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.

Thursday, 25 May 2017

Clear evidence of financial stress rising

Stress on the rise

The latest regional quarterly figures from the Australian Financial Security Authority (ASFA) provided the most compelling evidence yet of rising financial stress levels. 

Although the number of Part IV and Part XI bankruptcies was higher in the March quarter than in the preceding three months to December, year on year there was a modest decline. 

Western Australia has seen a clear uptrend since the June quarter of 2014 as the resources downturn continues to bite.


Looking at new personal insolvency activity, however, there was a clear rise in the number of debtors both on a quarterly and on an annual basis. 

Here too the figures for Western Australia reveal clear signs of financial stress, but in fact there was a strong increase in the number of debtors right across the board in the first quarter of the calendar year.

Below the figures for personal insolvencies are smoothed on a rolling annual basis to strip out seasonality. 


Sydney stress emerges

The number of debtors entering personal insolvency in Greater Sydney increased by a non-trivial 11 per cent in the March quarter.

Drilling into the statistical areas it is clear that many of Sydney's lower socio-demographic suburbs and LGAs are driving the increase, with elevated levels of activity in Penrith, Campbelltown, Bankstown, and Blacktown, and a secondary tier of stress emerging in Fairfield and Liverpool. 

There is also a growing heat spot of financial stress focused on the Central Coast, with rising debtor activity reported in Gosford and Wyong. 

As explicitly predicted in our Long & Short Reports, the region with the highest proportion of new debtors in the adult population was St Marys, for the apparent reasons explained in the report. 


Across regional New South Wales, there was also a small flash of debtor activity in Newcastle during the March 2017 quarter, which will warrant careful monitoring. 

Stress on the urban fringe

Similarly in Queensland the greatest contributor to the rising number of personal insolvencies was the outer urban region of Ipswich, including Springfield, while there was also a higher number of new debtors reported in the Logan region, where unemployment rates are elevated.

Scanning out across regional Queensland the regions with the highest number of new debtors in the March quarter included Townsville and Rockhampton. 

Meanwhile in Greater Melbourne the greatest number of insolvencies was also seen in outer suburban hubs such as Wyndham, Whittlesea-Wallan, and Frankston. 

With both full time employment growth and wages growth so weak, the rise in the number of insolvencies looks set to continue. 

For ongoing timely analysis of mortgage arrears and personal insolvency activity, please see our detailed monthly subscription reports

Rising population

It should be noted that with Australia's population swelling by well over 1 million people every three years or so, it is more or less assured that the absolute number of personal insolvencies will rise over time. 

Adjusting the number of personal insolvencies for the size of the incumbent population and we can expect to see Queensland and Western Australia rising to the top of the pile, being the states most comprehensively impacted by the winding down of resources construction (and in Queensland's case, severe flooding). 


Note that there is a series break in activity in the Australian Capital Territory (ACT), since before 2005 personal insolvencies were reported by state of lodgement rather than state of residence. 

The wrap

Overall, the ASFA figures provide compelling evidence of a rising trend in the number of people in financial difficulty. 

The regions showing the greatest levels of financial stress fit closely with what has been previously highlighted in our detailed market reports

In the absence of further monetary policy easing, a further rise in insolvencies appears inevitable. 

Wednesday, 24 May 2017

Mining cliff over; what next for resi?

Construction slowing

Total construction work done declined by 0.7 per cent in seasonally adjusted terms to $46.4 billion over the first quarter of the calendar year to be 7.2 per cent lower over the year to March 2017. 

After weaker trade and retail figures, all of the signs appear to be pointing to a weak result for GDP growth in the first quarter. 


First, here's the good news: having peaked all the way back in 2012, engineering construction activity is now rising again. 

There were still moderate ongoing declines in Western Australia and the Northern Territory as resources construction activity continues to wind down, but the rates of these declines is now tapering off.

And indeed, at the national level engineering construction activity is rising again, partly driven by infrastructure projects in the three most populous states. 


Dodgy weather...or peak resi?

Residential building work done dropped by 4.7 per cent in the quarter, which was the worst quarterly result for the sector since the introduction of the Goods and Sales Tax (GST) more than a decade and a half ago. 

Building activity slowed across new house building, apartments, and major renovations, suggesting that at least part of the reason for the decline was Cyclone Debbie towards the end of the quarter, while Sydney also had some shocking weather during the period. 


