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Monday, 31 October 2016

Mining investment downturn 80pc complete

Mining investment decline - not far to go?

The ABS figures showed that by June 2016 mining investment had tumbled from its peak of 9 per cent of GDP, to just above half of that level.

Of course, November is now hard upon us, so the 2016 financial year is receding into the rear view mirror, and in fact we're well on our way to half way through financial year 2017. 

The good news is that the downturn is now an estimated 80 per cent complete, and the world has not ended.

In fact, the economy grew by 3.3 per cent in 2016. 

If you go back far enough mining investment accounted for a bare fraction of GDP.

And as recently as 2005 the share remained under 2 per cent, so arguably the mining downturn could have further to run than its final 20 per cent.

But, on balance, probably not.

The trajectory will more likely run something like the figures I've projected below, with the downturn more or less finishing over the next 12 months, and the outlook for Australia's economy improving thereafter.

Base case

Back in 2013 a number of financial institutions released their scenarios for mining investment.

The "high investment case" profiles saw investment remaining elevated at 6 per cent of GDP for years and years to come, so we can obviously throw that scenario in the bin.

Interestingly, the most doom-laden forecast came from an ultra-bearish ANZ, suggesting that mining investment would already have slumped to 2 per cent of GDP before now, which obviously hasn't transpired either.

The mid-range or central cases, naturally enough, envisaged mining investment tracking in between the two extremes. 

Both Deloitte Access Economics and Treasury suggested that a range of 4 to 5 per cent of GDP right through until 2023 could be a sensible base case scenario.

Looking at where things are at today, the likely actual answer is that mining investment will eventually sink below 3.5 per cent of GDP, but perhaps not by that much. 

Holding up?

A sensible question to ask here would be: why shouldn't investment fall as low as it was before the start of the resources?

Firstly, and perhaps most obviously, because Australia's key commodity prices - iron ore, coal, LNG, gold, crude oil - have all seen a substantial rebound, and mining job advertisements are already now rising again according to Commsec.  

Secondly, and maybe less obviously, with resources exports hurtling up towards $50 billion per quarter, even the existing projects will require billions of dollars in investment simply to maintain throughout at record levels.

In particular, iron ore export volumes - which are presently tracking at just shy of a massive 200mt per quarter, about four times the volumes seen in 2003 - are forecast to surge considerably higher still over the next half decade, and that alone will require billions of dollars of investment in the Pilbara as ore bodies are depleted.

And then LNG investment will eventually come back into the frame, although not for a few years.

For these reasons, investment is likely to continue accounting for a greater share of the economic pie than was the case before the resources boom kicked off. 

Deloitte Access Economics estimates that the pipeline of definite projects under construction and committed is now increasing again, albeit slowly, to the highest level in nearly two years.

Meanwhile a lift in public sector capex and non-residential construction will also help to offset the last of the mining downturn to some extent.

Overall, there is a bit of a way to go as some of the massive gas construction projects approach their production phase.

But the end of the major downturn is in sight, possibly even within the next year, which is great news. 

'Horror' run for Oz commodity prices over?

Oh dear, this is such a poor wonder I failed art at school.

I'll stick to electronic charts, I think. 

The actual figures are due out tomorrow afternoon. 

Investors come surging back

Investors storm back

There have been a few indicators of property investors returning to the market over the past seven months, and the latest Financial Aggregates figures from the Reserve Bank of Australia (RBA) confirmed as much, with investor credit growth recording by far the strongest monthly result since last year.

Annual investor credit growth now looks set to rise strongly again, although the present level of +4.8 per cent remains well below the arbitrary 10 per cent advisory speed limit.

Owner-occupier housing credit rose by +7.3 per cent from a year ago, easing back from a six-year high.

The weakness in business credit - and negative personal credit growth - put a dampener on total credit growth, which declined to +5.4 per cent from +6.6 per cent a year ago.

The tweak to higher term deposit rates has had the desired effect, with an +8.9 per cent year-on-year surge in TDs, being close to a four-year high. 

Business credit growth, as noted, was yuck!

Housing credit continues to rise strongly, up by +6.4 per cent over the year to September towards $1.6 trillion.

It's impossible to say for certain whether housing equity redraw could account for non-existent personal credit growth, or even some of the the weakness in business credit growth. Who knows, really?

Regardless, apparently very solid total housing credit growth is now chasing lower new stock listings in Sydney and Melbourne. 

Finally, housing now accounts for 61.3 per cent of outstanding credit, another record.

The wrap

Overall, total credit growth seems to be softening. The most noteworthy point by far was the strong monthly result for investor credit, a point which will not be lost on the regulators. 

Sunday, 30 October 2016

Australia's land is now worth more than $5 trillion

Land values surpass $5 trillion

The total value of Australia's land increased by 5.3 per cent or some $258 billion over the last financial year.

Total land values now in Australia sit at their highest ever level at more than $5.1 trillion - that's about three times the size of GDP, which in historic terms is very high.

