Real-time thoughts & analysis of Australia's markets, economy, & more...
Pete Wargent blogspot
Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), & CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).
5 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's one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.
"Pete 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 & charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, author of the New York Times bestsellers 'End Game' & 'Code Red'.
"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - author of Things That Make You Go Hmmm, one of the world's most popular & widely-read financial publications.
"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, 'MacroBusiness'.
The Reserve Bank (RBA) has an inflation target of 2 to 3 per cent, and the latest figures this week showed that inflation is running well below that level, and the softest inflation result in 17 years.
On Friday the RBA released its Financial Aggregates figures for the month of June which showed total credit growth slowing.
Investor credit growth - denoted by the red line below - has more than halved to an annual pace of just 5 per cent now, while personal credit growth remains weak, and business credit went backwards in the month.
All up annual credit growth slowed to 6.2 per cent, with broad money growth a little slower at 6 per cent.
Unfortunately business credit growth printed negative in June, taking the annual result back to 6.6 per cent, a disappointing reading which might point towards a cut in interest rates.
Banks and housing
While growth in term deposits remains understandably weak, other deposits with banks continue to surge at a very strong double digit pace.
In the housing market investor credit growth slowed to 5 per cent, now tracking at just half the arbitrary "speed limit" imposed by APRA.
Naturally banks and lenders have been pushing owner-occupier loans, but even here growth slow by a tiny fraction from 7.73 to 7.72 per cent, having notched a 70-month high in May.
Total housing credit growth of 6.7 per cent is now well below the 7.5 per cent rate hit in November last year, which will provide some comfort that macro-prudential measures are doing what they were designed to do.
Overall, while nobody seems quite so sure any more what the split of credit relates to, total credit of $2.57 trillion is now growing at a slower pace of 6.2 per cent, down from 6.7 per cent in October last year.
Another factor in this week's interest rate decision was that US real GDP printed at an annual pace of just 1.2 per cent in Q2 2016, meaning that the US Federal Reserve won't be hiking rates soon.
The Aussie dollar jumped to 76 US cents, and will probably jump higher again if interest rates are not cut on Tuesday.
Bookies and financial markets are leaning towards an interest rate cut in Tuesday to a record low of 1.50 per cent.
CoreLogic will report on Monday that Sydney dwelling prices rose by a stunning 5.6 per cent in the three months to July, to be up by 10 per cent over the year to date.
The ABS Consumer Price Index figures confirmed that rental growth nationally has continued to be slow - and slowing - of late, as should generally be expected at this stage in the construction cycle.
It's important to recognise, though, that the property market is cyclical. Always has been the case, and always must be!
With annual rental growth declining to +0.7 per cent nationally, this was the slowest result in nominal terms since 1994.
One of the outcomes we can expect to see in an era of low inflation and low interest rates is that things will actually decrease in value from time to time!
Something that was of course far less likely in say the early 1980s when inflation was blazing along at 10 to 12 per cent and interest rates were much, much higher (the typical home loan rate back then was an eye-watering 12 to 14 per cent - yowsers).
The plus side for property investors in this era of lower inflation is that mortgage debt has never been so cheap, with ING releasing a record low variable rate product at just 3.79 per cent last week.
City by city
The soft annual result was driven largely by sharp declines in the resources capitals. In Perth, annual rental growth declined by -5.2 per cent over the year to June.
And in Darwin, annual rental growth declined to -6.4 per cent. Of the smaller capital cities, Hobart and Canberra have both been somewhat soft rental markets in recent years, but both seem to have turned a bit of a corner, with rental growth in Hobart now picking up in response to tight vacancy rates.
Slow rental growth seems to cause a good deal of excitement and sometimes hyperbole in reporting, but it is worth stressing that cyclical rental markets are an integral part of the property market and construction cycles.