And looking at the building work done figures by state confirms as much, with a very sharp 10 per cent quarterly drop in Queensland, and a somewhat lesser 4 per cent decline in New South Wales. 

In Victoria building activity powered to a new record high in chain volume measures terms, with the industry going like the clappers in Melbourne and operating at close to full capacity. 


New detached house construction has been broadly flat since the end of 2014, with the growth in residential construction since that time driven by record activity levels in the apartments sector.

Here too there was a sharp weather-related 22 per cent fall in Queensland, plus a relatively small decline in New South Wales.

But there was also a slowdown in evidence in Western Australia, South Australia, the Northern Territory, and Canberra. 

On this evidence, then, it's possible that the peak for apartment construction activity might have passed, although there is of course still a huge pipeline of work to be completed.  


The wrap

Firstly, growth in the economy in the first quarter is going to be weak, and perhaps very weak. 

On the positive side there is light at the end of the tunnel for the resources states, as engineering construction activity finally looks to be bottoming out, after years of contraction. 

Strip out the impact of Cyclone Debbie and heavy rain in Sydney and the apparently sharp drop in residential construction in the first quarter of the year may prove to be less than dramatic. 

However, it's hard to escape the conclusion that building activity in the residential sector is about to fade away as the record pipeline of apartments is delivered to the market. 

It might reasonably be expected that dwelling starts fall by about a quarter over the next couple of years. 

Given the huge level of employment in the construction industry, this could prove to be a very significant drag on the economy going forward. 

Rezoning for Dreamworld?

Dreamworld located on "prime real estate"

I recently took a look here at the February trading update and HY17 results from Ardent Leisure (ASX: AAD) in the wake of events at Dreamworld. 

In a Strategic Initiatives ASX release this morning Ardent noted that it has appointed a town planner to assess feasibility for rezoning parts of the precinct.


Source: ASX

"Alternate uses" - sounds ominous.

Asking prices soaring in Melbourne

Melbourne rips

On the back of some very strong auction results, Melbourne asking prices are on an absolute tear.

Over the past three years median asking prices for houses in the Victorian capital have now increased by 43 per cent, exceeding the gains even in Sydney (42 per cent). 


Source: SQM Research

Huge Budget boost for NSW

Stamp duty records

Stamp duty and transfers paid in New South Wales hit $9.63 billion over the year to April 2017.


This will be another huge boost to the New South Wales Budget, which ended the 2016 financial year in surplus, partly thanks to a one-off bonus from the Ausgrid transaction. 

Cranewatch

Later this morning the Australian Bureau of Statistics (ABS) will releases its March quarter figures for Construction Work Done.

This may be a key data series in determining whether interest rates yet have further to fall.

Total construction activity has declined over the past three years as the resources boom has wound down, yet the industry still employees more than 1.1 million people, about three quarters of whom are accounted for by the residential property sector. 

Construction work done fell by 7.8 per cent last year to $46.3 billion in the December quarter - although the rate of decline slowed significantly towards the end of the year - and this was despite another solid 5.7 per cent lift in residential construction in 2016. 

There was a bit of dodgy weather around towards the end of the March quarter, so a further decline wouldn't be a surprise, although public works should now at least be contributing a little bit of growth.

Output gap

Credit Suisse put out a note last week suggesting that Australia's output gap may be consistent with several further interest rate cuts, citing upwardly-biased labour market figures which understate the likely level of slack in the labour market. 

Certainly the anaemic level of wages growth in the economy supports this view.

And, as I noted here, the inflation figures are also known to be upwardly biased, a factor which could come into play towards the end of the year.  

All of which leaves growth in the economy highly susceptible to any downturn in residential construction, so stay tuned...

Tuesday, 23 May 2017

All around the world

Global house prices

The Bank for International Settlements (BIS) provides a neat data series measuring residential property prices across various advanced countries. 

Comparing house prices in different jurisdictions is arguably of limited use, but it's nevertheless an interesting exercise to see how markets in different countries have performed over time.

Indexing to a base of 100 in the year 2010 and looking at a selection of countries shows how prices in Hong doubled before a recent correction.

New Zealand has also seen a thunderous 60 per cent increase in nominal prices, while Canada is not too far behind at 42 per cent. 

