Pete Wargent blogspot


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Friday, 29 April 2016

Housing credit grows by 7.2 per cent

Credit growth moderates

Following APRA's actions to slow investor lending, annual credit growth in this sector has fallen very sharply over the past 9 months from 11 per cent to 7 per cent, with undoubtedly more declines to come.

The Reserve Bank's Financial Aggregates figures for March showed that housing credit has continued to switch its focus towards homebuyers, with annual owner-occupier credit growth increasing to a 66-month high of 7.2 per cent.

The net result is that annual housing credit growth has gradually moderated to 7.2 per cent, from a cyclical peak of 7.5 per cent six months previously.

Overall credit growth in the economy has also eased back to an annual pace of 6.2 per cent.

Business and banking

Business credit growth notched up a result of only 0.3 per cent growth for the month, with the annual pace of growth steady at 6.5 per cent.

This mirrors softening trends suggested elsewhere such as in the ABS lending finance data series, while initial and secondary capital raised on the securities exchange has also slowed in 2016.

The cost of business funding is at a record low, but research has shown that expected returns and hurdle rates can be a more important driver of business or project funding decisions.

In terms of bank lending and funding, although growth in term deposits has been understandably weak in the prevailing low interest rate environment, the growth in other bank deposits has been hugely strong.

Combined with equity raisings this means that banks will have few problems meeting their funding requirements in 2016, strong deposit growth and capital raised helping to offset any moderate rising in funding costs.

Bank funding costs declined significantly in 2015 in any event, and sit way below the levels seen in 2012 or during the financial crisis.

Housing and outstanding credit

Although the pace of growth has slowed a notch, overall outstanding housing credit has continued to power higher to $1.55 trillion.

The composition of housing credit has shifted dramatically over the past eight months, with the investor share of outstanding credit having fallen by fully 3 per cent over that timeframe, a remarkably rapid shift in market dynamics exacerbated by loan reclassifications.

One other curious observation is how personal credit is actually now in decline.

One wonders whether this is related to the growth in the use of mortgage buffers and offset accounts, as it is certainly very unusual to see personal credit going backwards in Australia, even with mortgage repayments at such low levels for many existing homeowners.

Total credit increased by 1.5 per cent or $38 billion in the first quarter of 2016 to a grand total of $2.54 trillion.

The wrap

Overall, the result was pretty much as expected on all fronts, with tightening measures restricting the annual growth in housing credit somewhat over the past six months to 7.2 per cent, and total credit growth a bit steadier at 6.4 per cent.

MYOB Pulse: 7 ways to cope with stressful days in the office

Read my latest MYOB Pulse piece here.

Export prices at 10 year low

Australia's terms of trade were clonked again in the first quarter of 2016 it seems. 

The ABS International Trade Price Indexes figures for the March quarter showed that export prices fell by -4.7 per cent in the first quarter to be down by -13.8 per cent over the year and to sit at a 10 year low.

This quarterly fall was driven by falls in the prices received for metalliferous ores & metal scrap (-5.3 per cent), coal, coke & briquettes (-8.1 per cent), natural & manufactured gas (-11.6 per cent), and petroleum and its related materials and products (-15.8 per cent).

On the flip side, import prices were also down by 3 per cent, with petroleum a key driver here too.

Overall, though, it looks like another clonk to the terms of trade when the National Accounts are released in due course.

Thursday, 28 April 2016

UK house prices set to slow

Although UK house prices and transactions surged in the run up to the tax deadline, price growth is now expected to slow.

Nationwide's April data (not seasonally adjusted) showed prices rising from £200,251 to a record £202,436 in the month.

However, the seasonally adjusted gain of 0.2 per cent for the month and 4.9 per cent for the year does suggest an imminent slowdown, with the annual gain dropping quite sharply from 5.7 per cent in March. 

The huge surge in March was reflected by an all-time high 165,400 transactions as landlords rushed to beat the tax deadline, with lending also surging by around 60 per cent year-on-year driven by rocketing buy-to-let mortgages.

The north/south divide has continued to widen, with Nationwide's Q1 2016 data showing the gulf at a record high, as London (+11.5 per cent) and now Outer Met (+12.2 per cent) prices yet again bolted higher over the year while regional prices have stalled.

Price growth should now flatten, but watch out for a spike in rents in London and the south east of England later in 2016 as buy-to-let lending dries up.

Nationwide's reports can be found here.

Sydney auctions rebound

It is generally felt that Sydney's housing market is cooling right now.

That said, CoreLogic's final auction clearance rate for Sydney last week was strong at 77.4 per cent from 643 auctions, well ahead of Melbourne at 71.4 per cent from 602 auctions.

At the sub-regional level Sydney's Eastern Suburbs recorded a massive result at 92.9 per cent from the highest number of auctions.

Certainly there still remains a high level of competition in the east, and overall not that much quality stock on the market.

Source: CoreLogic-RP Data

There will be more scheduled auctions in Sydney this weekend (763), and many more in Melbourne (1,233), which should produce a stiffer test.