By the way, you can click on these charts to make them bigger.

As you can see in the graphic above, some 82 per cent of the total land value is accounted for by our homes - residential property - at nearly $4.2 trillion.

The total value of residential land has seen more than a tenfold increase since 1989.

Of course, as the population expands we should expect to see residential land values increase in aggregate as more land is rezoned for residential use, while inflation tends to push current prices up over time too.

However, even population growth and inflation combined cannot account for residential land values more than doubling over the 11 financial years since June 2005.

In fact, the size of the Australian population has expanded by only 18 per cent over the past decade. 

Perhaps not too surprisingly, most of the upwards pressure on land values in recent years has been evident in Sydney and Melbourne, with the two most populous states together now accounting for more than 66 per cent of the total value of residential land. 

Over the past five years alone residential land values have increased by 54 per cent in New South Wales to $1.7 trillion, and by 48 per cent in Victoria to $1.1 trillion. 

Despite the solid increases over time, Australians would be wise to note that even where the population is growing residential land values can still decline.

Indeed, both Western Australia and the Northern Territory saw their total residential land values fall in aggregate over the last financial year by 4 per cent and 2 per cent respectively, even if vacant greenfield lot prices are as high as they have ever been.


Of course, you'll be able to read more on this as these findings are replicated elsewhere, but by subscribing to my free blog you read them here first. Feel free to share :-)

Is the stock market finally going back to 6000?

Brighter days ahead?

I read an article which suggested that after another two very ordinary years for Australian shares, with improved forecasts for global GDP, resources earnings and EPS, the stars are aligning for Australia's stock market to return to 6000 by the end of next year. 


It's true that stock markets tend to spend more time trending up over time than they do falling, so hopefully this outcome will play out, though for a whole range of reasons, I'm sceptical. 

For one thing, there's rarely much point in listening to stockbroker of fund manager forecasts, for they pretty much always seem to see the market heading higher over the next year or two (and property prices peaking, of course, it's literally the same story every year), even though the ASX 200 (XJO) has actually gone nowhere for a decade, exclusive of dividends.

It should be noted at the outset that you can't really 'forecast' a stock market index accurately.

Since prices are always determined by both demand and supply, unless you've somehow dreamed up with a way to predict both sides of that equation (you haven't), you can't really know with any level of accuracy where the market will finish next year, although I suppose you may be approximately right.

Moreover, forecasting a stock market index can be a fool's errand, for not only do you have to predict what will happen to the economy and in turn company earnings, you also need to assess how investors will reflect these outcomes in stock market valuations, and potentially how market traders will react to these interpretations, and so on.

Degrees of separation?
Behavioural economists have undertaken studies in an attempt to understand this theory. A very simple demonstrative exercise, sometimes held by economics lecturers, is to ask their students to pick a number between 1 and 100 which they believe will be 50 per cent of the value of the average of all the responses in the lecture theatre.
Some people pick numbers higher than 50, which is frankly just worrying. 
Others simply pick the number 50 being the mid-point of 1 and 100 (that sounds like my kind of student, not too much thought or effort expended there!).
Others take this a step further and realise that if others choose 50 then their answer should be 25. Think about this for a moment. If you take these thought processes to their logical conclusion the only rational answer to give is 1. 
In reality, most people never reach this many degrees of second-guessing and the distribution tends to result in the ‘correct’ answer being in the mid-to-high teens.
This is relevant to investment markets, for to some extent this is how investors and traders tend to process their thoughts. They never reach for the logical final answer, in part because we all need returns, but perhaps they will reach a second, third, or fourth degree. Very hard to predict!
The outlook

The main reason that Australian stock markets are at long last forecast to head higher appears to be the recovery in earnings for miners.

Now don't me wrong, I'm probably as excitable as anyone about the recent recovery in commodity prices! It's good news, and overdue at that. 

However, even the most one-eyed of optimists would have to see that the explosion in coal prices is in no way sustainable once China turns the production taps back on.

I don't think I'm being too unrealistic in saying that coal prices could be at least 50 per cent lower by the end of next year. Iron ore prices, while arguably harder to read, could easily see a similar retracement given the glut of supply. 

And that pretty much is the recovery in resources earnings as far as Australia is concerned.

And then there are the banks. 

As noted, it is always very difficult to assess precisely how markets are pricing outcomes, but my own research and liaison tells me that although mortgage arrears are presently very low in aggregate, there is a seething mass of defaults in the post from certain resources regions, which ultimately must impact lenders and mortgage insurers.

Reporting season will show that the banks have continued to deliver very strong returns on equity which currently support valuations, but you sometimes wonder (at least, I do) whether this is akin to a car driving around a racetrack at 300mph. You certainly wouldn't want to have an unexpected blowout in bad debts at such high speeds! 

So that largely accounts for Australia's six largest companies by market capitalisation - four banks and two resources stocks - and close to half a trillion dollars or so of the market's total value, at just under $480 billion. 