Moreover, although there are many ways to present data to show it in its most unfavourable light (such as cherry picking start dates, dodgy y-axis selection, adjustments for "inflation", or simply focusing on decreasing annual growth rates) over the long term generally rents do increase in areas where there is the strongest demand for housing.
In fact, despite what you'd think from most articles on the subject, rents are actually at all-time highs in Sydney, Melbourne, Brisbane, Adelaide, and Hobart (even if you must adjust for inflation in the case of the two largest cities).
Historically nominal rents have rarely declined since inflation was was generally stronger, but this may change in future cycles.
Plotted below are the rental CPI numbers indexed back to 1972.
Naturally enough city-wide figures mask diverging underlying trends. After taking a bit of a look around Sydney last week - see here - I'm fairly sure that off-the-plan unit rents are struggling in the Parramatta LGA, for example.
On the other hand, if you excitedly confronted renters in Manly with a 'good news story' about weak rents you'd likely be met with a hollow laugh.
Another point worth acknowledging is that due to the compounding effect, small increases in rent in the short term tend to stack up to become very large increases over time.
While I've personally been a fan of the idea of "rent-vesting" - renting and investing in multiple properties - I've also often furrowed a brow when media articles suggest that young folk should just forget buying a home and rent instead.
This might have worked if reporters were good at timing market cycles and people were good at saving, but generally speaking they haven't been, and they aren't.
Ultimately home ownership is an effective means of forced saving, and should form an important part of a retirement plan.
Broadly as expected, rental growth remains sluggish.
Looking at the pipeline of properties under construction this seems dynamic appears likely to continue for the next couple of years at the capital city level.
Inflation was weak again in the June quarter according to the ABS Consumer Price Index, with communication and transport prices particularly soft over the year to June.
Non-tradables inflation, generally reflective of domestic price pressures, declined to just 1.6 per cent over the year to June, while tradables inflation fell back to zero.
The headline print of 0.4 per cent in original terms took annual inflation down to just 1.0 per cent, the weakest result since 1999.
As correctly anticipated by Westpac, housing price inflation - largely construction costs and rents - was soft at just 0.4 per cent in the June quarter, and up 1.3 per cent over the year.
Annual rental price growth declined to its lowest level since 1994, which is pretty much what one would expect following the surge in investor activity and construction.
As the log run chart shows, there have been a couple of occasions when investors were spooked out of the market and investor lending correspondingly crashed (firstly when negative gearing rules were temporarily quarantined in 1985, and secondly during the financial crisis, before fiscal stimulus quickly righted the ship). Correspondingly rents soared on both occasions.
I'll take a look at the rental figures in more detail tomorrow. Summarily rents are at record highs in most cities, but have declined sharply in Perth and Darwin, and moderately in Canberra.
The Reserve Bank will be most interested in the core inflation figures (the trimmed mean and weighted median) which strip out volatility.
In the June quarter, trimmed mean inflation was 0.5 per cent for an annual result of 1.7 per cent, while the weighted median was 0.4 per cent, for an annual result of just 1.3 per cent.
Since these annual figures are both well below the 2 to 3 per cent annual range, economists think that it's a dead cert that the cash rate will be cut next week to a record low of 1.50 per cent.
That's the base case, sure enough, but are there any reasons that might give the central bank pause?
Firstly, the unrounded core figures were at least a bit less limp this time around than last quarter, at 0.51 per cent and 0.41 per cent respectively, while the seasonally adjusted "all groups CPI" result was 0.55 per cent. So there is some inflation, even if it is still soft.
I mention this in part because every quarter someone will troll me (hi Trolls!) about Australia being in the "grip of deflation". Ah, yeah...but nah.
As a minor point of interest, thanks to the power of compounding consumer prices are about 29 times higher than they were at the beginning of the data series.
A second consideration for the Reserve Bank is that, two of the main house price indexes are now suggesting a surge in house prices.
Residex released its June figures yesterday, which showed strong quarterly house price gains in Sydney (+2.9 per cent), Brisbane (+3 per cent), and Melbourne (+2.4 per cent), with Sydney's median house price rising by +8 per cent over the year to $1,073,000.
