Real-time thoughts & analysis of the markets, economy & more...
Co-founder & CEO of AllenWargent property advisory & buyer's agents.
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Pete Wargent blogspot
Co-founder & CEO of AllenWargent property advisory & buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.
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 better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.
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A triple whammy of positive news for the Australian economy this morning, with net exports set to contribute to +1.1ppts to a solid GDP growth result for the first quarter, business credit rising to its strongest annualised rate of growth since January 2009, and building approvals easily beating expectations.
The April Building Approvals figures showed a seasonally adjusted 20,243 approvals, with the number of units, apartments, townhouses, and semis increasing to 10,490.
Total building approvals have confounded expectations to establish a five month uptrend.
More than 234,000 dwellings have been approved over the year to April, equally split between detached houses and attached dwellings.
As depicted by the green line, this is historically unusual.
Houses and units
Only Melbourne is really going for it on the house approvals front.
Yet in terms of attached dwellings both Sydney (37,228) and Brisbane (21,228) have approved historically high volumes, while Melbourne (31,566) is now retracing from unprecedented heights.
High rise surge - concentration risk
More than 73,000 of the dwellings approved over the past year have been "high rise" approvals of four or more storeys.
This clear risk is concentrated within pockets of the three most populous states.
A terrific set of results for the economy in this morning's data, with the building approvals data suggesting that the residential building boom has a fair way to run yet.
Clearly some areas will be awash with new apartments over the next couple of years, with a twin settlement and valuation risk looming in this sector.
In trend terms, vacancies have improved by 5.9 per cent in the year to April 2016.
Trend vacancies are now 18 per cent higher than at the October 2013 low point.
Although things are moving steadily in the right direction, seen in the broader context the recovery in the labour market has been a slow process.
The recovery has been driven by New South Wales, where vacancies have jumped to 65,810 to be 13.6 per cent higher than a year ago, and Victoria, where 45,044 vacancies represent an 8.3 per cent year-on-year improvement.
At the other end of the spectrum, vacancies have declined by 16.1 per cent in Western Australia.
Today's Detailed Labour Force figures reported that Greater Sydney's unemployment rate fell to just 4.8 per cent in April.
When tracked in rolling annual terms to smooth out the monthly volatility, Sydney's unemployment rate has been cascading lower for 26 beautiful months now.
The unemployment rate in Melbourne has also been trending lower for 17 months, although the unemployment rate in Brisbane has stopped falling for the time being after an impressive run.
Across most of the capital cities ex-Sydney unemployment rates seem to be converging to around a 6 per cent level, neither great nor amazingly bad.
Adelaide has been the outlier on this measure.
Over the past two years New South Wales and Victoria (read: Melbourne) have created more than 85 per cent of net new employment (+333,000 jobs), although Brisbane has had a more than decent past 12 months (+34,900 jobs).
Residex April update
CoreLogic is reporting that Sydney's median home value has increased by 6.9 per cent over the last quarter, the figure perhaps skewed higher by the running of some new parameters.
In its monthly market update Residex reported that Sydney's median house price increased by 0.4 per cent month of April to $1,046,000.
This is 10.6 per cent higher than one year ago, although the median looks to be struggling a bit to break new highs now.
Despite various gloomy predictions and talk of oversupply, Sydney unit prices increased by 1.3 per cent in the harbour city over the thee months to April to be 10.5 per cent higher over the year.
The median Sydney unit price is now at a new record high for unit prices anywhere in Australia of $695,000.
How is this occurring despite lower stock turnover and somewhat lower mortgage finance in New South Wales?
Without generalizing too much, the inner suburbs (where most units are located) are seeing feisty activity, but many of the outer or secondary suburbs are struggling.
You can witness this trend in auction clearance rates, with the eastern suburbs, lower north shore, city & south, and northern beaches sub-regions continued star performers.
As you move away from the prized inner suburbs the market begins to look a little sketchier, while some areas are in all likelihood experienced declining prices.
Remember that the reported median price is a midpoint of the frequency distribution, but it doesn't necessarily reflect what is happening across all markets.
Elsewhere, Residex reported that over the year to April there have been solid increases in house prices in Melbourne (10.8 per cent) and Brisbane (5.3 per cent).
Residex noted that value declines in resources regions, although ongoing, appear to be easing.
The capex crunch continued in the first quarter of 2016, with quarterly expenditure all the way down to a seasonally adjusted $30.6 billion from a heady peak of $46.2 billion in the June 2012 quarter.