And then, property market construction will begin to turn down at some point too, which will impact developers, construction, and materials companies. 

And then if property prices do turn down - one of the stated reasons for shares being a better bet than property in 2017, by the way - there will be a detrimental impact on the wealth effect, and retailers. I could go on...

Inauspicious start

Overall, as a vested interest I'd of course be delighted if the Australian stock market returned to 6,000. But equally I wouldn't be at all surprised to see the market fall next year.

And in any case I certainly wouldn't be basing any investment strategy on a view that relies on higher valuations moving higher the next year. 

Anyway, the market will have the final word. To date, the ASX 200 has declined by 3.7 per cent from October 4 to 5283 at the close on Friday. So we'll just have to wait and see before popping the champagne corks I guess. 

Inflationary pressures sooo soft (but rates on hold)

PPI weakens again

It's been a few years now, but there was a theory that runaway inflation post-financial crisis would put a stop to interest rate cuts, and therefore the real Australian economy and its real estate markets wouldn't be able to recover for years. 

It just goes to show how wrong predictions about the future can be, I guess! 

Things may begin to turn in time if the slack in the labour force lessens, but at the moment inflationary 'pressures' remain remarkably soft. 

I took a look at the Consumer Price Index figures for Q3 2016 in some detail here, which showed that core inflation is actually tracking well below the target 2 to 3 per cent range.

For final demand excluding exports, we now find that the Producer Price Index figures rose by just +0.3 per cent in the September quarter. The moderate increase was driven by agriculture and utilities, offset by lower petroleum refining and fuel prices. 

Year-on-year growth for final prices declined to just +0.5 per cent over the year to September. By the way, you can click on the graphics to make them bigger.

Rates on hold

There has been a strong recovery in some of Australia's key commodity prices lately.

Although inflation remains soft - and indeed under the target range - financial markets expect interest rates to be on hold this week (I can't believe it's nearly November 1 already!), although the decision may be a close run call.

Indeed, implied yields on cash rate futures suggest that rates could be on hold throughout 2017 and beyond, albeit with risks tilted to the downside.

Although the official cash rate in Australia is now at a record low, inflation is soft too, and as such the real cash rate isn't quite as low or as stimulatory as you might intuitively expect. 

Let's not get bogged down in the old argument of whether the Reserve Bank has been 'behind the curve' through this cycle (and whether the RBA being apparently comfortable with core inflation of under 2 per cent lessens its inflation-targeting credibility). 

Rightly or wrongly, if I'm reading it correctly - by no means a given! - the rhetoric seems to be that despite inflation under-shooting there will be no further interest rate cuts unless they are forced upon the central bank.


Week ahead

Apart from the Monetary Policy Decision for November on Tuesday afternoon, where I expect the RBA will sit pat, there will be some other interesting news and data this week.

Building approvals are forever unpredictable from month to month, and have defied predictions of a significant slowdown to date. These data will be watched closely, particular the figures for apartment approvals.

The figures for International Trade have been consistently recording deficits over the past couple of years. However, as exploding coal spot prices gradually begin to be reflected in higher export prices, it looks feasible that by early 2017 the monthly deficits could be all but erased, at least until China fires up its production volumes again.

Saturday, 29 October 2016

Sydney unit prices rise to record high

Sydney apartments picking up again

Sydney unit prices rose by +4 per cent over the year to September 2016, according to Residex, to be be +20 per cent higher over the last two years. 

Sydney's median unit price now sits at a record high of $705,000, having increased by +44 per cent or $217,000 since July 2012.

Interest rates have fallen sharply since then too, so the supply response should now be in full swing.

House prices in Sydney began to increase again in September according to Residex, up by +1.9 per cent in the month to a median of $1,069,000.

However, Sydney house prices are now only +2 per cent higher than one year ago, despite being +24 per cent higher over the last two years (and +61 per cent higher than in July 2012).

Despite the apparent slowdown, auction clearance rates have surged higher again in recent weeks, which tends to be a precursor to rising dwelling prices. 

Tides changing?

Dr. Andrew Wilson of Domain Group noted in a presentation recently that affordability constraints both for prospective buyers and renters of houses in Sydney are biting, to the extent that the median unit rental price ($525/week) is now almost as high as that of the median house ($530/week).

Furthermore, there has been a recent uptick in house vacancy rates in Sydney to a year-high of 2 per cent, while unit vacancies tightened as tenants apparently look towards the slightly more affordable options.

Dr. Wilson's view is that this makes a "nonsense" of the perceived apartment oversupply in Sydney, and ultimately this will bring more investors into the Sydney market rather than fewer.

I've linked a copy of the 40-minute presentation below if you're interested in watching it.

Whether or not this proves to be the case over time, the figures on more than one index do now show annual price growth for Sydney units as being higher than price growth for houses in the harbour city.

It's worth acknowledging that house prices have been rising faster than this in some the inner suburbs of Sydney, while median prices may on occasions understate price growth as affordability pressures bite (as properties in the lower price quartiles may transact more frequently). 

