Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Sunday, 7 February 2016

The week that was...& the week ahead

Auctions begin again

Last week the Reserve Bank of Australia (RBA) released its latest Statement on Monetary Policy, which as expected didn't reveal much in the way of changes to forecasts for economic growth or inflation, but the outlook for the labour market was upgraded.

Indeed the RBA's central case sees unemployment declining all the way down to 5.3 per cent by 2018. A moderate upward revision to 2015 GDP growth forecasts to 2.5 per cent implies that GDP for the fourth quarter will be around 0.6 per cent, or perhaps a shade lower.

Declines in mining investment from the 2012 peak are expected to continue for the next few years, but with a particularly sharp decline in 2015/16, meaning that "the largest subtraction from GDP is expected to occur in this financial year" (i.e. imminently).

This key point raised by the Reserve Bank echoes what I discussed in a little more detail here last week. After another huge 42 per cent decline in engineering construction activity in the year to September 2015, the great bulk of the drag on growth for Queensland is by now in the rear view mirror.

At the same time, the RBA notes that liquefied natural gas (LNG) exports are "expected to ramp up substantially over the years ahead", thus in part compensating for the decline in resources construction, and eventually serving to act as a boost for the state of Queensland.

Auctions begin again

The auction markets slowly cranked up again in the two largest capital cities this week, albeit on fairly low volumes.

There has been a fair bit of hopeful talk on various blogs and social media accounts predicting a meaningful correction in capital city property prices this year (well, every year), but it doesn't really look to be shaping up that way, with preliminary auction clearance rates reflecting a rather more sanguine outlook:
  • Sydney 73 per cent
  • Melbourne 79 per cent
Sydney recorded a number of huge sales results in the inner suburbs, reflecting the enormous demand for well located properties priced up to $1.5 million, which is perhaps not surprising given strong employment growth in the harbour city, exceptionally low interest rates, and near record low levels of reported mortgage stress.

The week ahead

The week ahead is a quieter one for domestic news, comprising the usual overload of consumer sentiment and business surveys, and with the more interesting ANZ job advertisements series due for release tomorrow. 

Governor Stevens of the Reserve Bank will be speaking on Friday morning at 9.30am AEDT, while the latest Overseas Arrivals and Departures figures will provide further insights into the impact of the lower Aussie dollar on our demographics, not least the massive boom in tourism.

However, the most interesting release of the week almost certainly be the Housing Finance data for December, which is due to be released on Friday morning. You can read some of my analysis of the November Housing Finance figures here.

Investor activity fades

The largest property markets are in a clear state of transition at the moment. APRA's crackdown has successfully stymied the property investor sector, something which needed to happen sooner or later, for a healthy market cannot easily continue to function smoothly when it is comprised of 50 per cent investors (or an even greater share in some sub-regions).

Where such a dynamic exists for too long, a point is reached at which their are more rentals than willing renters, and yields are eventually eroded. 

As you can see in my chart below, the volume of owner-occupier activity through this cycle at the national level has been relatively muted, in marked contrast to headier times in years gone by. In no small part has this trend been due to the proliferation of investors in the market, but the tide has been turning of late, as lenders encourage an effective baton change to bona fide homebuyers.

First hand observation of market activity is proof enough that investor loans have slowed sharply across recent months, thereby proving the success of APRA's interventionary measures.

Industry liaison suggests that lenders have been successfully fighting hard in the owner-occupier space, with mortgage rates available from as low as 4 per cent, which is exceptionally cheap. The number of owner-occupier approvals increased by +1.8 per cent in November. while the total value of new loans increased for both investors (+0.7 per cent) and owner-occupiers (+1.7 per cent). 

Market analysts expect to see another solid gain in the number of owner-occupier approvals in December. However, as my chart above shows, there is also plenty of refinancing taking place in the market at the present time, and with the rate of investor activity slowing sharply, the general picture is one of transition towards a much more balanced market.

It is early days in 2016 still, but the auction activity at the weekend likely points towards a year of steady dwelling price growth.

What's the beef?

With a slower week ahead for news, it is as a good time as any to look at some of the more esoteric developments in the economy. In this context, on Wednesday the ABS will release its final 2015 data for livestock slaughter and meat production, which will be worth looking at.

I'm by no means a cheerleader for the livestock slaughter industry (in fact as a vegan I'm rather the opposite...more of a "boo-boy", if anything), but it nevertheless remains a material part of Australian industry, and particularly so in Queensland.

As you can see below, tonnages of red meat production have surged back fairly dramatically since the wet years of 2011 and 2012 when flooding and port closures clobbered beef exports for the first month of those respective calendar years.

Indeed, as I've looked at previously via the International Trade figures, the meat and live exports industry has been one of the standout performers over the past year as Australian producers look to supply expanding Asian markets.

Industry data suggests that there was a significant spike in exports in December, the month being distorted by heavy US trade as tariffs were removed to fill quotas, but activity has reportedly since slowed in January. If the below numbers appear to be on the low side, then this may be because the 500 million or so chickens slaughtered per annum aren't classified as "livestock".

While Japanese meat trade has declined there has been a corresponding increase in exports to Korea. There has also been another strong year-on-year increase in trade with China, with the approval of last year's Free Trade Agreement (FTA) making this an interesting market to watch. 

That's about all for today. Have a great week!