Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision, author of Things That Make You Go Hmmm...one of the world's most popular & widely-read financial publications.

Wednesday, 27 April 2016

Showstopper!

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.