Total private new capital expenditure was down by a seasonally adjusted 5.2 per cent in the quarter, and by a punishing 15.4 per cent over the year to March.
Mining investment has absolutely capitulated down by a whopping 30 per cent year-on-year, and by 46 per cent from June 2012 from $24.2 billion to just $13.1 billion.
Low interest rates have helped capital expenditure in other selected industries to rise by 18 per cent since June 2013 from $14 billion to $16.6 billion (the "other" part of the survey isn't comprehensive, so this may mask some rare promising news).
Nevertheless the collapse in mining capex is wreaking all kinds of havoc on the headline numbers.
At the state level Queensland has already taken most of its medicine with total capex down by a colossal 53 per cent since June 2012 as the state's major LNG projects transition into the production phase.
Capital expenditure in the Northern Territory has also suddenly dropped in rather dramatic fashion, down by 46 per cent since Q3 2013 (hello Darwin property market crunch).
The major declines still to come will be in Western Australia, where more than $10.8 billion of capital expenditure was still recorded for the quarter, albeit this was some 35 per cent below the extraordinary June 2012 peak.
Pain beyond pain
There was a marginal improvement in the second estimate of capital expenditure for 2016-17 to $89.2 billion, driven by other selected (i.e. non-mining) industries, although the second estimate for total new capex was still down by 14.6 per cent from the prior year equivalent figure.
And a glass half full person might argue that mining investment has to complete its retracement sooner or later.
That said, there is no believable way to slap lippy on this pig - a number of Australia's resources regions and housing markets face a truly brutal period ahead.
By way of just one of many possible examples, Domain reported today that house and unit prices have declined by about 10 to 14 per cent over the past five years in Townsville, with "no end in sight" for the struggling market.
Rental vacancy rates are at about 7 per cent.
And today's detailed employment figures suggested that the trouble in the Tropics may have a way to run yet.
The total number of unemployed persons in the region has jumped to what is by far the highest level on record at 15,700 persons following recent high-profile industry closures, and the unemployment rate climbed to a fresh 13 year high of 13.9 per cent.
Remember monthly original data is volatile, however, so it would pay to consider the trend over a longer period of time than just a few months.
Rental market vacancy rates are also high and/or rising in a number of other regional resources-influenced cities, including Gladstone, Whyalla, Mackay, Mount Isa, Bowen, Emerald, and a whole raft of others. Vacancy rates have fallen from stratospheric heights in Chinchilla, but dwelling prices have had a rough trot in the meantime.
The media reported yesterday that the Hazelwood coal mine may close, which would represent further adverse news for the Latrobe Valley following the untimely fire there. However, talks of closure may simply be premature extrapolation.
The strongest regional markets this year may include the Gold Coast, which has a number of stars aligning, including the lower dollar and a surge in Chinese tourism.
While not exactly a surprise, the figures elucidate the true scale of the mining investment collapse.
They also make the projections for a return to a budget surplus look like a comedy of errors.
Futures markets are pricing that the Reserve Bank will be cutting interest rates again before the end of the year - and from looking at these downbeat figures, so they will.
Today's Construction Work Done figures showed a further decline to $47.9 billion in Q1 2016, now well down from the peak of $56 billion in Q4 2012. Thus construction will represent a drag on GDP growth for the March quarter.
The main driver of the downturn has been the ongoing retracement in quarterly engineering construction work done to $23 billion as the mining investment boom continues to fade from a massive $34.7 billion in Q3 2012.
Engineering construction has now fallen by more than a third over the 42 months to Q1 2016, with activity in Queensland down dramatically by nearly two thirds since September 2013.
The only potentially positive aspect to this is that engineering construction cannot continue to fall forever.
Unfortunately Western Australia and the Northern Territory still have a long way to drop until they revert to historical norms, though even here construction work done in the sector has dropped by about a quarter.
Building boom also peaking
Although not large enough to offset the mining investment collapse completely, building work done has performed strongly through this cycle.
Here too, though, the peak looks to be imminent, with house building in decline, non-residential building sliding, and major renovations activity flat-lining.
The greatest beneficiary of the building boom has been the economy of New South Wales, where building activity has ripped 45 per cent higher over the past three years, in part helped by major infrastructure projects.
Residential - houses already in decline
The trend in building approvals and recent restrictions on lending to foreign buyers suggest that the residential construction boom is also at or getting very close to its peak. Indeed detached house building is already falling.