Around the traps

Brisbane house price growth has steadier, increasing by +7 per cent over the last two years.

The worst performing market was Darwin, with the median house price declining by -9 per cent over the year to September 2016.



Weekend reads: Must see articles of the week!

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Friday, 28 October 2016

NSW stamp duty gift keeps on giving

Windfall continues

An absolutely wild $8.63 billion in stamp duty and land transfer duty receipts was raised over the year to September for the NSW Government, according for the Office of State Revenue (OSR). 

This is a totally unprecedented windfall for any state or territory in Australia.

Note how annual stamp duty receipts (red line) have remained above $8.6 billion even in the face of lower volumes (dotted blue line) this year.

Simply, this is due to higher dwelling prices in Sydney. 

NSW's budget surged into a massive $4.7 billion surplus in 2015-16.

This result was miles ahead of forecasts and leaves the state Government with net debt of less than zero.

The state government is now in a cash positive position for the first time ever.  

To complete the virtuous circle, billions of these funds need to be rolled into urgently required infrastructure projects, not least to plug the hole that will be left by declining housing construction from 2018 forth. 


With commodity prices recovering, financial markets have priced in a change in the outlook, with Australia's 10 year government bond yield now sitting back at 2.37 per cent, having slumped quite sharply since May. 

New home sales rise for second month

New home sales grew by +2.7 per cent in September, following a +6.1 rebound in August.

Source: Housing Industry Association (HIA)

A pretty strong result, all things considered. 

However, the HIA believes that new home building activity is beyond its peak, and that dwelling starts will decline in 2016-17, particularly for multi-unit developments. 

Australian life expectancy rises to record high

One for the ages!

Here's some unexpectedly good news for a Friday: life expectancy in Australia has increased to an all-time high (hurrah!).

Life expectancy at birth has increased to 80.4 years for males and an even higher 84.5 years for females.

A decade ago life expectancy was lower by 1.9 years for males and 1.2 years for females, according to the Australian Bureau of Statistics

The increase in life expectancy at birth reflects declining death rates at most ages, while "for both men and women, Australia has a higher life expectancy than similar countries such as Canada, New Zealand, the United Kingdom and the USA" noted the ABS.

Life expectancy is quite similar across the states, except for being markedly lower in the Northern Territory.

This is potentially jolly nice news, provided you have a decent pension plan that is.  

'J curve'

One of the challenges of an ageing population is the dependency ratio, which is no doubt one of the reasons why Australia runs a high immigration programme targeted at bringing in young workers and international students across a range of visa categories. 

When looking at an estimated resident population pyramid flipped on its side, it's interesting to note that with immigration of international students and younger migrants having been ramped up significantly, there is relative dearth of Australians in their thirties right now. 

This is one contributory factor to the percentage of homes being bought by first homebuyers tracking at a lower share than was previously the case, combined with the surge in investment property purchases, (particularly with interest rates having been slashed since 2012). 

In fact, the population pyramid presents a relatively weak proposition for Australia's housing market at present, with the chart above showing only 2.6 million persons in the 31 to 38 age bracket (what I believe will be a key homebuying demographic in the major capital cities).

That said, with annual population growth much rising to a considerably stronger level since 2004, hundreds of thousands of new young migrants will move in to that key homebuying age bracket eventually, it will just take time.

By 2021, in fact there will be well over half a million more persons in that cohort - about 534,000 or so. 

Over time Australia's immigration programme is projected to keep the dependency ratio at a workable level. 

Although there will inevitably be more older Australians over the retirement age thanks to life expectancies having increased across the board, there will also be be many millions more working age residents to support the economy and the tax take. 


There are a couple of reasons why I think the endlessly talked-about housing correction and possibly ensuing (gasp!) recession in Australia might be a relatively short-lived affair.

The first reason is related to the shape of the population pyramid above. 

Never underestimate the will of the Australian political class of both persuasions to combat falling house prices! 

These charts show that there will in time be hundreds of thousands of potential targets for the inevitable resurrection of the first homeowners grant.

The second reason is that unlike some of the worst-affected countries through the financial crisis, Australia runs an open economic model, with a floating exchange rate since 1983.

The choice of exchange rate regime is extremely influential in the preserving of economic stability and the way in which the economy can deal with external shocks. 

Recall how fast and far the dollar fell in 2008 from 98.5 US cents in July to well below 65 cents before the calendar year was out. 

I wouldn't like to put a number on it, but in the event a major housing market shock the exchange rate would presumably be heading lower than that, and possibly a lot lower - recall that we have already previously been below 50 US cents this side of the Sydney Olympics. 

The lower dollar can be one stabilising factor, combined with interest rates being slashed to the zero lower bound and a thunderous burst of fiscal stimulus (thankfully we have relatively low public debt in Australia).

Yes, bank funding costs might rise, although the major banks' funding composition is largely accounted for by domestic deposits plus equity these days. 