In Brisbane the median house price is up +6 per cent over the year to June at $509,000.
Meanwhile Sydney unit prices jumped by +2 per cent in the month of June alone to a record high of $704,000.
Since I have some mortgage debt I'd intuitively be happy to see rates fall to record lows, of course, but not sure that I'd be slashing interest rates into rising house prices and a Sydney median of above $1.07 million.
Yeah, I know, it's not a house price targeting central bank, got it...
Cut and dried
The weakest inflation result in 17 years should ensure that interest rates fall again.
On housing, the Reserve Bank's own Minutes make reference to a slowing in total lending with housing credit growth softening, as well as the considerable amount of dwelling construction yet to be completed.
Admittedly, therefore, overall this implies a looming rate cut.
Throw in weaker business lending, commodity earnings, and wages growth, and the case becomes more compelling again.
One might just pitch in that record low interest rates could add to even more high-rise apartments being constructed, but the lowest rates on record are bound to come hand in hand with some market distortions.
CoreLogic's weekly figures showed that dwelling prices continue to rise nationally.
Year-to-date dwelling prices have increased by 6 per cent according the capital city index (the Queensland figures below incorporate Brisbane and Gold Coast).
New stock listings have tightened recently, with the number of new listings considerably lower than 12 months ago.
The mortgage index rolling three month trend is solid.
With low stock levels in Sydney's preliminary auction clearance rates - while struggling in some outer suburban areas - are absolutely flying in the inner west (93.9 per cent), eastern suburbs (92.9 per cent), and northern beaches (90.9 per cent).
In the words of Blackadder's dogsbody Baldrick: "Boom, boom, boom".
Potentially the most important data release in months is due out at 11.30am, being the inflation figures for the June quarter.
After the preceding quarter's negative result another soft print could trigger further interest rate cuts.
As a general rule of thumb if the quarterly underlying result is below 0.5 per cent, stand by for further monetary easing in 2016.
If you've been reading this blog for a while, you'll know that I've been suggesting since last year that the slowing population growth narrative is likely to be misguided.
You'll know that because I've mentioned it ad nauseam for months, and indeed every month at the time that the Overseas Arrivals and Departures figures have been released!
My basic contention was explained in more detail here last year - although student visa issuance and uptake had initially been slower than expected, I argued that this was likely just a lag, and eventually a flood of international students would lead to a resurgence in population growth.
The demographic statistics lag a little, but recent figures have suggested that the collapsing population growth narrative hasn't been quite right in any case.
Annualised population growth
Year to March 2015 - 316,000
Year to June 2015 - 317,100
Year to September 2015 - 313,200
Year to December 2015 - 326,100
In May this year I wrote at Business Insider how Chinese and Indian international student enrolments in Australia have boomed.
Particularly into Sydney, Melbourne, and south-east Queensland.
And every month, I make the point that short term education arrivals have been increasing at a year-on-year pace of about 20 per cent.
A key point of note is that those arriving for courses of one year or less are not recorded in the immigration figures, only as short term arrivals.
But as a Brit that arrived on a one year visa myself in Australia back in the 1990s, I know from experience that many short term arrivals either end up staying on a new or extended visa, or finding a different way to return to Australia soon after their departure.
I've floated these theories with everyone from senior economists to taxi drivers and shoe-shine boys over the past year, mostly gaining underwhelming traction.
UBS weighs in
Scuttman over at Business Insider reports that UBS have put out a research note arguing that ABS population growth figures have failed to capture international students on shorter term courses, while record tourism arrivals have also bolstered the number of people in the country at any one time:
"UBS suggests that population growth - essentially the number of people in the country at any one time - has actually accelerated in recent quarters, rising at around 1.7 per cent per annum in the past 12 months."
Bingo! My point exactly.