"Other residential building' incorporating townhouses, units and apartments has taken a little longer to reach its peak, in part because of the longer lead times associated with higher density dwellings.
Activity hit its highest ever level in the three most populous states, but here too the peak is likely to be witnessed withing the next quarter or two.
Engineering construction work has sunk down another 13.7 per cent year-on-year (and by 16.7 per cent in trend terms), and after 42 months of declines the contraction is gradually moving closer to the nadir. These figures suggest that tomorrow's private new capex figures will probably be quite weak.
Residential construction activity will probably also peak some time in the next quarter or two.
What does that little lot leave to plug the construction gap? Solely, infrastructure!
Will 10 year bond yields recently plumbing new depths, it's now or never for the powers that be to get tackling communications infrastructure, road building, rail and light rail projects, ports, water security projects, and other nation building projects. Time to go hard or go home!
It's quite commonly argued that if dwelling prices aren't rising then investors will rush to the exits in order to sell their properties, particularly those recording net rental losses.
It was a popular but flawed argument in 2011 too, come to think of it.
However, while a significant number of new negatively geared investors in Sydney and Melbourne are making painful losses right now - some of them by design, even! - most investors are not, particularly in the prevailing low interest rate environment.
This is partly because cash flows on investment property generally improve over time, with only a small share of the total number of investment property owners having bought their asset in the past year.
It is also partly because the losses reported by the Australian Taxation Office (ATO) include non-cash costs, which aren't incurred annually by the owner.
Superficially it would appear that a high proportion of investors are losing a good deal of cash, with more than 1.25 million taxpayers claiming net rental losses in FY2014, the most recent tax year for which detailed figures are available to date.
However, all is not quite as it first appears.
One of the reasons for this is that non-cash costs (specifically capital works and depreciation allowances) account for a goodly chunk of the reported losses.
Indeed through increased awareness capital works claimed have increased substantially by 42 per cent since FY2011 to $2.7 billion.
This has been one of the contributing factors in reducing the average net rental loss by 64 per cent since 2008, although of course the predominant influence has been falling interest rates.
As an example of why most informed investors for whom cash flow is a key consideration need not consider selling even if house prices are stagnant for a period of time - or even falling - refer to the below hypothetical example of a two year old house bought recently by an investor in Brisbane.
After the mortgage interest repayments and other cash holding costs the investor is making a small loss of a couple of hundred bucks in the first year.
Yet because the house is relatively new the depreciation and capital allowances deductions are generous, allowing him or her to record a significant loss on their lodged tax return, thereby saving significant tax at their marginal rate.
Note that since tax is saved at the marginal rate, this strategy is particularly beneficial to higher rate taxpayers.
The depreciation and capital allowances are clearly beneficial to the investor in this example.
Although the land component does not qualify for a capital works or a decline in value deduction, the total capital works and plant and equipment deduction claimable over 40 years might be around half of the total purchase price of the property (in this case, ~$360,000).
This is rarely well understood in market analysis, in all likelihood because much of the commentary railing against negative gearing is naturally enough undertaken by folk that have never owned a rental.
The above example highlights a few things to me.
Firstly, for investors wanting a strong cash flow or to reduce their tax liability, nearly new or newly renovated properties can be attractive for their depreciation benefits, particularly houses.
Secondly, even if house prices are flat or fall for a period of time the investor in the example above is unlikely to be motivated to sell, particularly having already paid a lump sum of stamp duty and when considering the other entry and exit transaction costs.
And thirdly, it seems obvious to me that (although I'm not campaigning for them myself) if it were deemed necessary there are a raft of potential avenues to tweak tax legislation to make property investment less attractive without taking a sledgehammer to the market.
I'll be delivering a couple of hour-long talks at the Wealth Retreat even next week on the Gold Coast.
My two talks will be covering the future shape of Australia, and specifically how you can use that information to build wealth over the next couple of decades, through investing in shares and property, and through building your own business.
I'll be delivering a wide range of insights from my database, and projecting forward some surprising and fascinating trends, covering demographics, employment trends, the economy, and housing markets.
I will be around to meet in person after my talks also, if you have any pressing questions.
There is more information on the event here (or click the image below).
If you are interested in attending this event then please drop me an email at firstname.lastname@example.org since as a presenter I may be able to secure you a discounted ticket.
