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.

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

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

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

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Friday, 28 April 2017

ScoMo address (Budget emojis)

'Scalpel not chainsaw'

An interesting address by Treasurer Scott Morrison in Sydney yesterday in the lead up to the May Budget, in retort to some 'smart aleck' quips from Shadow Treasurer Bowen.

From a housing market perspective, ScoMo strode forth to bat each of Labor's proposals calmly and serenely to the fence.

Capital gains tax increase...thwack.

Negative gearing quarantining...swat.

Banning borrowing in self-managed super funds...clonk. 

A short section of the speech is copied below:


Source: Scott Morrison MP


Non-bank lending

To be fair, there was plenty of common sense in the speech. 

The plan of attack appears to be to ratchet back interest-only lending over time with APRA's oversight, while getting jobs and the economy moving again, to eventually stimulate inflation and wages growth. 

Morrison also noted that foreign investor interest is declining.

Given that rental price growth is likely to be moderate at best in the face of the apartment building boom, an accelerating economy and in turn mortgage rates rising to 6 per cent or above would naturally calm property investor activity.

One of the challenges with low interest rates is that macroprudential measures do not "get in all the cracks" as evidenced by the rapid rise of non-bank lenders such as Pepper Group.

Budget emojis

How, then, does Morrison intend to get the economy moving again?

In short, by borrowing and spending.

The government proposes a change to the way that the Budget is reported, differentiating between bad debt (sad face) for recurrent expenditure and good debt (happy face) for investment in major growth producing infrastructure assets, such as transport or energy infrastructure.

The Budget will now report a net operating balance (NOB?) in addition to the underlying cash balance to differentiate between recurrent expenditure and investments in productive capital, including infrastructure.

If the process is well managed, taking on debt for investments that increase productive capacity seems eminently sensible in an era of low interest rates, and it is something I've mentioned here on several occasions.

The types of assets we can expect to see funded include inland rail and a second airport for Sydney, assets which should deliver a rate of return far in excess of the cost to the Budget in interest charges.

The challenge of course will be to pull this off without incurring a downgrade, Australia being one of only ten countries with a AAA rating from all three of the major ratings agencies.

We'll have to wait for Budget night for all the details, but on paper this sounds promising.

Stamped out

Stamp duties explode

From the sublime to the ridiculous, state governments levied an outlandish $20.6 billion in stamp duties on conveyances in FY2016.

This figures was up by 77 per cent since FY2012. 

So much for investors "rorting" the system by savings a few thousand in net rental losses!

In New South Wales, where the bulk of property investment activity has taken place, stamp duties collected increased by an absurd 122 per cent over the five year period.

And that's with even more to come in FY2017!


Total state and local government taxes, including land taxes, increased from $33.5 billion in FY2012 to $49.6 billion.


The increase in total property taxes over the same year year period was therefore not far off 50 per cent!

As such, property alone accounted for well over half of taxation revenue for state and local governments at 52 per cent, up from 46 per cent in 2012.

No doubting that more property taxes will be the call, though. Always is! 

Blame game

A short piece I did for the Brisbane Courier Mail yesterday (click image).

Thursday, 27 April 2017

Export prices biggest annual gain since 2009

Terms of trade lift

A huge lift for the terms of trade in the first quarter of 2017.

Export prices rose by 9.4 per cent to be a stunning 29.1 per cent higher year-on-year!

This is the largest annual increase in the index since the China stimulus boom of March 2009.

Import prices lifted marginally in the quarter, but remained marginally lower over the year to March.


The gains were largely driven by coal and especially iron ore export prices, which absolutely belted higher until February. 

The result has been a series of massive trade surpluses for Australia.


This is an amazing boost for national income while it lasts, but don't forget that iron ore prices have fallen sharply since February

In fact, the news for the remainder of the year is unlikely to be quite so rosy.

See here at Business Insider for more details.

Time for a sugar tax?

Vegetables inflation

Yesterday's inflation figures showed that the price of vegetables has increased by a thumping 13.1 per cent over the year to March 2017. 

The significant increase in the price of vegetables has been driven by adverse weather conditions in the major growing areas.

Potatoes, cauliflower, cabbages, and salad vegetables have been hit hard (although there's better news if capsicum and broccoli are more your thing). 


Not surprisingly, recent studies have shown that a sugar tax could result in improved life expectancy and reduced health costs.

Some countries have introduced measures to tax and subsidies certain food types to change consumption patterns.

For example, a tax could be applied to sugary drinks, but healthier foods such as fruit and vegetables might be subsidised. 

Maybe now is a good time for Australia to follow suit. 

If not then the present price fluctuations appear likely to lead to poorer diets.