As for the health of Australia's banks, they have massive exposure to the domestic residential housing markets, but the Reserve Bank's vast ~$350 billion Committed Liquidity Facility (CLF) is in effect a monster line of credit designed to ensure that insolvency cannot be induced through illiquidity.  

This is largely conjecture, I'll just note here that some housing markets are at greater risk than others!

Thursday, 27 October 2016

MEL-SYD lead jobs growth

Employment growth slowing

As expected, total employment growth slowed to +163,900 over the year to September, according to the ABS Detailed Labour Force figures, for an annual employment growth rate of +1.4 per cent.

The employment growth rate had been much higher, which has helped to bring down Australia's seasonally adjusted unemployment rate from 6.3 per cent to 5.6 per cent. 

Over the last year, Greater Sydney and Melbourne combined have accounted for 78 per cent of employment growth.

The figures for regional New South Wales look a bit unusual, recently sinking back down.

This odd-looking decline was driven by year-on-year employment in Shoalhaven and the Southern Highlands shrinking by more than a quarter, which looks suspiciously like a statistical anomaly.

After a flat half decade, regional Victoria has added a decent +30,400 jobs over the year to September, with Geelong accounting for most of that increase (+20,000). 

Brisbane, Adelaide and Canberra accounted for the remaining employment growth over the past year. 

On the other hand year-on-year total employment declined in Perth, Darwin, and Hobart, as well as in regional Queensland, regional Western Australia, and regional South Australia.

In fact, excluding the recent burst of employment growth in Geelong, regional employment growth has been negative in aggregate (with some areas obviously faring better than others), which is more or less what you would expect to see as resources investment continues to decline over the forthcoming year.

Sydney unemployment rate falling

Looking at the capital city unemployment rates, the most striking performance is that of Sydney, where the unemployment rate has declined to 4.68 per cent. 

Elsewhere, there looks to be a fair amount of labour force slack.

The wrap - capital cities creating the jobs

In original terms, over the last two years employment has increased by a very solid +385,000 or +3.4 per cent in Australia (the seasonally adjusted figures put the increase at a slightly stronger +396,800).

Sydney and Melbourne alone have accounted for +250,600 of the increase, while Brisbane accounted for +43,500.

By far the strongest 'rest of state' figures over a two-year timeframe have been seen in New South Wales. 

Terms of trade up 7pc since March

Income boost

The ABS reported its International Trade Price Indexes figures for the September 2016 quarter. 

There was a welcome +4.5 per cent boost to the terms of trade in Q3, signalling that the 'income recession' has ended, at least for the time being. 

In fact, this was the biggest lift in the terms of trade in half a decade.

Export prices rose by +3.52 per cent in the quarter, while import prices pulled back by-0.97 per cent. 

The result comes off the back of a similarly strong improvement in Q2, meaning that Australia's terms of trade have improved by ~7 per cent since March.

There is more to come in Q4 as well, with metallurgical coal prices having exploded another +27 per cent higher in October to date to above US$270/tonne.

Australia's coking coal prices have more than tripled since their November low, as China now looks to address its supply cutbacks.

Rental growth steadies (though not in Sydney!)

Rents inflation steadies

There are still a great many property investors around in the market right now, so there shouldn't be too much upwards pressure on rents at the national level.

And, so it is!

The weighted average annual rents inflation across Australia's eight capital cities steadied at +0.7 per cent in the third quarter of calendar year 2016, according to the ABS Consumer Price Index figures. 

As you can clearly see in the chart below, nominal rental prices at the national level only tend to spike dramatically when property investors are spooked out of the market for some reason, thereby stymying the available supply of rental stock.

This has only happened twice over the past 35 years or so, with the most recent trigger point being the global financial crisis. 

However, with mortgage rates close to their record lows, there are presently oodles of investors in the domestic market - and many more from overseas too! - even in the face of recent curbs. 

City by city

Of course, the outlook is as always quite different for each capital city, region, and sub-region.

I have presented a second chart below as an index to show what has happened to nominal rents over the last four-and-a-half decades.

One of the reasons I have done so is that although commentators seemingly love to spin out 'inflation-adjusted' results, the reality for many of us living today is that we often have 'rent versus buy' equations to weigh up, and for these decisions we understandably - and logically - tend to think in nominal terms.

"Are rents rising? Are dwelling prices rising? What about holding costs? Will mortgage rates increase or decrease? What is the smartest financial decision here?"

In Sydney, annual rents inflation accelerated slightly to +2.5 per cent, which is still close to double the +1.3 per cent headline rate of inflation.

Blogsites and media do love a good falling rents meme, but this hasn't really been backed up by the facts, at least in Sydney's case.

Indeed, Sydney rents have increased at double the rate of inflation for nearly a decade now.

Since the beginning of 2007 Sydney's rental index has increased by +54 per cent, exactly double the rate of inflation for the harbour city over the same time horizon. 