The increase over the corresponding seven years in Australia was lower at 31 per cent, reflecting that while some markets have seen very strong growth - mainly Sydney - others have essentially been treading water. 

Residential prices in Ireland have now recovered to where they were in 2010, but remain well below their pre-financial crisis peaks.


The BIS also provides indexed prices in real terms, adjusted for inflation.

Here, New Zealand looks like an outlier recording huge 47 per cent growth in real terms, comfortably outpacing Canada at 29 per cent, and Australia at less than 15 per cent.


Of the countries selected above, only Ireland has not seen prices increase in real terms since 2010, reflective of monetary policy stances globally. 

Monday, 22 May 2017

Swan dive over?

Respite for WA?

Western Australia, which basically comprises the western third of the country, has been through a rough trot since the peak of the resources construction boom. 

And then in April the seasonally adjusted unemployment rate suddenly fell from 6.5 per cent to 5.9 per cent. 

Does this signal that the tentative beginning of a recovery? Well, perhaps. 

Certainly the decline in engineering construction is now considerably closer to the end than the beginning, while the recent bounce in commodity prices might help to spur along some new drilling as iron ore reserve are depleted.

The trend unemployment rate has recovered more gradually from 6.5 per cent in October 2016 to 6.1 per cent in April. 

This may in part have been helped along by net interstate migration to the eastern states. 


In fact, the labour force figures for WA have improved on a number of metrics since the third quarter of last year. 

For example, the employment to population ratio has tentatively begun to trend up again. 


Victoria has overwhelmingly created most of the new jobs over the past year on a net basis, but WA has moved back into positive territory having really plumbed the depths last year. 

Full-time employment had crashed as low as 890,800 in September 2016 - down from the record 2014 peak of 966,900 - but has since bounced back somewhat, up by 44,200 to 935,000. 


Monthly hours worked have also increased year-on-year, up by 1.7 per cent in trend terms.


The wrap

After such a punishing run, you wouldn't want to jinx it by calling the bottom, but there are at least a few signs of green shoots here for WA. 

On an obliquely related note, from March next year residents of Perth will be able to fly non-stop to London on the Qantas Dreamliner service. 

Sunday, 21 May 2017

Sydney auctions bounce

Auctions rebound

Domain reported a preliminary auction clearance rate of 76.9 per cent for Sydney on Saturday, recording 512 sales. 

The median auction price was back up to its highest level in six weeks at $1,300,000, and was quite considerably higher than the corresponding weekend last year. 

The median auction price reported for houses increased from $1,407,500 last year to $1,511,000, while the median price of units sold under the hammer increased modestly to $875,000 from $850,000 last year. 


CoreLogic reported a clearance rate for the week of 80.7 per cent in Sydney from well over 1,000 auctions, which was its highest reported result for Sydney since April 9.

The top sale of the weekend was seen in Northbridge, where a grand 5-bedroom waterfront home on 1,891 square metres with panoramic Sydney harbour views and water access fetched $9.3 million. 

A strong result, no doubt, but not a patch on the street record set in September last year. 

Respective auction clearance rates were also very strong in Melbourne.

More lenders are set to report higher mortgage rates this week for interest-only loans.

Despite the unambiguously strong auction results, slowly but surely regulatory and Budget measures respectively are set to strangle city-wide growth in these two markets, as I looked at in a little more detail here and here

Friday, 19 May 2017

APRA may deploy its 'special powers'

'Special powers' APRA to the rescue

It was announced in the 2017 Budget speech that the regulator APRA will explicitly be allowed to differentiate loan controls by location. 

This is another move signalling that politicians and regulators don't trust banks to lend responsibly, while simultaneously inferring that they know better than the market what 'should' be happening in terms of property markets and lending activity (which may be a positive thing or a very worrying development depending on your outlook!).

Practically speaking this means that APRA might look to restrict the flow of credit into 'hot' housing markets - essentially Sydney - while presumably steering clear of intervention in markets where prices and rents are in a multi-year freefall (such as Darwin, Gladstone, or indeed any number of of Australia's resources regions). 

This all sounds jolly good on paper, until you think about all of the potential ramifications of regulatory intervention. There isn't the space here to go into detail on this point, but it's a concern!

Lending finance rebounds

The March 2017 Lending Finance figures, which strangely never seem to get any media coverage, saw total lending jump tidily from $67.6 billion to $72.9 billion in seasonally adjusted terms.