Stamp duty bonanzathon

Debate rolls on

More to and fro on the ol' negative gearing debate with the Grattan Institute taking a veritable salvo of pot shots at government policy, noting with some justification that negative gearing distorts investment decisions and makes the housing market more volatile (but later contradicting itself later in the same report by claiming that abolishing the rules would only have a very slight impact, being a "1 or 2 per cent" decline in dwelling prices).

One positive to come out of this has been that we finally got a bit more detail and insight into the Coalition's line of thinking, blogged by Prime Minister Turnbull here.

Grattan's Hot Property report speaks of saving $5.3 billion from the budget bottom line through hiking the rate of capital gains tax ($3.7 billion) and quarantining net rental losses so they can only be written off against investment income ($1.6 billion).

The negative gearing component is a timing difference only, and implies only a tiny saving in the context of a housing market which now raises more than $45 billion per annum in taxation revenue. Such a seismic shift in policy hardly seems worth implementing if it genuinely would only devalue prices by 1 or 2 per cent as claimed (which admittedly sounds dubious to me).

The costs of negative gearing to the budget have been in decline for some years now in any case, with net rental losses falling by 53 per cent across the past two tax years alone, with further declines to come next year.

The average net rental loss has declined from $5,096 in the 2008 tax year to just $1,828 by FY2014, a whopping drop of more than 64 per cent, with more budget savings in the post next year.

Turnbull's blog piece was right about one other thing: Grattan's suggestions are not  actually in sync with Labor's proposed policy, and Grattan is also in part critical of the ALP stance of quarantining deductions to new build properties.

One of several problematic holes in Labor's proposed policy is that losses could still be written off against other income but not salary income, which in turn actually favours wealthier investors with multiple income streams.

CGT hike

Note that a proposed capital gains tax (CGT) hike would not apply only to negatively geared properties, but to all assets. A clear problem with hiking CGT is that it is a tax which discourages investment and imposes other costs on the economy, and in turn causes further distortions of its own.

In terms of the property market, for example, a higher CGT rate would without doubt lead to "asset lock-in", meaning that long term investors would be disinclined to sell an investment property if the action of so doing triggered a large tax liability, even where it otherwise made economic sense to do so.

This is particularly so in an era where it is now much easier to simply borrow (tax free) against the equity of the asset. Thus not only with the so-termed budget "savings" never transpire, there will be sundry costs to boot.

A CGT hike could potentially also lead to even greater investment in the principal place of residence through renovation or buying bigger and better homes, as the home remains capital gains tax free.

Grattan went on to produce a chart to attempt to show that rich people such as anaesthetists (891 of them) and surgeons (1,020) gain the most benefit from negative gearing, although its own analysis of ATO data from the preceding year has already shown that in fact there are many more people in everyday occupations using negative gearing - they just make smaller losses on average.

Grattan's latest Hot Property report notes that "the median taxable incomes (sic) for taxpayers who negatively gear is $61,533". This ties in with what I found myself from the ATO data, while most of us are active in investment property around our peak earning years (and not, say, while studying at Uni) as one would expect.

Of course, it is a truism that higher tax paying households can save more tax because they also pay more tax, while the tax benefits are of little use to the half of all households that pay no net income tax after welfare benefits are included.

Grattan swings hard

Grattan has gone in to bat hard against negative gearing here, and makes some valid points in its report. However, one problem with think tank "analysis" with an underlying agenda is that theories aren't always tempered or informed by real world experience, or sometimes even basic common sense. Or perhaps the report was just rushed out in order to stick in the boot back into Turnbull post-haste? Not sure.

Some of Grattan's claims are unsubstantiated, such as the statement that most landlords own only one or two properties due to land tax constraints. This point is obviously made up and self-evidently untrue - the truth is that property investment is a low-yielding cottage industry and largely the domain of middling income earners, while investors overwhelmingly choose sub-optimal and often unprofitable assets which lead to administrative and financial headaches for the landlord, and fairly often to the speedy sale of the property.

Some of Grattan's other quoted "facts" are just plain wrong e.g. "most of Australia's housing stock is owned by landlords with one or two properties", which is not even remotely close to being true.

Other bright ideas just seem to be the result of wild speculation splurted out in a brainstorming session in order to support "the cause", but clearly haven't been subjected to a sense test. A case in point being the  bizarre claim that negative gearers need to keep switching properties to stop annual rent increases eating into their tax losses, and as a result "are reluctant to agree to long-term tenancies".

Lol. I can't imagine for one second that in the history of the Great Southern Land a single person has ever bought a house in for the purposes of making a loss, then sold that house to buy another house because the rents increased and the first house was making too small a loss. Stop and think about that for a second. It's a completely ridiculous line of argument.

An interesting exercise in fiction, one can only assume that somebody was toking too hard on the wacky baccy that afternoon, the common sense check foregone in the befogged quest for munchies...

Of course in the real world such a daft tax-avoidance strategy would never work in a month of Sundays due to the prohibitive transaction costs, which leads us on neatly to...

