction watch


Stacks of interesting news out this week, but alas not until tomorrow, so just a ramble today.

It's mainly a been a week of furious tax debate. Admittedly it's been quite a few years since I was employed in a tax position of any note, and even longer since I sat my tax exams. No matter, for almost everyone in Australia is a tax expert, and nearly all of us are in agreement that someone needs to pay more tax...just as long as it isn't us!

Higher stamp duty levies, land tax, income tax, capital gains tax, imputed rental charges, corporation taxes, and superannuation taxes are just a handful of the tolls and contributions being demanded by the baying mob. We are suddenly all sure loving the idea of higher taxes!

A couple of things I can recall from studying tax, particularly with regards to the interdependent sectors of the housing market, are that firstly it's far easier to tweak tax rates and sections of the tax legislation than it is to rip them up entirely, and secondly most modelling and scenario analysis falls over miserably because it fails to account accurately for behavioural change triggered by new tax legislation. 

To be frank, I'll believe any fundamental changes when I see them. Deductibility of mortgage interest for investors has effectively been a bi-partisan policy for decades, and it's only now in Opposition that the ALP is proposing a second stab at grandfathering negative gearing rules. My guess is that the most likely change to housing market taxes would be caps on deductibility, but that really is just a guess.

Record residential construction boom

Perhaps the most curious part of the entire issue is the timing. A surge of investor lending has seen rental growth careering to 20 year lows, and with the supply response now in full swing a record nadir is almost certainly in the post. In fact, we're already there according to CoreLogic-RP Data's data series.

It's a well worn argument that investors don't add to the dwelling stock, but if you've ever worked in the development space you'll know that developers don't give a care a toss give a fig whether a property is bought by a homeowner or an investor, negatively geared or otherwise.

What creates new supply is declining financing costs, rising demand in aggregate, and thus rising prices, and as this cycle has progressed we have been getting all of these in spades, particularly resulting in a surge of new units, townhouses & apartments, which in turn has already cooled these parts of the housing market naturally.

The strongest prices gains have been seen in Sydney and Melbourne and these cities have played host to the bulk of the supply response, though a combination of rising prices, low interest rates and, let's be blunt about this, a fresh market of Chinese mainland buyers of new apartments, has seen construction activity increase sharply in Brisbane and elsewhere too.

Only a couple of years after the system was apparently busted (which would allegedly march us into a recession) residential construction activity hit its highest ever level. So much for negative gearing restricting the dwelling stock - it's the greatest residential construction boom on record!


As for whether falling demand from investors would lead to rents rising, logically the answer is obviously "yes" as rental supply diminishes, for not all renters want to buy, and many could not afford to do so without borrowing the full purchase price and associated closing costs, a dynamic regulators have been nervously edging away from ever since the financial crisis.

Unfortunately I don't have much hard Australian-based evidence upon which to base this assertion, since there have only been two instances where rents have spiked in Australia over the 33 years of available data, but one might reasonably expect that these coincided with downturns in investor activity.

Incidentally, another quirky facet to the negative gearing debate has been the so-termed "Fact Check" articles which instruct us that rental growth indices "must" be adjusted for inflation i.e. the price of consumer goods (such as the price of cheese, pork, sewerage costs, goat, and so on). "Must" they, fact checkers? According to whom are these "facts" actually facts?

While there may conceptually be a very loose relationship between inflation and rental price growth, at best it is a link bound by a mile-long rubber band. I've never once come across a landlord adjusting rents for the growth in price of a tub of ice cream, or a dozen eggs, or a packet of smokes, the price of having a root canal, or whatever. It's an absurd notion, really.

Typically rental price growth is simply one function of the wider property market cycle, specifically supply (the number and type of rentals available for lease) and demand (the volume of renters in the market, and the product collectively in demand from them), although household income growth does indirectly play its part.

We can see in the chart below that investor lending more than halved from $0.210 billion in May 1985 to $0.099 billion by early 1986, so evidently the amendments to the tax legislation at that time did change investor behaviour, while dwelling starts also immediately collapsed as charted here previously.

Unfortunately the ABS data on investor loans is sawn off at January 1985, so it's not possible for me to put the drop into a wider context, although if you believe what property-loving folk wrote nearer to that time, investor sentiment fell dramatically, which contributed to rent increases in Sydney and Perth in the short space of time that interest deductibility was quarantined.

The inverse relationship between investor activity and rental price growth in these two charts above could not be any clearer.

Moreover, the property markets of today aren't readily comparable unless population growth is dialled back, since in the major markets of Sydney and Melbourne absolute population growth is much higher. Victoria's population grew by 42,781 in 1985, for example, but has been tracking at around 2.5 times that level recently.

Mostly old ground. But what about more recently when annualised rental growth soared to 8.4 per cent in December 2008? Was there also a dip in investment lending then which led to the rental supply shortage and some wretched rent increases in parts of Sydney and elsewhere?

Again, clearly yes, the figures show that investor lending all but halved from $10.1 billion in June 2007 to just $5.1 billion by January 2009, coinciding exactly with the spike in rents as investors deserted the market, spooked by the onset of the global financial crisis and various predictions of a crash by market commentators.