The UBS estimates imply an actual increase in headcount of well over 400,000 over the past year.
One thing I'd add though is not to take my word for it. Take a look around you in the capital cities at the number of Asian students and tourists. Does it look to you like population growth is really slowing up?
A final point to note is that these trends are likely just at their beginning.
As I explained in more detail here, effective 1 July visa rules were relaxed to allow primary school students and their guardians to apply to study in Australia.
Early indications suggest the uptake in time could be massive.
I don't normally bother previewing data releases, but on Thursday week comes a potentially momentous, absolute whopper of a release!
So it's worth spending a bit of time discussing the inflation result, what is likely to be reported, and what it all means. Firstly, here's the back story...
Annual non-tradables inflation - which one might take to be a reasonable proxy for domestic price pressures - fell to just 1.7 per cent in March 2016.
That's the weakest result since before the Sydney Olympics, when TLC was number one with "No Scrubs" (chart-topping singles being the default measure for things that happened ages ago, of course).
This reflects softer than implied employment conditions, with under-utilisation and under-employment in evidence across all states and territories.
In other words, there has been plenty of spare capacity in the labour market, wages growth has been slow, and price pressures weak. The flagging red line in the chart below tells the story.
In theory at least, a correspondingly weaker dollar and the "pass through" effect therefrom should partially help to offset the weakness in domestic price pressures.
But as the blue line in the chart above shows, that basically ain't happened, and the dollar has actually been pretty much stable for the past year now, with the odd wobble.
The market forecasts headline inflation of 0.4 per cent for the June quarter, which would take the annual headline result all the way down to just 1.1 per cent, well below the Reserve Bank's 2 to 3 per cent range.
"...an ‘inflation target’ and seeks to keep consumer price inflation in the economy to 2–3 per cent, on average, over the medium term. Controlling inflation preserves the value of money and encourages strong and sustainable growth in the economy over the longer term."
Such a weak annual result would suggest that interest rates will be cut to a record low of just 1.50 per cent on August 2.
And indeed 24 of 25 surveyed economists do believe that this will transpire, in turn potentially supplying a massive boost to asset markets as cash in the bank delivers even lower returns.
It's not a shoo-in just yet, however. The market forecast range suggests that the headline result could be anywhere from 0.3 per cent to 0,8 per cent.
The headline inflation figures can be a bit volatile, and so the Reserve Bank looks at the core or underlying inflation figures, these analytical series stripping out the volatility and outlying results.
In the year to March the inflation picture was mixed, but generally soft.
In particular, weak wages growth has contributed to very soft price pressures in food and beverages, clothing and footwear, household goods, and recreation and culture (holidays).
It's been argued that overdue supermarket competition from cost-cutting Aldi has contributed to lower food prices, but Aldi surely can't explain the weak inflation across so many sectors.
Westpac forecasts that the underlying measures - the trimmed mean and weighted median readings - will come in at an average of just 0.35 percent for the June quarter, well under 2 per cent annualised and supporting the need for a further rate cut.
Partly, that's a result of the above factors. But the most important factor this quarter, explains Westpac, is housing.
Rent and construction costs generally aren't all that volatile, so are almost certainly going to be included in the core inflation measures, and construction costs have fallen away outside Sydney and Melbourne.
Moreover, rental pressures have also steadily dissipated as new apartments and houses are built.
Indeed, rental price inflation hasn't been this low since the reintroduction of negative gearing rules in 1987 saw rental price growth drop from sky-high levels in the period during and immediately after quarantining.
Rental price growth has softened almost everywhere, but has been particularly soft in the resources capitals of Darwin and Perth, where annual rental prices have actually been falling since the second quarter of 2015.
A key point of note is that the Reserve Bank expects an underlying result of 0.5 per cent in June. So if Westpac is right, then the RBA may be moved to act on August 2.
Piecing it together, you can see that with a punchy inflation print in June 2015 dropping off the annual result this quarter, the annual headline result is certain to be very soft.