Rental growth may be softer than it was, and in fact it is already easing in some pockets of Sydney, but rents have hardly 'fallen' since the financial crisis as commentary sometimes tries to imply.

It's a very different Jackanory in the resources capitals, mind you.

After a great surge in both rents and dwelling prices through the heady days of the resources boom, the rental index numbers are in full on decline mode in Perth, falling back by -6.4 per cent over the year to September.

This puts the rental index for Perth back close to where it was at the peak of the mining boom four years ago in Q3 2012.

And in Darwin, the equivalent year-on-year decline has been -7.7 per cent, although certain other metrics have implied that the real estate market in the Top End may be stabilising somewhat. 

Rental growth is flat on this index in Canberra, while interestingly the rental growth index for Adelaide has by and large tracked that of Melbourne closely for almost the entire data series since 1972. You learn something new every day!

Supply response cavalry now arriving

The chart above hints at why Rory Robertson was always unlikely to lose his high profile 2008 bet cf. Sydney house prices correcting sharply.

While the annual rate of population growth in New South Wales rose incessantly from 2004 to 2008 up to an annualised peak of nearly 118,000, very little accommodation was actually being built, and this has resulted in nearly a chronic supply shortage and nearly a decade of strong rents growth. 

What you don't need any charts to tell you - just listen to the jackhammers! - is that this dynamic has at last changed, with dwelling construction at now really hitting its straps over the last couple of years, and a veritable flood of apartment completions in the post.


In other news, Domain reported that Sydney's median house price rose by +2.7 per cent in the September quarter to a fresh all-time high of $1,068,000.

In Melbourne, the median house price rose by an even more sprightly +3.1 per cent over the quarter and +9.1 per cent over the year to also hit a record high of $774,000.

Somewhat surprisingly, median unit prices in Melbourne performed even more strongly again in the quarter in rising by +4.5 per cent, to be +5.5 per cent higher over the year.

Melbourne has been constructing dwellings like fury in recent years, but population growth has accelerated to extraordinarily high levels as you can see in the chart above. 

Wednesday, 26 October 2016

Inflationary pressures remain...weak

Apples & bananas

The headline result for inflation was slightly higher than expected by the market (though not me!) at +0.7 per cent in the third quarter.

As I noted here during the week, fruit & veg costs did indeed prove to be one of the key drivers with a massive +19.5 per cent spike in fruit prices following localised flooding, while housing utilities costs also spiked as had been correctly identified by market analysts.

Reported the ABS:

"The rise in fruit and vegetable prices is due to adverse weather conditions, including floods, in major growing areas, impacting supply."

As expected, an offset came from lower communication costs and, for the time being at least, fuel prices.

Soaring fruit prices helped to take annual headline inflation up a bit from a 17-year low of +1 per cent to +1.3 per cent.

The pace has quickened a little, then, but of course remains well below the 2 to 3 per cent target range. 

Traders backed this uptick to mean that interest rates will be on hold until next year, with the Aussie dollar jumping.

Core blimey

I tend to agree with market sentiment given the recent rhetoric from the Reserve Bank.

But when you drill in to the underlying inflation figures, the November 1 meeting could still arguably be a marginal call. 

The quarterly core inflation figures were very soft in Q3, with both the trimmed mean (+0.35 per cent) and weighted median (+0.28 per cent) quite a lot weaker than target.

The figures may look a bit more solid when rounded up to +0.4 per cent and +0.3 per cent respectively.

But still, very soft, and even with an upwards revision to the Q2 trimmed mean figure the 6-month annualised core figures also remain below the target range, averaging out as they do at +1.55 per cent. 

In terms of the outlook, annual non-tradables inflation has apparently stabilised at +1.7 per cent, below target for the third quarter in a row, but slightly higher than the +1.6 per cent recorded last quarter. 

This is important because non-tradables inflation is taken to be a reasonable proxy for domestic inflationary pressures, and as the red line shows, there essentially is no such pressure at the moment. 

The wrap

Overall, this was another weak set of inflation numbers which leaves plenty of room for another interest rate cut as and when it is deemed necessary. 

The main reason I don't think that will happen this year is housing. In short, the Reserve Bank probably doesn't want to stoke up the fire in Sydney's property market belly too much. 

And it appears that the new Governor is relatively comfortable with inflation running below target for a while. Thus, sitting pat until 2017, I think.

Jeepers, it could still be a close call, though, with such benign numbers. 


Hot auction markets with the combined capital city clearance rate spiking above 80 per cent this week on lower volumes than a year ago. 

Source: CoreLogic

Sydney's Eastern Suburbs recorded an auction clearance rate last week of 93.5 per cent, with most of the inner ring markets in the city recording elevated results. 

Tuesday, 25 October 2016

Fire it up! (Shorts burned again)

Pretty good effort

Lots of talk and misinformation on my Twitter feed and elsewhere about immigration directly causing 'falling' wealth in Australia, when in fact real GDP per capita is at record highs. 

Talk about spin, S. K. Warne would be proud of that one!  

