Pete Wargent blogspot

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

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

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the 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.

Saturday, 22 July 2017

No tightening bias in evidence

Waiting for tonight

With its burgeoning tourism boom, gosh aren't Sydney hotels becoming rather expensive these days?

This week we looked into booking an 8-night stay in the harbour city for October and received one quote back from the Four Seasons at a somewhat ambitiously priced A$43,000.

One assumes that was for the penthouse suite.

As a mildly amusing aside my wife once encountered Latino pop diva Jennifer "J. Lo" Lopez in the elevator during one of our stays at the Sydney Sheraton on the Park (two young girl fans asked her for a hug, but alas Jenny from the block politely declined!).

Like most people that aren't pop empresses, I will surely not be shelling out 43 grand for my short stay, although the website being perused still came back with a surprisingly punchy $4,000 quote for the Novotel at Darling Harbour.

Since virtually nobody pays hotel rack rates these days, I reckon the sojourn will end up being about three quarters of that price, but still it's another indicator of a state capital economy that is humming along right now.

Housing markets firm

Following the introduction of new incentives there have been some early signs of a first home buyer reawakening in Sydney and Melbourne, thereby confirming that there are no meaningful price falls on the immediate horizon.

The preliminary auction clearance rates reported on Saturday evening pitched in at the highest level in six weeks. 

There has also been a good deal of premature arousal about rising mortgage rates.

It's true that investor loans have seen rates tweaked higher, but generally speaking commentary has focused too much on standard variable rates and not enough on discounted rates.

The fact remains that - for all the talk or rising funding costs - depending on the loan-to-value ratio home loans can still be secured from 3.69 per cent.

Just like with hotel stays in Sydney, while some people will pay the advertised headline rate on mortgages, most will shop around and get considerably better deals. 

In the absence of much housing market excitement to write home about, all eyes will be turning to Wednesday's inflation figures, and in turn the trajectory of the official cash rate.

For all the talk of imminent rate hikes, the Reserve Bank Minutes certainly did not indicate a tightening bias.

And in any case as residential construction starts to turn down this will likely act as a material headwind to growth in 2018.

Improving jobs figures

There has been a marked improvement in the jobs figures since late last year, but even now youth unemployment remains fairly elevated at about 13 per cent.

Youth unemployment can sometimes be quite a useful indicator of economic strength - younger employees are often the first to go when times are tough, but may be hired again when conditions and the outlook improve. 


In New South Wales the trend unemployment rate has declined to just 4.75 per cent, with strong jobs growth in Sydney across recent years pushing the unemployment rate in the capital down as low as 4.4 per cent. 

Although Sydney's strong economy is attracting immigrants from overseas in droves, the latest internal migration figures show that thousands of residents are using their boosted equity to retire from the Sydney workforce to the regional south coast and to the Hunter Valley, while increasingly Sydneysiders are migrating to Queensland for a cheaper cost of living.

With such a low unemployment rate, upwards pressure on Sydney wages should now be returning in due course. 

Melbourne's record population growth is being driven by internal and overseas migration, and the unemployment rate sits some way higher

Slack ahoy

Despite the improvement in labour force figures, there are few signs of significant inflationary pressures and it's far too early to be talking about rate hikes. 

The Reserve Bank Board appears confident that forward-looking indicators suggest further improvements are in the post for the labour market, but also recognises that the rate of under-employment remains elevated.

Even in New South Wales the underutilisation rate is still some way above where it was before the financial crisis shock, and all of the other major states sit some way higher again. 


Inflation still benign

With wages growth generally soft, it should be no surprise that core inflation has been consistently missing the target range to the downside.

Although the CPI figures are rarely weaker in the second quarter of the calendar year, Bloomberg's survey of economists suggests that this trend of core annual inflation missing the bottom end of the target range may well have continued in the June quarter.

While there will be a post-Cyclone spike in fruit prices, this will to some extent be offset by falling automotive fuel prices at the bowser.

Finally, a rarely mentioned potential twist in the tail is that the inflation figures are known to be upwardly biased, since the measures are fixed for a number of years. 

And with the expenditure classes set to be re-weighted for the December quarter, this could add even further downwards pressure on inflation in due course.

Some observers therefore believe that if interest rates do move next year then it's more likely to be down than up.

But on balance the most likely outcome seems to be rates on hold for the foreseeable future.

Roll on Wednesday...

Weekend reads: must see articles of the past week

Summarised for you here at Property Update (or click the image below).