As you can see in the chart below, investor lending rebounded strongly from the month of February 2009, which was the month within which Kevin Rudd announced his famous $42 billion stimulus package, and rental growth quickly cooled again.

Overall the figures suggest that sharp rental price increases do follow declines in investor activity, pretty much exactly as you would expect.

Recent pullback

At the end of the above chart, we can see that monthly investor lending has recently fallen from a peak of $15.5 billion in June 2015 to $12.6 billion by December. Despite this pullback, which was driven by APRA's interventionary measures, I actually don't see strong rental growth returning any time soon for a few reasons. 

Firstly because the rate of dwelling construction and work in the pipeline remains at very high levels. Secondly because such a high proportion of new dwellings is presently being bought by foreign buyers (and thus are not captured by this data). And thirdly because I also have a sneaking suspicion that a fair percentage of deemed "owner-occupiers" are magically switching to become investors post-purchase.

There may also be some small impacts from subtle shifts in rental practices such as the growth of Air B&B, although these will surely be less influential than the key trends.

Overall, despite media articles assuring us over and over again that hosing down investor activity would not lead to increasing rents, market experience tells me that in the largest capital cities this is precisely what would play out. 

Changes to tax?

Penultimately, few figures have been tortured more enthusiastically of late than those showing who claims negative gearing benefits or deductions for net rent. Of course, the highest deductions in dollar value terms are claimed by high income earners, since this cohort pays the highest rate of tax - and thus the most tax - and also tends to buy more expensive rental properties, which naturally have a weaker rental return. 

The data presented objectively by Cameron Kusher of CoreLogic-RP Data below show that negative gearing is used right across the spectrum of taxpayers by income bracket, although it is true that you are more likely to claim net rent deductions if you have taxable income of $80,000 or above (25.8 per cent of taxpayers in this cohort) than if you earn $80,000 or below (13 per cent).

This rings true. From my own experience, none of my friends owned a rental property when we worked in part time jobs at university or in the years immediately after high school, but a fair few did so over time as they grew older, got full time and better paying jobs, met life partners who were incumbent property owners, and so on.

The figures show that the overwhelming majority of taxpayers with rental properties never own more than one property, and most of the remainder own only two (this can easily happen by default as a couple leave their respective starter home apartments in order to cohabit), while my experience in the market tells me that everyday people in full time employment claim rental deductions just as frequently as CEOs and surgeons. You can see this for yourself every weekend at opens and auctions. 

In this regard, market experience is as instructive as the tortured data. Not dissimilarly it was obvious during the so-called "homebuyers strike" in Sydney that every second person who called me was a first-time buyer, but rightly or wrongly they were buying an investment property as a first step onto the ladder rather than a home (and as such were not being captured or classified as "homebuyers").

There have been calls to halve the capital gains tax discount, but with a Coalition Prime Minister with a net worth of well over $100 million, this seems to me to be a seriously remote prospect.

It's worth noting that the introduction of the capital gains tax discount did not halve tax payable as is frequently implied, rather it replaced the old indexation of the cost base system which ran from 1985 and was not discontinued until 1999, inflicting a searing pain upon tax exam students and preparers of tax returns alike.

Capital gains tax (CGT) is a crappy tax, especially when it does not account for inflation, effectively a punitive double taxation of savings which discourages investment. The optimal rate of CGT is zero. In any case new housing is already one of the most heavily taxed commodities there is.

New builds?

Finally, on paper Labor's proposal to limit negative gearing deductions to new builds sound plausible, but in practice this would simply replace one market distortion with another. In particular buyers of new-build investment properties benefitting from tax deductions would discover that their resale market had been ripped out from underneath them, effectively leaving them sitting on six-figure paper losses or "negative equity" from the date of settlement.

Indeed this already happens to buyers of new properties today, albeit to a less dramatic extent, which is why in the absence of homebuyer grants for new builds developers often sell to self-managed super funds lured by tax incentives and bad advice from accountants, or to foreign buyers. Chris Bowen's assertion that buying new property is not "in any sense" more risky than buying established is discredited by all available research.

Most of the debate this week has really been about intergenerational equity rather than budget repair, which is sensible, but perhaps overlooks the high level of supply of construction in the pipeline.

In my opinion changing negative gearing rules - which after all, is a timing difference rather than a genuine tax concession - would generate close to zero additional tax revenue after behavioural change, reduced stamp duty excise and soaring public housing costs are accounted for. In any event, net rental losses have declined since even in nominal terms in 2008, while net rental profits have increased by well over 50 per cent.


Enough tax talk, a quick look at one of Brisbane's key construction hotspots in the areas located close to the South Bank. New apartments the back of the old Boggo Road goal:

Looking back towards the CBD from Boggo Road, cranes everywhere:


And looking out towards Lady Cilento's Children's Hospital, which this week has been the scene of impassioned protests about more serious issues than who does or doesn't pay the most tax.

All part of a record construction boom in full swing.


Much more interesting stuff to look at tomorrow, including wages and construction work done figures, followed by capex and the detailed labour force data on Thursday.