Stamp duty bonanzathon

Taxation Revenue figures released by the ABS this week showed that state and local governments gouged a spectacular $45 billion in property taxes and rates in financial year 2014-15, equating to more than half of their entire total taxation revenue at 50.6 per cent.

Interestingly since the CGT "discount" was introduced in 1999/2000 stamp duty revenues have increased by a thunderous 233 per cent, although my belief is that low interest rates and other market fundamentals have played at least as significant a role in this dynamic. Incidentally this is another problem with think tank or academic modelling: through necessity it often takes little or no account of the behavioural change which inevitably follows shifts in tax legislation.

Stamp duty revenue from conveyances soared in 2014-15 by another 22 per cent in New South Wales, and by 19 per cent in Victoria.

In fact over the last three financial years stamp duties have absolutely ripped higher in NSW (+96 per cent), Victoria (+50 per cent), Tasmania (+42 per cent), Queensland (+33 per cent), South Australia (+50 per cent), and Western Australia (+26 per cent). In the Northern Territory revenues spiralled by +185 per cent over the same three year period.

Property investors in particular pay a huge amount in stamp duty, land tax, and capital gains tax, which has always led me to believe that budget savings from changing negative gearing rules could only ever be minimal, particularly when increased public housing costs are accounted for.

It's also usually conveniently overlooked that interest deductions claimed by property investors are mirrored by the interest booked as revenue by the lender, with bank profits taxed accordingly thereafter, so the actual "savings" in the budget would be $nil.

I was planning to upload a few charts here to show just how hard governments have been scouring housing markets for taxation revenues over the past 15 years, but Cameron Kusher of CoreLogic-RP Data has already produced those particular goods. The answer is "a startling amount", with revenues up by 150 per cent.

Investor overload

What I think anyone with a reasonably functioning brain would agree is that mainly thanks to low interest rates by early 2015 in particular the market had become far, far too top-heavy with investors. Property markets need a certain percentage of investors to function properly, but shouldn't become overrun with them as this reduces home ownership rates and creates unnecessary imbalances and financial stability risks.

There are easier ways to taper down investor activity, though, and indeed we have already seen a few them, including tweaking interest rates on investor loans higher, restricting investor mortgage credit growth via tighter serviceability ratios, stripping higher LVR investors out of the market, and plenty more.

And heck, there are a great many easier ways to make property investment less attractive without smoking the market to smithereens, such as caps on deductions, making depreciation allowances less generous, or any number of others.

The wrap

Some good points have been raised about tax policy this week, and some utterly nonsensical ones, which is often a problem when folk are campaigning for a cause. For example, last year it was claimed that landlords are leaving some of their properties empty in order to increase rents on the remainder of their portfolio.

Such harebrained theories might seem plausible in a theoretical vacuum, but are totally illogical in the real world.

A key underlying point here is that nobody can forecast housing markets accurately (refer to almost any media article or property blog from 2008 to 2012 versus what followed thereafter), and certainly not with such as questionable level of understanding of property investor motivations. Yet predictions to within a 1 per cent accuracy are reported more or less as gospel on both property prices and rents. Most concerning, if not completely bonkers!

Thank heavens we will all have something else more interesting and tangible to talk about tomorrow when the Reserve Bank of Australia (RBA) releases its private sector credit figures! We should be looking for a monthly gain of 0.5 per cent in March, with a softer result expected for business lending as nationally credit growth loses a bit of momentum.

Annualised housing credit growth has slowed to 7.3 per cent, down from an annualised pace of 7.8 per cent in the three months to October. In particular, note how dramatically investment lending has been tightened! The share of new investor lending has already fallen from 43 per cent to 30 per cent, with the quarterly value of lending diving from $41 billion to $29 billion between the June and December quarters.

More of the same tomorrow, I'd hazard. 'Til then!

Wednesday, 27 April 2016


CPI print very soft

Whoa, there! It seems that inflation has disappeared into a puff of dust!

Nothing like an outlying result to shake things up a bit, and today's Consumer Price Index (CPI) or inflation result for the March quarter was an absolute ripper!

Headline inflation printed negative at -0.2 per cent.

This was miles below expectations and the second weakest reading in nearly two decades, taking the annual result all the way down to 1.3 per cent (which is well below the target inflation range to 2 to 3 per cent).

The falls were broad based, with six out of the eleven CPI groups recording declines.

More importantly, the "core" analytical series, which strips out outlying readings, notched an extraordinarily soft set of numbers to take the respective annual readings to a record low.

I've diced the data up below to four decimal places, but all you really need to know is that the incredibly weak trimmed mean (0.2 per cent) and weighted median (0.1 per cent) inflation for the quarter have taken the annual readings down to exceptionally low levels at 1.7 per cent and only 1.4 per cent respectively.

Non-tradables inflation, which is taken to be a reasonable proxy for domestic price pressures, fell to its lowest annual reading since some seventeen years ago in June 1999.