Rental growth remains soft

Rental growth at two-decade low

Rental growth was flat at just 0.6 per cent over the year to March 2017, according to the ABS inflation figures. 

This is the equal lowest annual percentage growth since 1994, largely reflecting the new supply of apartments hitting the capital cities on the east coast. 


The national figure obscures contrasting fortunes around the capital cities.

Sydney recorded annual growth in its rental CPI of 2.5 per cent. 

In Melbourne rental price growth has been picking up over the past five quarters, although only to 1.7 per cent year-on-year according to the ABS series (there has been considerably stronger growth in asking prices). 

Hobart recorded the fastest annual growth of the capital cities at 4.2 per cent. 

In Canberra there has not been much to see in aggregate, but anecdotally there is a view that the annual land tax has turned investors away from houses leading to a shortage of detached rental stock (though as in most capitals there is clearly no shortage of new apartments, which has compensated tenants for now).

In Darwin rents declined by 7.4 per cent year-on-year, although this actually represents an improvement on the preceding quarter's drop.

And in Perth, rents were down by 7.3 per cent year-om-year, having now dropped by 12.1 per cent from their peak. 


In Brisbane nominal rents remain positive, but there's no doubt that inner city apartments rents are set for a tumble, as evidenced by the "for lease" banners strewn around the inner city.

This from yesterday...


Benign inflation

The above figures feed in to the benign inflation picture.

Moreover, while dwelling construction is expected to remain strong for some time in Sydney, new apartment projects are now being shelved or scrapped practically by the week in Melbourne and Brisbane.

As each new Brisbane apartment project completes this will leave a small hole in the economy, which cumulatively will act as a drag on growth.

For this reason the government will be looking to loosen the purse strings to pave the way for infrastructure projects to plug the hole, which can be achieved through borrowing without unnecessarily crippling the budget.

A final point, the Sydney market has seen rents outpace CPI by a factor of two over the past ten years to rise by 56 per cent. 


This reflects that Sydney's construction boom was still addressing an inherent undersupply until recently, but stay alert because the balance is about to swing sharply in favour of tenants over the next couple of years. 

Wednesday, 26 April 2017

Core inflation misses target...again

Inflation up a bit (base effect)

Headline inflation missed expectations of a 0.6 per cent increase in rising by 0.5 per cent in the March 2017 quarter.

This was obviously some way stronger than the negative -0.2 per cent print for the prior year comparative period, and as a result the annual headline inflation rate increased to 2.1 per cent. 

It seems that the risk of deflation - if there ever was one - has passed for now, and the Reserve Bank of Australia (RBA) may at least take a little bit of comfort in the inflation rate trending higher. 


Interestingly this means that real wages 'growth' is now negative. 

The quarterly gains were largely driven by a widely anticipated 5.7 per cent increase in the price of automotive fuel, while electricity prices rose by 2.5 per cent.  


However, nearly 40 per cent of the CPI basket recorded declining prices over the quarter, including travel, fruit, and furniture prices, and inflationary pressures overall were still subdued. 

A trawl through the sub-indices shows that a range of items are at their cheapest level in around three decades, including women's clothing and household electrical items, among other categories. 

Consumer price inflation was notably higher in Sydney and Melbourne - in the middle of the target range - than in the resources capitals. 

Rates on hold

The prices of non-tradables goods were up by 2.6 per cent over the year, while tradables inflation was still very low at 1.3 per cent. 

To be fair this represents a reasonable pick-up in non-tradeables inflation, but this may well prove to be temporary. 


Underlying inflation misses again

More importantly, the annual core measures of inflation continued to miss the 2 to 3 per cent target range for the fifth consecutive quarter. 

The trimmed mean (0.48 per cent) and weighted median (0.38 per cent) readings were again very weak in the March quarter, even after the seasonal adjustments were applied. 

And despite a moderate upwards revision to the trimmed mean reading, both core measures were still well below target year-on-year at just 1.86 and 1.65 per cent respectively.


RBA credibility

Overall, despite the uptick in the headline rate of inflation, this was another soft reading for the core measures.

And as the terms of trade begin to decline again through 2017 - in turn hurting earnings and wages growth - there appears to be a good chance that core inflation continues to deviate from target on the downside for even longer than it already has.

I only read 3 or 4 media pieces on today's inflation data, and strangely all of them noted that inflation wasn't yet high enough to lead to rate hikes (to re-iterate: inflation has missed target for five quarters on the downside).

This is arguably an indictment of the RBA.

Having a stated 2 to 3 per cent inflation target can work as a stable nominal anchor, but not if people start believing that the RBA is unconcerned about undershooting the target range.