Lending to homebuyers was relatively steady in the lead-up to APRA's latest round of macroprudential curbs, while nationally there was a moderate increase in lending to property investors (classified below under commercial finance). 

It's generally reported that lending for real estate is unproductive and risky, while lending to business is productive and a good thing. This may be true to an extent, though there are many sub-trends to take into account. 

Overall commercial lending saw a neat increase in the month of March to be solidly higher year-on-year, even if the recent trend series looks a little flat lately.


Renovations rose to a 6.5 year high in March 2017, as Aussies apparently shunned stamp duties and trading up for staying put and renovating instead, though looking at the numbers in their historical context the 'renovation boom' story seems a bit less enticing. 


Splitting out commercial finance fixed loans by industry shows how lending into the mining sector has all but evaporated, declining by a further 46 per cent over the year to March. Commercial lending to the mining industry has fallen to about a quarter of the level seen at the peak as the resources construction cliff now approaches its nadir. 


Despite this massive contraction, annual lending for construction continues to expand at a sprightly double digit pace, a trend which belies Australia's over-reliance on the residential building sector for employment and growth. 

Investor loans diverge

Carving up loans to property investors by state, it's clear that Sydney investors don't believe in the apartment oversupply and have been doubling down on harbour city real estate with a vengeance. 

Lending for investment in New South Wales surged to a thumping $6.2 billion in March - 39 per cent higher than for the same month last year - signalling a huge rebound since APRA's first round of macroprudential restrictions

There was also something of an increase in investor lending in Victoria which will warrant careful observation. 


The massive divergence in fortunes across the states in the prevailing low interest rate environment is ultimately what led to APRA's new powers to target lending practices in specific neighbourhoods.

While Sydney property has been burning up, property investor loan volumes in the Northern Territory have collapsed to their lowest level in 11 years as prices and rents in Darwin continue to fall. 


The wrap

Overall, it was a stronger month for lending finance in aggregate, with a sizeable lift in commercial finance. 

The housing market figures pre-date APRA's announcement at the end of the month of March that new restraints would be applied to interest-only lending

What the figures do show is the massive divergence in investor sentiment between the resources states and Sydney (and to a lesser extent, Melbourne).

If this continues APRA may be called upon to use its new powers sooner rather than later. 

Sirtex crashes again

The Wong termination

Sirtex Medical (ASX: SRX) is one of the stocks I've been following with a great deal of interest following another glaring executive selldown, and the ensuing insider trading probe

Then there was also the debacle surrounding the double digit growth guidance, and the anonymous "tip-off".

The market has gotten there in the end after yesterday's study reports announcement led to another 28.3 per cent crash in the share price all the way down to $10.75 at the close.


Source: ASX

You wouldn't like to call the bottom on a chart like this, but the market finally seems to be discounting news with a bit more healthy scepticism.

Thursday, 18 May 2017

NSW approaches full employment

Part time employment up

After a blazing result last month the Labour Force figures for April 2017 again blasted expectations with another increase in employment of 37,400. 

The Reserve Bank of Australia (RBA) noted in its Minutes this week that the distinction between full time and part time employment might be of less importance than in the past, which may be just as well since this month's result was exclusively driven by part time employment.

Total employment has surged by 97,400 in only two months to a fresh high of 12,099,300 according to the seasonally adjusted series, taking year-to-date employment gains to more than 106,000. 


Annual employment growth has in turn jumped from just 0.9 per cent to 1.6 per cent in the past two months, though the trend line suggests a more moderate rate of growth at 1.3 per cent (which is about in line with national population growth). 


Tellingly, perhaps, the number of monthly hours worked did not increase, notching only 0.7 per cent growth over the last year in trend terms. 


With so much part time work abounding and little meaningful increase in hours worked, there's no doubt that once you move past the rousing headline numbers, this was only a moderately upbeat result.

Unemployment down

The seasonally adjusted unemployment rate dropped from 5.86 per cent last month to 5.71 per cent, which in rounded terms looked like a pretty tidy move from 5.9 to 5.7 per cent. 

The trend unemployment rate has been stuck in the 5.7 to 5.8 per cent range now since the end of 2015. 


I've been having some fun in recent months tracking the respective unemployment rates of a few developed countries. 