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Friday, 21 July 2017

Kiwis trickling back to Oz

Kiwi exodus ends

Statistics New Zealand reported that net annual migration into NZ hit another record high over the year to June 2017 at +72,300. 

Annual net migration into NZ has been increasing steadily since 2012, but over the past three years has surged to record highs, despite a recent pullback in Indian student visa arrivals.

While the boom has been driven by Chinese migrants, as well as a big uplift in Brits and South Africans, the number of Australian migrants to New Zealand has now passed its peak, if only just.


Through the peak of the mining boom Kiwis were moving to Australia in droves, lured by high wages and labour shortages in the resources states.

In recent times this trend reversed as New Zealand's unemployment rate fell, and a shortage of domestic construction workers arose due to the rebuilding of Christchurch.

Through the first six months of 2017, however, Kiwis have been very steadily trickling back towards Australia, at least on a net basis. 


Temporary visa trends

At the beginning of the year I noted that there were nearly 2 million temporary visa holders in Australia, including over 677,000 New Zealanders as subclass 444 visa holders.

In particular, the number of student visa holders has been powering ahead, helping in part to explain why the feared apartment oversupply in Melbourne has failed to materialise as expected. 

Thursday, 20 July 2017

Sydney unit prices & rents accelerate

Rents & prices rise

Sydney's median house price rose by +1.6 per cent to a record high of $1,178,417 in the June 2017 quarter, according to Domain Group's latest release.

Apartment prices rose much faster, up by a ripping +3.2 per cent to a fresh record high of $757,991, as affordability bites on the detached housing market.

The median apartment price has increased from $359,853 in March 2007. 

Unit rents also jumped from $530/week to $550/week, to now match the median rental for a house in the harbour city.

Over the same period house rents have only increased by +10 per cent to $550/week.

Although this may seem illogical, generally speaking more units are located close to the city than houses. 

Sydney's apartment rents have surged +22 per cent higher from $450/week in March 2012. 

There's a rather different dynamic underway in Brisbane's new apartment market, as I discussed with Domain here (or click image below). 

Full-time employment growth returns

Employment growth picks up

Seasonally adjusted employment increased by +14,000 in June according to the ABS, with full-time employment soaring by an outlandish +62,000. 

Rather noisy monthly figures, of course, but full-time employment has now increased by +187,000 since September 2016, which represents a marked improvement.

Total employment now sits at its highest ever level at 12,166,900. 


Annually total employment was up by +240,200 or +2.0 per cent, which is quite a way ahead of the rate required to absorb population growth. 


The unemployment rate was 5.6 per cent, with the number of unemployed persons up a notch to 728,100.  


Perhaps the most sanguine measure of how the labour force is travelling is to look at the annual change in the number of hours worked, which has increased by 3+.3 per cent over the past year, or +2.4 per cent on the smoother trend series. 


In short, there has been a steady improvement since November 2016, following a period of apparent stagnation. 

NSW approaches full employment

At the state level Victoria continues to add the most jobs on an annualised basis at +97,800 - as it needs to, given record population growth - with Queensland next up, adding +44,600.

Western Australia saw a net increase in employment of +29,500, which should in turn see the unemployment rate falling as net interstate migration has seen thousands returning to the eastern states. 


After hitting an apparent plateau, employment in New South Wales is off and running again with total employment rising by +42,800 over the past quarter sending the trend unemployment rate to its lowest level since 2008 at just 4.75 per cent. 

Small wonder that mortgage arrears are so low and still declining in Sydney.


At the other end of the spectrum, employment has now been trending down in the Northern Territory for four months, and the resident population may also be following this trend into decline.

South Australia has the highest trend unemployment rate at 7 per cent.

The wrap

Overall, and looking through the monthly noise, it was a pretty good result, consistent with gradually improving conditions. 

ABC Lateline: Modelling the downturn

Modelling downturns

Housing market modelling shows that a more responsive supply of property to rising prices tends to generate dynamics that can ultimately lead to financial distress.

In Sydney's now-record construction boom this is most likely to mean markets on the city fringe where land is abundant, and the high-rise apartment sector of the market where the sky is almost literally the limit to the response in supply.

The overhang

Why is this so?

The short explanation is that in supply responsive markets large volumes of property are built during the boom period, thus creating a larger overhang of excess dwellings when the market turns down.

This alone can amplify the downturn in prices.

And since by definition more people will have bought near the peak of the market cycle, then more of the loan book is accounted for by borrowers that are liable to experience negative equity, magnifying market risks. 

Time-to-build lags add to risks

Where time-to-build lags are longer in highly responsive markets the impact on loan performance can be exacerbated.