But it's the underlying inflation result which is key.
If you're a homeowner, you should hope for underlying inflation of 0.4 per cent or lower in the June quarter, because if that happens interest rates will almost certainly be cut next week to a record low of just 1.50 per cent. Stay tuned.
A year ago Brisbane City Council upped its budget for grass cutting.
The 2015/16 budget allowed for an increase in cutting from 17 to 19 cuts per year on the city parks.
Never one to miss scoring a political point, "under Labor we only got 14 cuts per year!" proclaimed Lord Mayor Quirk.
Hailing from a part of the world where public parks are the places one generally heads to in order to get bashed (or at the very least efficiently relieved of your wallet and other valuables) the facilities on offer at these spaces in Brisbane are simply out of this world.
And before anyone complains about intergenerational theft or government overspend, the play areas are particularly outstanding and especially well used.
I recently took a look here at the statistics relating to the record number of dwellings under construction in Australia.
There's almost nothing worse than bloggers sitting at their desks churning out charts and statistics and claiming some level of pseudo-expertise, true enough.
You've got to be active markets to truly get any understanding of them, and at the very least get out there and see some of what's happening for yourself.
And I have to admit that when it comes to Sydney property, I rarely travel too far west of Balmain unless I absolutely have to.
Thus it was with a slightly heavy heart last week that I took a leisurely drive around Sydney's apartment construction hotspots and urban activation precincts, in the north, south, east, and west of the city. Apartments super-boom
What a change in the last four years there has been! It's amazing what rising prices can do - from half a decade of under-building to apartment sites being developed in almost every spare corner of Sydney.
The inner south is one of the most active sub-regions in terms of actual volume of construction.
In 2013, the stated plan was the inner south would deliver around 25,000 new apartments across Mascot, Zetland, Green Square, and other nearby suburbs, and much of this construction has been completed or is underway.
Despite the huge absolute number of apartments, in my best assessment this is not Sydney's highest risk area in this construction cycle.
The bulk of the new construction is located only 4 to 8 kilometres from the heart of the city, with direct city train links granting accessibility.
Moreover, despite these being high density suburbs, many of the new developments are pleasingly mixed use in nature, with commercial facilities blended in. As such, there is typically access to everything from cafes and restaurants, to hardware stores, supermarkets, doctor and dental services, all within easy walking distance.
Yes, there are flight paths - as indeed there usually are around airports! - but then much of Sydney's inner west deals with flight paths too, and this has not restricted demand for housing one iota through this cycle.
West is not best
Despite some years spent in northern Australia and East Timor, I've lived for about 10 of the last 18 years full time in Sydney, so I'm well familiar with the problem of traffic congestion. But since I rarely travel west of Balmain, what would I know, really?
Well, strewth. Here's a top tip for you - don't plan to drive down Parramatta Road on a Friday after midday. The traffic is just shockingly, dreadfully bad, and even worse than even I can ever remember seeing before: lane after lane of traffic standing chock-a-block for just as the eye can see.
Sure, there is a new $15 billion road link under construction - the 33km long WestConnex, which will ultimately link the M4 and M5 - but this appears to be a classic case of lagging or reactive planning, rather than proactive infrastructure development.
When you finally get there central Parramatta is quite a sight (or should one say, "site") to behold right now, with masses of apartment development coming on-stream. And some of the largest projects are yet to come, including the giant Aspire tower, which will eventually add a further 700 apartments.
How well will Parramatta absorb the new apartments? I guess ultimately the answer to this question will come down to job creation. But in the short term at least, I'm sceptical.
At least one positive thing that can be said about Parramatta is that developments have sometime been mixed use, incorporating commercial, retail, and residential space.
Unfortunately the same cannot always be said about Homebush, Olympic Park, and the masses of arguably ill-planned development down at the human/traffic trap that is Wentworth Point (formerly a part of the suburb of Homebush, located on the Parramatta River).