In the normal course of things this sort of result would make an interest rate cut a no-brainer.

While markets are suddenly pricing a cut as soon as next week on Budget day as an each-way bet, it would nevertheless still be quite a surprise to see such a change of narrative from the Reserve Bank so soon.

That said many analysts will now see June and August as potentially live meetings for rate cuts, which could take the cash rate down to a record low of just 1.50 per cent.

Generally it is said that easy monetary policy brings inflation in time, but if a lack of investment is the underlying problem then it is questionable whether more rate cuts alone will bring this to the party.

Anyway, what a result, and a game-changer, indeed!

Rental growth slowest since 1994

There isn't space here to run through all of the positive (education, medical services, pharmaceuticals) and negative (fuel, transport, holidays) contributors to inflation this quarter in detail, but we can see that rental growth has slowed to its lowest level since 1994.

As you can see depicted in the chart below, the periods when investors were spooked out of the market (1985 to 1987, and 2008) were also precisely the periods when rents spiked.

Correspondingly the record surge in investor activity since 2012 in response to low interest rates - which Blind Freddy could have predicted - has led to near-record low levels of rental growth.

Rampant investor lending has now been successfully stymied so equilibrium should return in due course, as the construction boom also passes its peak. It's always interesting and strangely satisfying when markets work just as they should.

Rents have continued to rise modestly in most cities through this cycle, but Darwin (-4.4 per cent) and Perth (-4.4 per cent) are in significantly negative territory year-on-year. On the other hand rents kept rising in Sydney by another +2.3 per cent over the year to March.

Looking instead at annual rental growth we can see how Perth has gone from star pupil straight into detention, and now must work through its elevated vacancy rates before annual rental growth reverts to the mean.

Rental growth was also negative in Canberra over the year to March (-0.6 per cent) but looks to be heading back into positive territory in the national's capital, while annual rental growth in Hobart increased to 1.4 per cent in the first quarter.

The wrap
Well, well. A stunningly low inflation result which wrong-footed markets and puts interest rate cuts right back into the frame. Game on.

Monday, 25 April 2016

Townsville unemployment at 13 year high

Regional Victoria stalls

It's very much true that monthly figures often don't tell you a lot, and even annual figures are often quite misleading.

But over a period of years now we have seen Melbourne come to utterly dominate population and employment growth in Victoria, directly at the expense of the state's regional centres.

Over the past year Greater Sydney (+67,200) and Greater Melbourne (+59,700) have both added a healthy balance to their total employed figures respectively, while Greater Brisbane added a solid (+34,900).

And after some years of stagnation regional New South Wales (+60,900) has now at last come to the party, adding jobs in the state's regional centres both to the north and south of the harbour city.

However, mirroring what I already discussed in more detail here when analysing the latest population growth figures, regional Victoria added just 900 jobs over the year.

In fact, if you strip out Geelong which added nearly 20,000 jobs over the year to March 2016 to see its unemployment rate fall to just 5.2 per cent, the rest of state has been going backwards as Greater Melbourne powers along. The most recently available population growth figures painted a very similar picture.

It is true that annual figures can sometimes be misleading, but population and employment projections are becoming increasingly lopsided towards the capital city in Victoria to the extent that regional Victoria could actually soon even soon be seeing its population decline in aggregate.

In fact, regional employment growth has been generally very weak in aggregate across all states outside of the Premier State, despite some tourism-related gains in Queensland's coastal regions.

Regional employment fell year-on-year, for example, in both South Australia (-900) and Western Australia (-15,900), the latter's labour force having been severely dampened by the end of the mining construction boom.

Totting it all up we can see just how skewed employment growth has been towards a few capital cities, and certain parts of regional Queensland.

Unemployment rates

Low interest rates are working their magic in the three largest capital cities where rolling annual unemployment rates are having been trending down nicely, in Greater Sydney, in Greater Melbourne, and in Greater Brisbane.

Elsewhere it's not such a pretty picture, particularly in Adelaide which now has by far and away the highest unemployment rate of the capital cities.

Greater Perth's rolling annual unemployment rate now seems to be holding firm at just under 6 per cent.

Sydney continues to have the best placed economy, reflected in generally low unemployment rates, especially in its inner suburbs.


Sydney and to a somewhat lesser extent Melbourne have seen their property markets take off since 2012 in response to low interest rates, but where will that growth ripple to next?

In my opinion, we could easily see a spike or "pop" in house prices in Hobart and Adelaide, following so many years of subdued property price growth and a relatively moribund construction industry which has seen rental markets become fairly tight in some cases.

In fact, this "pop" in prices may already be happening to some extent.

However, with low employment growth, slow population growth, and slow economic growth, more sustainable property price increases will be much harder to come by.

Over the course of the next cycle, Brisbane probably has the best property market prospects due its relative affordability.

Despite slower net overseas migration than it previously experienced Queensland benefits from interstate migration (as opposed to, say, South Australia, where a brain drain represents the opposite dynamic).