That is, where supply is highly responsive to rising prices but production delivers new housing supply over a longer period. 

This implies that some of the greatest risks are likely to be in the new apartment market, particularly in inner city Brisbane.

Characteristics of loan contracts

In Sydney's case, there is a further concern that if homebuyers are borrowing up to $1 million to buy new homes on the city fringe, then rising interest rates could eventually cause financial distress.

Housing market models unanimously show that the trajectory of interest rates during the downturn is likely to be pivotal in determining the extent of negative equity. 

Note that in Australia many investors have used interest only loans to fund purchases, which due to APRA's new regulatory measures may now be flipped into principal and interest loans at the end of the initial interest only period. 

I discussed this in a summarised fashion on ABC Lateline last night (click image to view video). 


Obviously this is a short excerpt from a considerably longer interview.

The statistical analysis sitting behind our views of the risks broken down to the LGA level can be found in our market reports

Wednesday, 19 July 2017

Bankruptices fall; personal insolvencies also fall

Easing conditions

The annual number of bankruptices fell in the June 2017 quarter to the lowest level since the quarterly data series began according to ASFA's latest figures. 


There were annual declines across every state and territory except for one (the Northern Territory, which recorded a miniscule increase comprising half a dozen bankruptices in the June quarter). 


Total personal insolvencies also declined from 7,900 to 7,616 over the three months to June 2017.

This improved result was also 3.5 per cent lower than the 7,893 insolvencies recorded in the June 2016 quarter. 


There has been a bit of an increase in insolvencies since the lows of 2015 - pretty much what you'd expect through a soft patch for the economy, particularly across resources regions - but the trend is now softening again with the unemployment rate generally trending down across the past 31 months. 

The declines continue to be led by New South Wales and Victoria, but with Western Australia now tracking at a higher level than through the resources boom.

S&P reported that home loan arrears were stable in May at 1.21 per cent, below the decade average of 1.30 per cent. 

There were increases in Western Australia to 2.37 per cent, and in the Northern Territory where arrears were up from 1.70 per cent to 1.91 per cent.

These were offset by declines in New South Wales and Victoria. 

England house prices rise 5pc

Price growth continues

The average UK house price increased by £1,000 in May 2017, to be $10,000 or +4.7 per cent higher than a year ago at £221,000. 


The gains were driven by housing in England, where the average price rose by 5 per cent over the year to £238,000. 


London continues to be the most expensive market, with an average price of $481,000, while the cheapest housing is to be found in North East at an average price of £127,000. 


The East of England has recorded the strongest price growth at 7.5 per cent.


Price growth in London slowed to 3 per cent on an annual basis, with the gains largely driven by the lowest deciles of the market. 

Total recall

Total return

A neat post from Scott Phillips of the Motley Fool.

When people say that Aussie stocks haven't gone anywhere for a decade, they are only presenting half a story (almost literally since 2012). 

Include the dividends and the total returns over the past five years have been strong at a shade under 75 per cent. 


Source: Scott Phillips, Motley Fool

Dividend yields on the ASX 200 have been broadly tracking in a range of 4 to 5 per cent over the past half decade, which is considerably higher than the MSCI World index excluding Australia.  

Since Australia has compulsory superannuation, the studious recovery in Aussie stocks has been a strong driver of record household net worth, particularly since 2012. 

Recent returns have been bolstered by a bounce in the resources index. 

Tuesday, 18 July 2017

Perth & Darwin rents still falling

Mining malaise

My housing supply dashboard showed how dwelling completions have been tracking well ahead of population growth in Western Australia. 

And now SQM Research has reported that vacancy rates in Perth rose again to 5 per cent in June, in turn suggesting that Perth's property downturn still has a way to run.

Indeed, vacancy rates edged higher in most cities in June, Adelaide and Darwin excepted.


The below chart smooths vacancy rates on a 6mMA basis. 

While not a true reflection of 'trend', since it doesn't account for the higher vacancy rates typically experienced over the Christmas period, it does show that Perth and Darwin have experienced consistently elevated vacancies since the peak of the resources construction boom. 


Asking rents for houses in Perth have declined by 6 per cent over the past year, while in Darwin the equivalent figure is as high as 11 per cent. 

Record apartment completions have taken some heat out of asking rents in Sydney and Melbourne -with Melbourne vacancy rates bouncing off 7-year lows - though apartment rents remain higher year-on-year in both of the most populous capital cities by 3 per cent and 6 per cent respectively.