And now some are clearly doubting the Reserve Bank's commitment to meeting the inflation target, which is precisely what should not happen.

Perhaps if the Governor disagrees with the media 'hot takes' he will infer so in due course, so watch this space...

Anyway, the cash rate seems likely to be on hold for a while to come, but realistically there remains more chance of a cut this year than a hike.

Land prices accelerate to record high

Land prices surge

The weighted median vacant lot value rose by 4.8 per cent in the December quarter to a record high of $254,406, according to the Housing Industry Association (HIA). 

Vacant lot prices rose by 9.3 per cent over the year, while volumes are declining sharply, implying a shortage of shovel ready land for homes in some capital cities. 


Source: HIA

The rise was driven by massive annual increases in Melbourne (+16.3 per cent), Sydney (+10.7 per cent), and Adelaide (+10.3 per cent).

There were however also increases in Brisbane (+5.4 per cent), Hobart (+3.1 per cent), and Perth (+0.9 per cent). 

Sydney has the most expensive median vacant land price, rising by 65 per cent over the last five years to $455,000, which is about 45 per cent of the median house price in the harbour city. 

Lower volumes

The increase in median lot values came despite a  significant drop in sales volumes since 2015.

Lot sales totalled 10,756 in the December quarter, down by 23 per cent from Q3 2016, and by a massive 40 per cent from the prior comparative period. 

Kiwis trickle back to Oz

Record NZ migration

Migrant arrivals grew to a record high 129,500 over the year to March 2017 according to Statistics New Zealand, putting increased pressure on the Auckland housing market. 

On a net basis permanent and long term migration rose to a record high 71,900 over the year to March, with fewer migrant departures being an important part of that equation. 

It's been a long time coming but the number of permanent and long term departures from Australia to New Zealand is now in decline. 

Record migration has been driven by sea-changing Brits, Chinese migrants, and migrants from South Africa. 

There has been a sharp pullback in the annual number of migrants from India, perhaps related to a freeze on the parent visa category, through which new NZ residents sponsor family members. 


More than a quarter of migrant arrivals were citizens of New Zealand. 

On a net basis the flow across has the Tasman has been in the direction of Australia for three months consecutively, suggesting that the "Kiwi exodus" has run its course. 


Unemployment rate Bledisloe

New Zealand's unemployment rate rose to 5.2 per cent in the December quarter, but this remains some way below the 5.9 per cent unemployment rate recorded in March in Australia. 


Despite this, Australia remains a popular destination for Kiwis.

The latest available data showed that from nearly 2 million temporary visa holders in Australia more than 677,000 were New Zealanders on a subclass 444 visa. 

Tuesday, 25 April 2017

Northshore Hamilton

Hamilton (Brisbane)

I haven't done a post on a construction hotspot for, gosh, at least two weeks.

So let's take a look at Hamilton in Brisbane, which has a vacancy rate of about 9 per cent.

Granted, 9 per cent doesn't sound like a whole lot.

And it isn't from an international standpoint, implying after all an occupation rate of more than 90 per cent.

But you have to look at it in terms of the Australian reporting standard - by way of comparison, the entire metropolis of Melbourne has an official vacancy rate of 1.5 per cent. 

The trend is the important thing to watch, and until lately it's been up, up, and away...from close to zero half a decade ago, give or take a few frictional vacancies. 


Source: SQM Research

For new Brisbane apartments at the moment, we're starting to see plenty of 'incentives' to lease.


I went for a wander around down at Northshore Hamilton today.

Ready for some photos?

Northshore Hamilton

Hamilton is a pleasant suburb on the north bank of the Brisbane River, located a little further downstream than most of the other major construction hubs in Brisbane, at 4 miles or about 7 kilometres from the Central Business District. 

The suburb has had the highest mean taxable income in Queensland, and is home to some phenomenally expensive real estate in the elevated locations with amazing water views, leading to a median house price comfortably (and, to be fair, deservedly) in the 7-figure range. 

In 2008 it was announced by the Urban Land Development Authority (ULDA) that the northshore of Hamilton would be developed. 

The area to be developed close to the river covers some 304 hectares and a strip of around 2.5 kilometres of land along the riverfront.

The land was previously government owned and zoned for industrial use. 

The areas that have been developed to date are pleasant enough, although in truth there isn't an awful lot down there besides a ferry terminal and a nice cafe.


Not all of the development stages come as apartments, which is a bonus, although the terraces don't exactly come with cheap price tags. 

All but one of the terraces have now reportedly been sold in this Parkside Circuit development. 


Vacancy rates are already shifting higher as evidenced by the 'For Lease' signs.


There is a chance that vacancy rates may be potentially understated at this stage in the construction cycle, a point covered in more detail in my market reports. 