The unemployment rate has also steadily been trending down in Brisbane, helped by a construction boom.

True, the economy has hardly been firing, even if things are broadly tracking in the right direction.

But the initial trigger for rising property prices is simply likely to be rising property prices, with the cheapest available cost of borrowing having not far off halved since the last time the city saw any price growth in real terms, and interstate investors struggling to see so much value elsewhere.

In fact, dwelling prices are already rising quite fast in some areas of Brisbane, reflected in year-on-year median price growth of above +6 per cent for Brisbane and Gold Coast (CoreLogic-RP Data), but the market is quite multi-speed, particularly with the volume of construction going on.

Regional headwinds

Brisbane offers something that Sydney and Melbourne no longer do, being cheap entry prices.

And if you're looking for cheaper entry prices still and higher initial rental yields you may be tempted further afield.

However, remember that yield and income are not the same thing, and in the field of investment a higher yield can often be reflective of higher risk.

In particular a once-in-a-century commodities and resources construction boom must eventually experience a corresponding decline, and so regions with a concentrated exposure to a narrow range of industries may see a spike in unemployment, which tends to result in slowing population growth, falling property prices, and rising vacancy rates (which is the ultimate risk for leveraged investors).

I don't know much about how Townsville's property market is tracking lately, but do note that unemployment just hit its highest level in 13 years this month after the commencement of the Yabulu lay-offs.

Granted monthly unemployment readings at the sub-regional level are incredibly seasonal and are about as reliable as a beat up Datsun. But this is not a coincidental result with Townsville having witnessed nearly 10,000 jobs lost in just the past year alone, the high profile Nickel industry closure being the latest casualties of the bust.

The latest ABS figures record some 13,100 unemployed persons in Townsville, the highest since a brief spike in February 2003 for the most troubling regional unemployment rate in Australia at 12.4 per cent.

These types of trends tend to be reflected in rising vacancy rates as population growth dries up.

It never pays to over-dramatize, but Warwick Powell (to my knowledge not a man prone to making wildly exaggerated statements) said recently that "the region is on the precipice of a great depression", while economist Colin Dwyer lamented that Townsville is "the insolvency capital of Australia".

The ABS data shows that employment in Townsville has fallen by an extraordinary 20,342 or 18 per cent in only the past year. Let's hope to goodness that is a rogue figure, but it doesn't much look like it from the trend.


A smattering of interesting data due out this week, including private sector credit, and particularly the inflation or CPI figures for Q1 2016.

While interest rates will be left on hold in May, another soft core inflation reading of 0.5 per cent or lower would comfortably leave room for another interest rate cut later in the year should it be deemed necessary.

Saturday, 23 April 2016

Weekend reads - must see articles of the week!

OK, so it's half way through the long weekend...but here they are!

By the way, why not subscribe for the free newsletter here too?

Friday, 22 April 2016

Dial 000, shorts murdered

Another enormous +8.8 per cent spike in the iron ore price last night to $70.46/tonne, the third largest daily gain on record.

The iron ore price is now up by 84 per cent since its December 11 low.

At that time the "Big Short" call was that iron ore companies were headed into receivership, with a real value of $nil.

Below is the Fortescue Metals Group (ASX: FMG) chart, showing a rally from $1.44 to $3.62...or 151 per the close yesterday since the nadir of January 21.


Slowest NZ migration since May 2015

NZ migration slows

New Zealand has a good deal in common with Australia in terms of its migration patterns.

Having pushed record migration, the economy has lately been weaker with an estimated 85 per cent of milk producing farmers projected to be loss making in the face of weak dairy prices.

As such in the normal course of events it would be extremely difficult to see enough employment created to sustain the boom.

Thanks to a surge in international students, however, particularly from India, migration has continued to track at historically high levels (New Zealand classifies students as "migrants" if they intend to stay in the country for at least months).

That said, seasonally adjusted monthly net permanent and long-term migration fell from 6,100 (revised down to 6,000) to 5,300 in March, the lowest figure since May 2015.

And according to Westpac the number of student arrivals has now tailed off, having experienced a "sharp decline, and this looks to have continued this month".

Statistics NZ

While the weakest migration result in 10 months may have been exacerbated by the Easter break, it has still been a very strong run for New Zealand migration, with the rolling annual total just about clinging on to a record high for the 20th month in a row at 67,600.

New Zealand experienced a seasonally adjusted net gain of 100 migrants from Australia, the 12th month in a row this figure has been positive, although this number has also now fallen from its peak.

The greatest number of permanent and long term migrants over the year to March continued to come from Australia at 25,800 - to a fair extent comprising Kiwis returning home - the annual total stone dead flat from February at 25,800 (and up marginally from 25,700 in January).

More than half of arrivals stated on their arrivals card that they would reside in Auckland, the capital city focus for migrants representing another trend which mirrors Australia.

Annual visitors to New Zealand hit a record 3.26 million, driven by Asian tourism, which is yet another trend held in common with Australia.