As Wentworth Point is still largely under construction, some of the streets feel spookily like a ghost town, even on a Friday afternoon.
Nevertheless, the volume of new units constructed and under construction was quite a shock - like a miniature Singapore sprouting up on the water. It's very hard to deduce how many of these units are tenanted from street level, but in my best estimate, many of them appear to be vacant.
I understand that in addition to a couple of dozen high-rise apartment towers a school, plaza, shopping precinct, and usable green space are planned for the area, with an astonishing 20,000 residents expected to live in Wentworth Point over the next decade and a half.
All I can say is, the planned infrastructure will be sorely needed - having driven around the sparse road system the tenants will never be able to get out of the joint! Connex alone can't fix this. More regular train and bus services out of Olympic Park would be a welcome start, while improved access to Rhodes train station will also help.
Inner suburbs outperforming
Building approvals data through this cycle has generally suggested that unlike in some other cities, the inner suburbs are not being so well supplied. Indeed, the recent draft City of Sydney plan made it a stated goal to restrict residential development in favour of productive commercial space.
As a general rule, many of Sydney's inner suburbs have somewhat more constrained supply, and far superior access the city.
Residents of the eastern suburbs and the lower north shore have access to world class beaches, and perhaps more importantly, they don't have to contend with the horror of Parramatta Road.
Supply and prices
It's long been my contention that the end game for Sydney's high population growth is a two-speed apartment market, such as we have seen in more developed cities such as London. Prime central suburbs with outstanding transport links will generally see dwelling prices outperform over time.
This appears to have been borne out in price action over the past year to some extent.
In this Domain article, Chief Economist Dr. Wilson goes so far as to describe the apartment oversupply as a myth, while noting that median price growth in a number of lower north shore, inner west, and eastern suburbs has been relentlessly strong. And so it has.
Will Sydney end up with an oversupply of apartments through this cycle? The answer, as with so many questions relating to the Australian economy, probably lies with China.
The latest figures from the Foreign Investment Review Board (which I looked at in more detail here) showed that Chinese approved investment in Australian real estate all but doubled to $25 billion in financial year 2015.
And most foreign investment in residential property ends up hitting Melbourne and Sydney.
With a huge increase in foreign investment demand for new and off-the-plan dwellings, the key question is what percentage of these purchases never make it to the rental market?
After all, a record construction boom won't make a jot of difference if Chinese investors are leaving their apartments vacant.
The ABS Detailed Labour Force figures for June recorded total employment in original terms of 11.965 million, a solid increase from one year ago of +228,200.
While the participation rate was unchanged from one year ago, the employment to population ratio has improved to 61.2 per cent from 61 per cent in June 2015.
Melbourne leads employment growth
In a recent change, Greater Melbourne (+78,300) has now edged out Sydney (+61,400) in terms of annual employment growth.
And after years of stagnation there was even a flicker of life in regional Victoria (+22,700), with employment gains in Geelong (+23,100) and Bendigo (+7,200) over the past year.
Elsewhere, only Greater Brisbane (+23,800) recorded annual jobs growth of any real note, with regional Queensland shedding a miserable -16,700 jobs in aggregate.
Employment growth has also been muted in Adelaide and Perth,
Piecing it together, the figures help to explain the recent trend of interstate migration to Melbourne - where a great many jobs have been created - from cities such as Adelaide and Perth, where employment opportunities have been less plentiful.
Sydney's unemployment rate declined to just 4.2 per cent in June, while the unemployment rate for Greater Brisbane of just 4.9 per cent was the best result for the Queensland capital in years.
At the other end of the spectrum, Greater Adelaide is still tracking at 7 per cent.
The monthly data is volatile and not very reliable, so below the figures have been plotted on a rolling annual basis.
Melbourne and Brisbane jointly win the "most improved" award, but Greater Sydney's infrastructure boom keeps the harbour city's economy at the top of the pile.