The US has seen its unemployment rate fall to just 4.4 per cent, while it was reported yesterday by Britain's Office for National Statistics (ONS) that the UK unemployment rate has fallen to a 42-year low of just 4.6 per cent.

Yet British wages are not growing in real terms, perhaps in part reflecting a trend being seen globally. 


Around the traps

In Western Australia the seasonally adjusted unemployment rate fell from 6.5 per cent to 5.9 per cent in the month of April for a welcome improvement, if partly driven by migration interstate. 

In New South Wales, meanwhile, the unemployment rate dropped from 5 per cent to just 4.7 per cent, which is arguably getting close to full employment, although here too there are few signs of wage price pressures just yet.

In South Australia on the other hand the rate of unemployment jumped from 7 per cent to 7.3 per cent.

The trend figures plotted below show the more consistent smoothed results. 


Victoria has created by far and away the greatest number of jobs over the past year at +115,600, accounting for record high population growth in the state, particularly in Melbourne. 

Vita crashes again

Vita Group down another 30 per cent yesterday, this time on Telstra remuneration deductions.

Now down to 90 cents from the 52-week high of $5.47.


Source: ASX

Today's intraday low was 83.5 cents.

Wednesday, 17 May 2017

Wages growing at a snail's pace

Sluggish!

Wages growth came in once again at 0.5 per cent for the quarter, leading to annual growth of 1.9 per cent, which is as low as we have seen over nearly two decades of readily available figures.

Since June 2014, wages growth has recorded increases of between 0.4 per cent and 0.6 per cent for 12 consecutive quarters. 

The Budget generously assumed that wages growth will rebound from here all the way up to 3.75 per cent over the years to come. 

Hmm, well let's hope so...and good luck with that!


Wages growth is still tracking ahead of underlying inflation - and so wages are growing in real terms - but only just. 

Overlaying the growth in public sector wages (2.4 per cent over the year to March 2017) we can see just how anaemic wages growth has been in the private sector (a record annualised low of just 1.8 per cent) over the last few years. 


Looking around the traps Tasmania (2.3 per cent) has rare bragging rights to the strongest wages growth, while Western Australia (1.2 per cent) has the weakest. 

The other states and territories saw wages growth grouping between 1.8 and 2.2 per cent.


The wage price index has not increased over the past six months from the September 2016 quarter in Western Australia. 

On the one hand this is lamentable, but on the other hand it's likely to be a necessary adjustment post-mining boom. 

In fact wages rose so hard and fast in Western Australia through the mining boom that the Golden state has been by far the strongest performer over the course of the data series. 


Mining is now the sector with the weakest year-on-year wages growth at just 1.2 per cent, while healthcare and social assistance, education and training, and public administration were jointly top of the tree with 2.3 per cent growth. 

Financial services wages were up by 2.2 per cent.


The wrap

Wages growth continues to kick along the bottom, probably at around the lowest levels in half a century in nominal terms.

Ordinarily this would have economists screaming for interest rate cuts, but nobody seems to care that much about the Reserve Bank missing its inflation target any more. 

With record low wages growth can certainly forget about any return to a Budget surplus until wages growth picks up. 

As you were!

Middle-ring Sydney tightest since 2011

Sydney investors pile in

Figures released today showed a resurgence in Sydney investor loans in March, suggesting that buyers are sceptical of a looming oversupply.

Following the Federal Budget APRA has new powers allowing the regulator to target real estate hotspots, and the $6.2 billion of investor loans written for property investors in New South Wales in the month confirmed the reason why they may be needed. 

I'll look at the investor loans figures in a separate post, but first a bit more colour on Sydney vacancy rates.

Figures from SQM Research released yesterday showed Sydney-wide vacancy rates at 1.8 per cent.

Vacancy rates in middle ring Sydney (10 to 25 kilometres radius) fell to just 1.2 per cent in April 2017.

This is the lowest monthly result since March 2011, more than six years ago.

In inner Sydney too, vacancy rates tightened to a remarkably low level of just 1.5 per cent according to the Real Estate Institute of New South Wales (REINSW) survey. 

The monthly numbers are liable to chop around a bit, but the figures I've smoothed below show how inner and middle ring Sydney have remained tight.


In outer Sydney the reported vacancy rate was 2.2 per cent for the third month in the past four.