There has also been a huge increase in annual arrivals from China, largely from Beijing, Shanghai, and Zhejiang, up by 82,300 to 377,800.

The wrap

Migration to New Zealand remains at historically high levels for now, thanks to international student arrivals, but appears to be slowing in sympathy with the softening economy.

From Australia's perspective whether or not there is a net gain or net loss of 100 persons per month across the Tasman won't make any tangible difference to our economy.

The population of Australia increased by about 310,000 in 2015, and is expected to increase to about 350,000 in over the next couple of years, and to beyond 400,000 per annum by the end of the decade.

Many of the drivers and effects will be a mirror image of those experienced in New Zealand, including international students, and hugely strong capital city population growth.

Thursday, 21 April 2016

Yabba Gabba Doo

Took a quick recce around Woolloongabba yesterday.

And what should one see, but...huge developments!

Small developments!

And more developments!

As you can see on this map here, 'Gabba will be one of the most developed suburbs over the next couple of years, which will put downward pressure on apartment rents, assuming apartments are rented out and not held vacant by foreign owners.

As you can see on the linked map, other areas which will see an impressive flurry of new unit stock include the West End, South Brisbane, Fortitude Valley, Newstead, and the Brisbane CBD itself.


Stamp duty bonanza for NSW

Not quite philately, I'm afraid, but the latest data provided by the Office of State Revenue NSW showed that the total stamp and land transfer duty paid over the last 12 months stayed steady at an astronomical $8.7 billion, with more than $1.2 billion having been collected in the month of December alone.

The chart more or less speaks for itself.

But just in case it doesn't, stamp duty collected by the New South Wales State Government has comfortably more than doubled over the past three years.

Holy cow

Cyclically speaking, you might argue that now would be the perfect time to abolish stamp duties in favour or a broad based land tax.

But the chart above also demonstrates why that won't happen.

While stamp duty is no doubt an insidious tax which discourages labour force mobility, it has also become far too lucrative for states such as NSW to consider abolishing it.

Arguably a transactional tax could also keep the market more stable by discouraging flipping or rapid turnover and ultimately keep a ceiling on prices, though that's open for debate.

The latest available data shows that there are fewer than 3 million dwellings in New South Wales, at around 2,975,600.

Mostly the residential dwelling stock in Australia is owned by households, in the case of New South Wales about $2.17 trillion of it, as compared to $120 billion owned by non-households.

Conceptually it might appears possible for about 2.8 million households to stump up an extra $8.7 billion per annum in land tax, but realistically it would just be politically too hard to implement.

One of the reasons for this is that all of those homeowners have already paid stamp duty in good faith, so asking them to pay even more tax on top of the annual rates they already pay to the tune of thousands of dollars per annum is likely to be as popular as...well, whatever the idiom is for something that isn't very popular.

A point that seems to be rarely mentioned that is that New South Wales already has a 1.6 per cent land tax above a threshold of $482,000 (with a 2 per cent premium rate for higher value properties), but with a PPOR exemption.

Thus the obvious whales are already largely off limits, since they're already being harpooned at a punishing rate.

This essentially means that the blubber is already being whaled, and the homeowner plankton would need to be harvested (OK, I don't think the metaphor extends this far).

There are also a wide range of further arguments against land tax, which I don't have the space to reproduce here.

Mainly these include that land tax takes no account of ability to pay - the "poor widows" argument - that some people will be forced to sell their homes or trade down.

And that a tax which is designed to lower the value pool of what it is levied upon would eventually be self-defeating, and could even cause a financial collapse depending upon who you choose to believe.

When you drill into the practicalities you also discover that land tax is not quite as equitable as it first appears, while there could also be a large administrative burden and dozens of unintended market distortions, including turning family homes into income-generating doss-houses, or landlords increasing rents, or a boom in tax-avoidance schemes, or...

These arguments have all been covered in detail on the world-wide-interweb.

In any event, it seems hard to imagine that the panacea for increasing homeownership - as the idea of a broader based land tax is often badged - could be to make home "ownership" (if you can even "own" something which is taxed annually) unattractive by taxing it annually.

Stamps and land transfers are one of those ugly taxes which you would dismiss out of hand if creating a new tax system from scratch, yet won't be scrapped due to them being such a cash cow for state governments.


The iron ore spot price has soared by a further 11 per cent over the last three trading sessions to $64.77/t, to be up by nearly 50 per cent over the calendar year-to-date.

The iron ore spot price is now at its highest level since June 2015, and are rapidly closing in on the prices last seen in January 2015.

Dalian coking coal futures are also up by more than 55 per cent over the year-to-date.

Oil up. Copper up.

An enormous boost to the budget.

Wednesday, 20 April 2016

Capital city land prices through the roof

Land prices exploded in 2015 

The Housing Industry Association (HIA) released its Land Report for the December 2015 quarter, which showed that land prices continued to soar through 2015.

The median lot price in Australia ripped +5.2 per cent higher in the three months to December alone to $234,600.