The average asking rent for a 3-bedroom house in Sydney is now $725/week, and for units the figure is $522/week.

Vacancy rates remain tight in Canberra at 1.2 per cent, and extremely tight in Hobart at 0.7 per cent, leading to soaring rents for houses in the Tasmanian capital.

New car sales break records

Two-speed

Moody's reported that mortgage arrears fell in the eastern states, but increased further in Western Australia.

And we're seeing similarly divergent trends in most data right now, with the national economy generally improving, driven forward by Sydney and Melbourne. 

New motor vehicle sales blazed to their highest ever level in June, with a seasonally adjusted 102,275 units shifted. 

An enormous result! 


The result was driven by yet another surge in Sports Utility sales, with a record 40,395 sales recorded in the month of June. 


At the state level the boom was initially driven by a combination of tax breaks on asset purchases and a thriving Sydney economy, with annual sales in New South Wales surging. 

Lately, the boom has been driven by Victoria, following an explosion in population growth. 


On the flip side, production volumes continue to drop, with annual production down by 39 per cent over the past five years as the assembly industry wastes away. 


The wrap

Overall, this was a colossal month for new motor vehicle sales, suggesting that talk of widespread household financial stress is wide of the mark. 

The Reserve Bank's Minutes released today talked of a broad based improvement in the economy, and a new "neutral" cash rate setting being 3.5 per cent.

Aussie dollar to the moon! 

Monday, 17 July 2017

Floater

Luck of the Irish

Over recent years there's been quite a lot of social media talk in Australia regarding the property market, being somehow "like Ireland".

Not sure why, exactly, as prices have not experienced anything like the same run-up, at least not since 2003 when the ABS house price index kicks off (though to be fair, a lot of this type of stuff depends on how you frame the data, over what time-frame, and so on). 

Attached dwelling prices across the 8 Australian capital cities have increased by 86 per cent since the inception of the index in 2003, while detached house prices have increased by a somewhat stronger 116 per cent. 


If you were looking for a European equivalent housing 'market' - not sure why you would be particularly, but if you were - Great Britain would probably be a more likely candidate.

Northern Ireland, not so much - its population is tiny for starters - while the Republic of Ireland's pound was superseded by the Euro in the late 1990s, which brought into play a whole different range of dynamics.

Free floating dollar

In addition to Australia's flexible labour market, the Reserve Bank of Australia (RBA) makes its own monetary policy decisions in terms of the cash rate, and since the 1980s Australia has had a free floating dollar. 

Before that, from 1931 Australia's currency was pegged to the British pound, before it was switched to a peg against the US dollar in 1971. 

Floating the dollar in 1983 helped to address the issue of volatility in monetary conditions.

Importantly, it also changed the way in which the economy can deal with external shocks (such as, let's say, wild shifts in commodity prices and the terms of trade, by way of a pertinent example). 

The floating exchange rate allows monetary policy to be focused on domestic conditions, and best directed towards achieving domestic price stability (the inflation rate) and economic growth.

The shift to a floating exchange rate has contributed considerably to less volatility over the past couple of decades.

The floating exchange rate also now helps to act as a buffer against external shocks.

That's why - at least, I reckon - comparing Australia's housing market to the protracted bust of the 1890s or whatever is pretty much as a waste of time, except in an academic or theoretical sense. 

Since, unlike Spain or Ireland, Australia is free to devalue its dollar - and because in global terms Australia has relatively low levels of government debt - a recovery from a sharp or severe housing downturn would likely be relatively much quicker. 

---

Obliquely related to the above, Rightmove released its July 2017 asking price index for England and Wales, which crept up to £316,421, to be +2.8 per cent higher year-on-year. 


You can see here the impact of the global financial crisis on asking dwelling prices in England and Wales. 

Britain, too, has a floating exchange rate, has run wide deficits, and has allowed interest rates to fall close to zero, while also deploying unconventional measures in the form of quantitative easing (QE).

While Britain has been through a seriously rough patch since the financial crisis, the stabilising factors have worked over time and the unemployment rate has now fallen to its lowest level in 42 years.

As for the housing markets, the UK downturn was felt most keenly in the regions from 2007 forth. 

Since the above figures exclude Northern Ireland, the downturn overall appears to have been quite shallow.

Yet if you stripped out the London effect the correction was quite painful in much of regional Britain, particularly in the north east of England, for example.

This is better shown by Nationwide's disaggregated index, with house prices across many of the regions taking six or seven years to recover, even in nominal terms.


In some economically depressed areas, prices are still below 2007 peaks even today.