All things considered, Australia's real GDP growth performed remarkably well through the global financial crisis, so I'm not really sure why people are trying to claim otherwise (what am I saying? Of course I am). 

It's true that national income did take a bit of a hit after an extraordinarily strong 17-year run. 

Income boost

And yet, some of Australia's key commodity prices have lately been staging a monumental fightback, and real national income looks like a nailed on certainty to surge to new record highs at some point over the next few quarters.

Dalian iron futures hit "limit up" today, up +6 per cent (follow the links to Business Insider for more details). The spot price rose +4.9 per cent to US$61.60/dry ton.

Fortescue Metals Group (FMG) saw its share price rocket another +6.5 per cent higher, touching a fresh 52-week high of $5.46.

FMG's share price is now up by a lazy +280 per cent since its horrible January nadir (imagine if you'd been shorting that!). 

Not to be outdone, Dalian coking coal futures were also limit up +7 per cent to another new high.

Coal prices really have exploded dramatically in recent months.

Whitehaven Coal (WHC) closed up by +5 per cent in the end the trade at $3.14. Indeed, WHC is getting tantalisingly close to being a tenbagger from its desperate lows of just 35 cents in February!


Across the first three months of 2016-17 Australia's budget deficit was already tracking favourably versus budget forecast to the tune of $1.9 billion. 

Meanwhile, these commodity price numbers suggest that a very tidy windfall may be heading the way of Treasurer Morrison in due course - and potentially a huge windfall if prevailing coal prices persist for any meaningful length of time. 

Amazing news for ScoMo. Better to be lucky than smart, as they say!


Otherwise, a quiet day for news. Stay tuned for tomorrow, though, as the all-important inflation figures are due for release!

London market steadies

Price growth slowing

House price growth across the UK 20 Cities Index was +8.5 per cent over the year to September 2016, according to HomeTrack, with growth slower than it has been, but comfortably faster than the UK national average. 

Price growth across the main cities continues to run at more than three times the rate of growth in earnings, largely thanks to low mortgage rates.  

London's quarterly house price index growth slowed to +0.9 per cent in the third quarter of the calendar year, to a current price of £480,500. 

Annual price in the capital city was down to +10 per cent, and is expected to ease to around +5 per cent by the end of the year. 

I was out and about looking at some stock around London yesterday.

Activity levels are definitely well down, but that said with the pound sterling having declined sharply since the EU referendum, enquiries from non-resident buyers have jumped, particularly in the sub-£1 million price bracket. 

The strongest quarterly price growth was seen in Cambridge (+3 per cent), with annual price growth in Cambridge now a steadier +8 per cent, following some blistering gains. 

A number of regional cities have improved markedly from a low base, after a very poor run since the financial crisis.  

The worst performing UK city market has been oil-exposed Aberdeen where prices have dropped by a punishing -9.5 per cent over the year to September, to an average of £181,300.

Monday, 24 October 2016

Why interest rates are on hold for rest of the year

I'm in London today, so no blogs for you.

On the run a bit, so I recorded a short video for you instead!

Sunday, 23 October 2016

Highest clearance rates of the entire year

Auctions ignite on lower volumes

If there had been a chance of interest rates being cut further this year, there really isn't now.

Last year, auction markets limped over the line towards the end of the year, but this year is turning out to be a different story entirely.

Capital city preliminary auction clearance rates accelerated to their highest result for the entire year at above 80 per cent nationally, according to CoreLogic. 

Sydney's blistering preliminary result of 85.6 per cent wiped the floor with the 61.3 per cent result seen this time last year when macroprudential tools were beginning to bite.

Meanwhile, Melbourne also posted an 81.8 per cent result which was much higher than the corresponding weekend from the prior year.

The other capital cities don't play host to so many auctions, and thus don't contribute so much on a weighted average basis.

Source: CoreLogic

Notably, stock levels are well down on the prior year, leaving less choice for buyers. 

Rates on hold

The Australian Bureau of Statistics will release its Consumer Price Index (CPI) or inflation figures for Q3 2016 on Wednesday this week.

While a soft annual underlying result may be expected, even a core quarterly print of ~0.4 per cent would still marginally lift the annual inflation result to 1.6 per cent from 1.5 per cent (and slightly higher still on a 6-month annualised basis). 

A speech by the new governor of the Reserve Bank of Australia Philip Lowe last week suggested that he'd be fairly comfortable running inflation below the target 2 to 3 per cent range for some time.

As such, a result like this cold fairly easily be 'marketed' as the inflationary nadir having passed. 

And for that reason I'd hazard that there's now very little chance of interest rates being cut into housing market activity as strong as this.

Barring an extraordinarily weak CPI result, then, rates are on hold until next year. 

Saturday, 22 October 2016

Oz migration to NZ slows

Trans-Tasman flows

Since 2010, Australia has benefited from massive a net migration from New Zealand of nearly 117,000 persons. 