Over the last half decade median lot values have increased by about +22 per cent, while lot sizes have also been shrinking, meaning that land prices per square metre have been increasing sharply.

This has not been regional Australia phenomenon through this cycle, with price rises driven overwhelmingly by the capital cities (although Adelaide's lot prices actually decreased in the year to September 2015).

The same dynamic was in evidence this quarter, with capital city land prices screaming another +6.6 per cent higher in just three months, while the number of transactions tightened again by a further -2.3 per cent.

That said, there are two "regional" locations which have experienced solid population and employment growth, and now have elevated and rising land prices, being the Sunshine Coast ($272,000) and the Gold Coast ($230,500).

The coastal areas of south-eastern Queensland are enjoying the lower dollar and increasing tourism, particularly from China as far as I can tell.  

As you can see in the chart above, it's clear that supply isn't keeping pace with demand, with the number of lot sales actually declining by -1.6 per cent in the December quarter.

Transaction levels have been fading for nearly two years now despite rampant demand.

Indeed vacant residential land sales crashed lower in Sydney (-22.3 per cent) and Brisbane (-20.1 per cent) on supply restrictions in the quarter, although there were increased sales volumes in some other capital cities.

Through the course of 2015 vacant land sales dived by 14 per cent, and by a staggering 19 per cent in the capital cities, where demand is actually higher.

The HIA noted that the dynamic of falling sales and rapidly rising prices points to supply bottlenecks.

Lowest inner Sydney vacancies in 2 years

Inner Sydney tightens

One of the reasons I've been relatively bullish overall on the prospects for capital city property markets over the longer term has been a question mark over how successfully the market would be able to cater for Australia's growing population in the popular inner suburbs where people want and need to live.

Over the last few years it had for a while seemed that building new high-density apartments and selling them to investors in mainland China could be the panacea, a win-win solution whereby Australia gains a new export industry, which in turn adds to the dwelling stock.

Now it seems that things are not so clear, not least because so many of the new dwellings are so small, so poorly constructed, and often utterly inappropriate to house more than two people. There has certainly been a boom in shoeboxes apartments, homes not so much.

It's also less than clear how much of the new stock is making it to the rental market.

The day before yesterday it was reported that Melbourne's vacancy rates had fallen to the lowest level since 2010, an incredible statistic given the volumes of apartment construction seen through this cycle to date.

And now the REINSW vacancy rate survey confirms that inner Sydney's vacancy rate has recorded back-to-back readings of just 1.3 per cent, a dynamic I had already hinted at here.

Of course monthly survey readings can oscillate a little, so below I've plotted New South Wales vacancy rates on a 3mMA basis.

While vacancy rates have trended up a little in outer Sydney, in inner Sydney rental stock seems to be becoming remarkably tight.

The REINSW noted that the inner Sydney "market is tight, and is expected to remain tight for quite some time".

APRA's regulatory intervention has successfully skimmed many of the higher LVR and higher risk investors out of the market, and as such rental stock in some areas appears to have completely dried up.

Although not yet reflected in the 3mMA figures the March 2016 readings for Wollongong (now just 1 per cent, down rapidly from 3.3 per cent) and the remainder of the Illawarra have tightened quite dramatically since the middle of last year.

The detailed regional figures also show tighter vacancy results for a number of other locations, including Coffs Harbour (1.5 per cent).

Outlook brightening

A fortnight is a long time for news about the economy these days, but the Reserve Bank's Minutes from its April 5 Monetary Policy Meeting are worth a read. In particular, this line caught my eye:

"Mining investment had fallen to around 4 per cent of nominal GDP from a peak of 8 per cent in 2012."

This may appear to be quick throwaway line, but this is a huge point of note for Australia. Here's what mining investment looked like in the run up to the peak.

There has been an enormous 64.1 per cent rebound in the iron ore price since December 11 in response to Chinese stimulus and some other commodity prices have shown overdue signs of life, but overall it is not expected that this will make any material change to the outlook for mining investment plans.

In truth, it's actually quite hard to say what happens next to mining investment. In today's litigious and safety-conscious environment, cost overruns often have a way of racking up in resources construction projects, and on occasions spectacularly (cf. Gorgon LNG).

And maybe Adani's Carmichael coal project will finally get up, which could arrest the decline.

Just as likely, resources investment could overshoot on the downside.

Either way, if investment had already fallen from 8 per cent to 4 per cent of nominal GDP by December 2015, then almost by definition the mining cliff is well over half way cooked, and is probably more like three quarters of the way done.

There has also been a great swathe of positive news since the Reserve Bank last met, which in aggregate has negated the outside chance of an interest rate cut in May, including:

-unemployment surprised by producing a stunning result to decline to a 2.5 year low of 5.7 per cent

-Roy Morgan Consumer Confidence rebounding by +3.8 points to sit above its long run average at 115.8

-NAB's Business Survey showing conditions at an 8 year high

-an enormous rally in the iron price, which has culminated in a spectacular rebound of +64.1 per cent since December 11 according to Scuttman of Business Insider, with yet more gains in the post today

-if share prices are your preferred bellwether, leveraged iron ore producer Fortescue Metals Group (FMG) has seen its share price rip from a 52-week low of $1.44 to $3.32 with short dhrift, yesterday hitting its highest price since 5 November 2014

-new motor vehicle sales trending to their highest ever level

-Fitch's Dinkum Index reporting that Australian mortgage arrears are tracking at near record lows in declining by 20bp year-on-year to just 0.95 per cent.