Pretty quiet around here in parts...


Hamilton: A construction hotspot

The $400 million mixed-use riverfront development was planned to comprise 700 to 1,000 apartments, parkland, a pool, and a restaurant and retail precinct.

'ICON', meanwhile, a new $650 million four-tower mixed use development proposal has been submitted for 19 Hercules Street in Hamilton, a 7,637 square metre site. 

The Hercules Street site previously had approvals for a 23-storey tower comprising 582 apartments by Mirvac (the development formerly known as 'Foreshore Hamilton'), but the site has now been sold on for a private property trust to develop. 

The new development is expected to comprising a hotel and three residential towers adding 567 apartments. 

Apartments are also now for sale off the plan from a retail price of $394,000 at Hamilton Reach.


Construction is getting underway at a new stage of the apartment living options. 


The development of more than 300 hectares of land in total is planned to be delivered in stages.


The government is reportedly pitching in $20 million for amenities, although it is not clear what plans have been made for public transport, aside from the existing CityCat ferry service. 


This part of Hamilton was previously a bit stranded away from the prestigious homes on the hill.

The suburb is effectively scythed in two by the noisy through-route of Kingsford Smith Drive (which, as the route name implies, runs away from the City to Brisbane Airport). 


From start to finish the project is expected to take about a decade to complete. 


Display suites are now open...


More than 15,000 people are projected to move in to the area over the next two decades, as the last strip of undeveloped land along this side of the river is converted to residential use from its industrial past. 


Northshore Hamilton is located fairly close to the airport. 'Good for transport' as they say in real estate parlance!


Future riverfront stage selling...


You can just about see the Central Business District, shimmering some 6 kilometres or so in the distance.


The wrap

The ICON development alone is expected to create 2,000 full-time jobs (and a further 1,500 ongoing full-time positions), while another 500 full-time jobs were reportedly to be created for the Northshore Hamilton development.

This certainly represents an opportunity for Brisbane, but also highlights one of the salient risks facing Australia right now, with more than 1.1 million people employed in construction from an employed labour force of just over 12 million. 

Over the year to April 2016 a record 21,679 units, townhouses, and apartments were approved in Greater Brisbane, but in the early months of 2017 new approvals have slowed to a trickle, while dwelling starts are also now clearly dropping off in the Queensland capital. 


I think it would be fair to say that Brisbane will have no shortage of new apartments over the next few years.

The biggest unknown factor in the market right now is how new apartment settlements and sales will hold up since local lenders became unwilling to lend to non-resident buyers.

New apartments tend to command a price premium in Australia, and as such foreign buyers often account for a high percentage share of sales in new apartment blocks.

Non-resident buyers are generally restricted from buying established dwellings, except for development purposes when adding to the dwelling stock.

---

Hugely important data release due out tomorrow morning, being the inflation figures for Q1, 2017.

If you have mortgage debt, you should be hoping for a low print.

The market expects a headline result of 0.6 per cent, with forecasts ranging from 0.3 per cent to 0.8 per cent. 

ANZAC Day 2017

A very large turnout for the ANZAC Day service at the Sandakan POW Memorial in Brisbane today.


Lest we forget.

UK average asking price hits new high

Brexit shrug

Rightmove's UK asking price index rose by 1.1 per cent or £3,547 in April to a record high of £313,655. 

Over the year to April 2017, the average asking price of new homes brought to market was a moderate 2.2 per cent higher. 


Note how in London average asking prices for new homes brought to market appear to have stopped rising at £636,777 in April.

The London average is being pulled down by some sharp declines in the premium sector, with average asking prices down by 10.4 per cent year-on-year in Kensington & Chelsea to £2,011,069.

At the cheaper end of the spectrum, however, asking prices are recording solid gains in London. 

For the reasons why, see here

Monday, 24 April 2017

Unemployment rate gets set to fall

Unemployment rate to fall

A number of indicators have suggested an improving outlook for the Australian economy, at least in the immediate future. 

Yet the unemployment rate has remained quite elevated at nearly 5.9 per cent on a seasonally adjusted basis. 

Flipping the unemployment rate on its head and mapping it against the strong jobs vacancies figures suggests that the unemployment rate should fall as 2017 progresses. 


And indeed the IMF recently forecast that Australian unemployment would fall from 5.9 per cent to 5.2 per cent this year. 

The May budget has yet to be released, but the above chart suggests it would be justified in assuming something similar. 

In reality the unemployment rate has already fallen well below 5 per cent in Sydney.

But elsewhere in the country unemployment and under-employment has been all too common.

A job search is most likely to be fruitful in New South Wales, with the number of unemployed persons per job vacancy having declined to below 3.