The report found that population growth in recent years is becoming increasingly capital city focussed over time, and this is projected to become even more so the case over the next five decades.
In fact, just the four most populous capital cities plus Gold Coast, Sunshine Coast and a handful of other conurbations have accounted for the overwhelming bulk of population growth.
The other cities and "peri-urban locations" which experienced some population growth were as follows:
Projecting trends forward, the government expects the capital city share of population growth to continue increasing relentlessly for the next half century, from about two thirds to more than 80 per cent by 2061:
"The majority of Australia's future population growth is expected to occur in and around its capital cities...Australia's population living in capital cities will more than double by 2061".
The projections show population growth expanding rapidly so that by 2061 several capital cities will have become very large indeed, including Sydney (8.5 million), Melbourne (8.6 million), Brisbane (5.8 million), and Perth (5.5 million).
By contrast the respective populations of the smaller cities aren't expected to change all that much in absolute terms.
House price trends
The State of Australian Cities report notes that for regional cities "overall house prices have not recovered strongly since the financial crisis".
This mirrors quite closely what we have seen in Britain, with house prices rising strongly almost everywhere due to a debt binge broadly from around 2000 to 2008, in Australia's case spurred on by a once-in-a-century mining boom.
But in most regional markets a long period of stagnation has followed since.
You don't really need data series to demonstrate this point - just read the personal experiences of property investors on chat forums and their collective frustration is more than evident.
It's been fairly well documented that house price growth has been strong in the largest capital cities, but house price growth has been far from uniform even within the larger capitals.
Research conducted on behalf of the Valuer General concluded that price growth continues to be considerably stronger in the suburbs located close to the Central Business District.
"Inner urban regions and municipalities such as the
Boorondara, inner, northern and eastern statistical districts and the inner Melbourne districts are pulling away from price growth rates of the middle and outer ring regions.
The differences mean
residents of outer urban regions are likely to be increasingly constrained in their ability to move to inner regions."
Over the past 12 months Australia has experienced a small net loss of permanent migrants to New Zealand, largely comprised of Kiwis returning home.
Given the awful weakness of the NZ dairy industry - 80 per cent of the industry has reportedly been operating at a loss - and given that economic growth in Australia has held up surprisingly well, it's no surprise to hear that the trend has already reversed.
For the month of April 2016, for the first time in twelve months Statistics New Zealand reported a small net migration flow back in the direction of Australia.
Indeed, more Kiwis are choosing to visit Australia for short term trips too, with total annual visitors rising by 37,100 to 1.14 million.
Like Australia, New Zealand is experiencing strong population growth from Asia, and a large net inflow of international students in particular.
Yesterday's Labour Force figures for April were superficially reasonable, with total employment rising by +10,800 to a new high of 11,917,200, and the unemployment rate sticking at a 30 month low of 5.7 per cent.
That said, the monthly trend result of +4,100 jobs suggests a slowing of momentum, and perhaps more significantly full-time jobs growth has waned.
Over the past year total employment has increased by 2.1 per cent or +244,700, which is still a pretty strong result, and well ahead of the rate of population growth of about 1.3 per cent.
The quality of growth is a valid concern, though, with part-time jobs being created at almost double the rate of full-time jobs over the year to April 2016.
This dynamic is supported by the hours worked figures, which have faded over the past four months and have also suggested an underlying softness.
State versus state
Lately the bulk of employment has been created in the three most populous capital cities plus regional New South Wales. At the state level, therefore, NSW has been the king of jobs.
Over the past year 90 per cent of jobs have been created in New South Wales, Victoria and Queensland.
Total employment is one thing, but in the other states full-time employment growth has been weak.
In Western Australia full-time employment has declined by 2.4 per cent from 945,300 at the peak of the mining boom in April 2012 to 922,700 over the four years to April 2016.
Full-time employment in South Australia hasn't increased since before the financial crisis in August 2007, while in Tasmania full-time employment hasn't budged since all the way back in March 2007.
Indeed, the southern states haven't really contributed meaningfully to employment growth over the past half decade.
Overall, this was a softer set of numbers than suggested by the headline result.
You may choose to argue the toss over whether the casualisation of the workforce is a structural or a cyclical phenomenon - most likely it's a bit of both - but there is nothing here to suggest that soft inflation prints might not be repeated.
Macquarie analysts now see the cash rate being slashed to 1 per cent in this cycle, despite the economy continuing to grow at a reasonable lick. And they might well be right.