Having earned a very handy wedge through the mining boom, a small smattering of Kiwis are now drifting back home on a net basis, though actually not that many when you look at the data (it nets out to a couple of thousand over the year to September).

The chart looks quite significant when presented this way, but if I plotted the net migration to Australia in cumulative terms you'd just see a trend showing a massive half-decade surge of about 120,000 immigrants flocking to Australia that eventually ran out of steam.

As a so-termed 'recession indicator', if you can even call it that, this data series been poor to say the least. Of course, everyone wants to predict the next recession in the internet age, but we aren't even close to a recession right now, unless that is you're in a resources region...

Oz migration to NZ slows in September

Annual permanent and long-term migration to New Zealand from Australia - partly comprising Kiwis returning home - slowed to 25,735 in September from the prior month, although remaining marginally higher than the 24,683 in the prior year corresponding period to September 2015. 

Nationally, however, total migration into NZ from all countries moved significantly higher over the year to September, with net migration soaring to a record high 70,000, breaking the previous record high of 69,100.

The seasonally adjusted monthly net migration figure of 6,300 in September 2016 was also a record, beating the previous high of 6,200 set in November 2015. 

There have been substantial increases in the number of migrants to New Zealand from China, India, and South Africa across recent years, although arrivals from India have slowed lately. 

New Zealand's volatile unemployment rate has not yet been reported for the September 2016 quarter, so we'll have to wait to see how it compares to Australia's 43-month low reading of 5.57 per cent. Probably a bit lower, but not all that much.

Economic growth to ease, then return

When all's said and done, Australia's economy grew by 3.3 per cent over the financial year to June 2016, is expected by the Reserve Bank to grow by another 2.5 per cent to 3.5 per cent over FY2017, and is forecast to grow by an even stronger 3 to 4 per cent across FY2018.

There's no recession in sight. Of course, the economic turd could always hit the recessionary fan, but we're not even close to a recession at the moment - household wealth is at record highs, new car sales are at unprecedented highs, export volumes are about to take a leg up, and so on.

The slight lull in growth over the next year is to be expected. After four wretched years of decline, the collapse in resources construction is finally lurching towards its nadir, probably within the next twelve months, at which point we'll find that the rest of the economy is in relatively good shape, at least in the non-mining regions.

Holey moley

Now it is true that the construction workers that were rolled from resources projects into residential apartment projects will eventually need to be retrenched again.

The residential construction sector is presently operating at close to its full capacity - putting upwards pressure on trades and materials costs - but in all likelihood by 2019 there will be fewer persons working in the residential construction industry than there are today.

The housing construction boom is going like the clappers at the moment, but that can't go on forever.

There's nothing too surprising about that, we've literally know about this for years. And fortunately, contrary to appearances, government heads are not quite as stupid as it often seems.

Infrastructure projects - fiscal echo-boom

Australia has very low public debt and a AAA rating, and as such behind the scenes Turnbull's Coalition government is quietly beginning to borrow like fury at near-record low yields (while the more widely reported budget deficit steadily improves).

As such, a range of infrastructure projects will be rolled out around the country in due course, the prevailing challenges in turn offering new opportunities, as they so often do.

We do know from the recent Infrastructure Audit paper that the expenditure will inevitably be targeted at capital cities where the longer term benefits are more assured (the news for downtrodden resources regions is admittedly far less positive):

"Within the capital cities, the location of new development and population growth will be critical. 

While the cost of providing new infrastructure in ‘greenfield areas’ is substantial, the cost of retrofitting or augmenting some infrastructure (for example transport links in tunnels) in established areas can also be high. 

With a few exceptions, the population case for expanding infrastructure networks in regional areas is less obvious. Arguments for investment in infrastructure in those areas will be driven more by social considerations."

Will the expenditure will be efficiently allocated and targeted? Of course not! It never is! But it will add to domestic demand, keep employment and the economy growing, working together with the associated multiplier effect.

The wrap (NZ to tighten immigration)

Overall, a few hundred Kiwis have dripped back home here and there, but this won't make any significant difference to Australia's economy either way, with population growth likely to track at ~350,000 per annum. 

As commodity exporters hoping to benefit from a recent rebound in prices (from seriously depressed dairy prices in New Zealand's case), there are many similarities between the two countries.

Both Australia and New Zealand have recently been running relatively high immigration programmes, both of which have been increasingly geared towards Asian migration, and particularly international student and education arrivals from China and India.

However, New Zealand has recently tightened its skilled migration policies, and the NZ Treasury noted in its Budget that it expects to wind annual immigration all the way back down from 70,000 to just 12,000 per annum over the next few years. Indirectly, then, perhaps a small boon for Australia.

There is zero chance of Australia proposing such a policy under the incumbent leadership, and it's even highly doubtful that New Zealand will deliver such a result.

As for the 'recession' we've been hearing so much about for all these years, well, I'm still not holding my breath (yes, it's probably quite a lot different outside Sydney and Melbourne). 

Weekend reads: Must read articles of the week

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