London suffered a bit of a downturn which spanned five quarters, before prices recovered to hit new highs. 

Sunday, 16 July 2017

Some more upbeat stats on household finances

Balancing the books

There have been quite a lot of headline-grabbing articles in recent weeks and months about the all-time record high severity of household financial stress, and so on.

If that is true then it hasn't manifested itself in mortgage defaults, which overall remain pretty low outside a handful of hotspots.

It's true that investment mortgages have seen rates tweaked higher, but the reality is that mortgage arrears on investment loans remain very low - and indeed much lower than arrears on home loans - although there has been a recent increase in Western Australia and parts of regional Queensland.


Source: CBA

This generally mirrors the figures on personal insolvencies, with Western Australia in a concerning uptrend.

The Reserve Bank of Australia (RBA) has shown that although gross household debt has increased, net household debt to income ratios after accounting for record high currency and deposits have actually eased across much of the past decade.

Credit where it's due

At the end of each month the RBA's Financial Aggregates figures are analysed here, and these have consistently been recording that personal credit growth to be falling, and quite sharply of late. 

The RBA's detailed statistical tables also reveal that despite strong population growth the value of credit card balances accruing interest has fallen substantially since 2012.


The average credit card balance accruing interest has fallen by 21 per cent since April 2012.


And the proportion of credit card limits being actually used sits well below the average for the last decade-and-a-half.


Nothing too arousing going on here.

Consolidation stress?

Of course, these are just a few of the data sources and indicators, and by rights all should be considered.

The ABS also released its Lending Finance figures last week for May 2017, and these showed that personal borrowing is way down (although there has been a recent jump in lending for home renovations).

In fact, non-housing loan commitments have now nosedived to their lowest level since 2002!


If households were truly experiencing financial stress in aggregate, then debt consolidation and refinancing would likely be trending upwards, yet Commsec's analysis showed that as a share of finance commitments these segments are now tracking at the lowest level since the beginning of the century.

The wrap

Despite the high level of gross household debt, there appear to be few signs of financial stress in these figures, and arguably ex-housing the signals suggest a positively conservative approach towards the reduction of other forms of debt.

Perhaps just as importantly, the unemployment rate has generally been trending lower now for 31 months.

Maybe it's time for commentary to reflect a bit more of these facts, rather than fitting the prevailing narrative...

Saturday, 15 July 2017

Everything you wanted to know about Census 2016 (*& some stuff you didn't)

Demographics is destiny

There is a vast range of information in the 2016 Census.

And it's changed our views on more than a few things about real estate.

In this 13-minute video we distil the key information, particularly as it relates to housing.


I also included a useful list of bullet point information to accompany the video.

Enjoy!

Friday, 14 July 2017

Middle-ring Sydney getting tighter & tighter

Misplaced middle

As has also been seen in rapidly tightening Melbourne, the trend in middle ring reported vacancies in Sydney has been getting tighter and tighter.

Rental vacancy rates are tracking at just 1.4 per cent for the middle ring.

That figure for the middle ring has now formed a multi-year downtrend, despite record apartment completions.

As a result, apartment rents have been rising sharply in both cities. 


The rental vacancy rate across Sydney was flat at just 1.8 per cent. 

Escalation in long term arrivals

Immigration speeds up

Long term arrivals continued to surge in May 2017, suggesting that population growth is heading back towards +400,000 per annum, overwhelmingly focused on the two most populous capital cities plus south east Queensland. 


Short term inbound arrivals sped up by 10 per cent over the past year to post a record 8.5 million, though the recent strength in the Aussie dollar saw the number of overseas trips gather pace too, to sit above 10 million for the first time. 


Education arrivals continue to break records by the month, with many of these arrivals eventually set to become permanent residents at the end of their respective study courses.


No surprises that a record 1.7 million visitors hit Aussie shores from China, Taiwan, and Hong Kong, but there has also been stunning growth in the number of visitors from the US, Canada, India, Japan, and other countries in Asia and America. 


The most notable demographic shift is evident in the origin of permanent settlers, with a huge swing away from New Zealand and the UK, and towards immigrants of Indian and Chinese origin. There's also been a larger humanitarian intake. 


The wrap

Overall, very strong numbers, though evidently more Aussies are holidaying overseas again, buoyed by record household wealth approaching $10 trillion and the recent strength in the currency. 

Immigration looks to be picking up speed again, and recent data - including from the Census - shows that recent migrants are overwhelmingly shunning regional Australia in favour of settling in the capital cities, in turn pressurising infrastructure bottlenecks.