Given the scale of the contraction in investment experienced in mining regions, Fitch's results in particular are remarkable. Although some self-employed borrowers have 30+ day mortgage arrears, the reported annualised loss rate in Q4 2015 of just 0.02 per cent is about as close to zip as it is possible to get.

On this evidence it is little wonder that cash rate futures markets are beginning to price out further interest rate cuts in this cycle, which represents a marked shift in sentiment over the last two months.

The one fly in the ointment could be the strength of the Aussie dollar which has gone on a tear to its highest level since May 2015 at 78.19 US cents.

The RBA Minutes noted that continued low inflation would afford the scope to lower interest rates if appropriate, so in that regard it will be very interesting to see what news the March 2016 inflation figures bring exactly one week from today.

Overall, though, it's been a very positive couple of weeks of news, as Australia moves yet another year further away from the financial crisis.

Tuesday, 19 April 2016

Last huzza for UK house price boom

March surge

UK house prices experienced the expected surge in March according to Halifax in advance of a clampdown on buy-to-let, with annual price growth surging to double digit levels at more than +10 per cent.

The quarterly data isn't yet available for Q1 2016, but evidently the indexed figures to the end of 2015 show that dwelling price growth has continued to be driven by London and its immediately surrounding regions.

Since 2008 the price of flats (+57 per cent) has increased far ahead of the price of houses (+37 per cent), driven overwhelmingly by flat prices in the capital and housing affordability constraints, while supply levels remain very low.

Asking prices surge to record

Rightmove also released its asking prices index which boomed by +£3,843 or +1.3 per cent to set a record high of £307,033, while London asking prices have increased to a barnstorming £646,200.

The boom was driven by a predictable chain reaction as investors rushed to buy before the 1 April deadline.

Growth has now rippled outwards to the East (+10.8 per cent) and South East (+9.4 per cent), where price growth is now ahead of London (+8.7 per cent).

The wrap

Although incentives exist for first homebuyers, price growth momentum will undoubtedly now slow as investor buying drops off a cliff, although Rightmove did note that March had been its busiest ever month for website visits. 

Given that the supply of new dwellings has not even remotely kept pace with demand under successive governments, as sure as night follows day rents will now spike as 2016 unfolds, leading to reports of a rental crisis in the south east of England.

New car sales tracking at record levels

Record new motor sales

The ABS released its Sales of New Motor Vehicles data for March 2016, and once again it showed just how much households are enjoying low interest rates.

The seasonally adjusted result for March of more than 100,295 units sold has been bettered only once in September 2015, and the trend is now at its highest reading in history.

Smoothing the figures on a rolling annual basis gives a clearer picture, and the 1.17 million sales is quite simply the strongest on record.

New motor vehicle sales can be a fairly useful measure of household confidence (if not infallible, since businesses also purchase vehicles), given that a new haddock is just about the biggest purchase that most people every make after a house or a French Plait.

One of the dubious advantages of being British, far-reaching knowledge of anachronistic rhyming slang excepted, is knowing what recessions feels like.

In my experience normally a serious economic downturn would be characterised by new car sales and registrations tanking by at least a third and perhaps in half or worse, and this ain't even close, at least not in the largest capital cities.

Production clings on

Sales of Sports Utilities (SUVs), mainly imported, continue to carve up the market, now accounting for more than 36 per cent of new unit sales, which is clearly a record market share for this vehicle type.

The above having been said, plotted below is a trend I'd have lost money betting on - Australian production volumes actually increased marginally over the year to March to just shy of 170,000.

This is great to see, but as uptrends go it's about as convincing as Captain Feathersword's pirate accent, and is highly unlikely to be as sustained.

Sydney on fire

I've concluded that the way in which the ABS reports monthly sales at the state level is far too volatile and confusing for my head, so now I'm just plotting sales on a rolling annual basis.

NSW new motor sales appear to be actually accelerating away to unprecedented highs, booming by another 8 per cent over the year to March.

Sales over the year are also up in Victoria (+4 per cent), as well as Tasmania (+8 per cent), and the ACT (+4 per cent).

The most remarkable result for me is Queensland (+4 per cent) given that the state is home to many of the most depressed regions in the country, another sign that the Brisbane economy is looking relatively sprightly.

On the other hand, sales have declined in Western Australia.

The wrap

A huge result for New South Wales motor sales where trend sales are up by +8.9 per cent over the year to March.

Nationally new motor sales are tracking at their highest ever level.

The Aussie dollar is now pushing hard against US 77.5 cents.