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).

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 is 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 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'.

"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.

Saturday, 25 November 2017

Corridor of uncertainty

Gabbatoir

As a cricket tragic, I was thrilled a little over a year when we named our son Stanley, being in part a subtle or oblique reference to one end of the Gabba cricket ground in Brisbane (I felt a reference to the old Clem Jones stand - or even 'Sir Gordon Chalk'! - might have been pushing it...). 

There's been a tremendous amount of excitement in Brisbane this week as the English cricket team is in town to the play the first Test Match of the historic Ashes series.

The view of the Stanley Street End skyline today takes in many cranes, as well as the imposing $85 million Trafalgar Residences, a 20-storey apartment block at 855 Stanley Street (being a new development since the last time an Ashes test was played here). 


Looking back towards the opposite Vulture Street End of the ground, the television cameras picked up the apartments advertised for sale and for rent at 444 Vulture Street, where apartments are advertised for rent from $360/week for 1-bedroom units, and from $750/week and above for 3-bedders. 

At this stage of the construction cycle there's a risk of vacancy rates being understated as single advertisements can account for multiple new apartments.

And the offers of rent-free periods for tenants, free internet, and so on in Woolloongabba apartments reflect the clear weakness in the rental market. 


In a moment of wry amusement, even match commentator Damien 'Flemo' Fleming was moved to mention the glut of new building in the suburb, a rare yet curiously welcome departure from the discussion of Bowlology, the Fast Bowling Cartel, and heavy metal music!


Avenue of apprehension

The new high-rise apartment market can be a risky one for buyers, in part because the apartments can lack scarcity, and partly because the duration of projects can span several years from approval to completion, at which point the market can suddenly become swamped with new supply. 

This cycle has played host to Queensland's greatest ever apartment construction boom, eclipsing even the post-recession boom of the early 1990s, although far fewer houses have been built this time around.


As we have seen in Perth since 2014, the long lead times mean that by the time projects are completed demand may have slowed significantly.

In fact, until relatively recently Western Australia was seeing the number of new dwelling completions exceed the growth in headcount, as population growth had slowed so dramatically, resulting in a surge of rental vacancies. 

Queensland has suffered from this dynamic too, albeit to a far lesser extent. The good news for Brisbane landlords is that the Queensland economy, employment growth, and thus the three components of demographic change (natural growth, net overseas migration, and net interstate migration) are now aligning to create faster population growth. 


Meanwhile new apartment commencements are slowing to a crawl, helping to rebalance the market over time.

So the market is heading back towards equilibrium eventually, but 2018 will nevertheless be a good year for renters, especially in some of these inner-city unit markets. 

Friday, 24 November 2017

Hunter's gathering pace

Recovery momentum

Job vacancies continue to rise solidly, up by another +8.4 per cent over the year to October 2017, according to the Department of Employment.

Vacancies have now increased by +37,000 or +26.5 per cent since the October 2013 nadir. 


In New South Wales vacancies are up by +6.4 per cent over the past year in seasonally adjusted terms to the highest level since March 2011.

The recovery since 2013 has really been a Sydney and Melbourne phenomenon...at least, until now.

Regional rebound

It's good to see momentum shifting away from the centre of the city a little, with advertisements now surging back to life in regions such as Newcastle & the Hunter (+26.8 per cent), and Gosford (+21.1 per cent).

Similarly in Victoria there was strong year-on-year growth in vacancies in Geelong (+13.4 per cent) and Bendigo (+13.5 per cent).

Of course, the absolute numbers of vacancies are much lower in regional cities than in the capitals, but the direction is nevertheless heartening. 


There was also double digit growth in Queensland and Victoria, while Western Australia (+16.5 per cent) has clearly turned the corner. 

In trend terms job ads rose in seven of the eight occupational groups over the past year, with the strongest gains recorded for technicians and trades workers (+13.6 per cent), machinery operators and drivers (+12.4pc), and professionals (+11.7pc), noted the Department of Employment.

Good to see. 

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Thursday, 23 November 2017

Sydney unemployment rate dropping

Sydney unemployment falling

Greater Sydney has been creating thousands of new jobs per month in recent times, and the harbour city's unemployment rate has generally been trending down now for the past 44 months, now hitting an annual average of just 4.65 per cent.

Brisbane also recorded a neat fall in the month, but seems to be creating a dearth of full time positions.


Sydney's monthly unemployment rate dropped to just 3.9 per cent in the month of October 2017 itself, a fantastically strong result which suggests any meaningful housing market correction is unlikely for the time being.


There hasn't been a lower monthly unemployment rate since more than a dozen years ago, all the way back in August 2005, and before the financial crisis.

Sydney's labour market is tightening gradually, and there are some nascent signs of wage pressures in the trades and construction industries.

It now takes 14 weeks on average for Sydneysiders to find a job, down from 18 weeks three years earlier, so it's been a bit of a slow burn.

Newcastle and the Hunter Valley have also seen a fine turnaround in fortunes over the past couple of years as the state's economy accelerated away from the resources downturn (and coal prices in particular came shooting back with a vengeance).

Stamp duty and transfer take has exploded to $10.7 billion, leaving the state of New South Wales in a negative net debt position.


Two of Sydney's largest sports arenas, Allianz Staidum and ANZ Stadium, will now be demolished and rebuilt at a cost of $2 billion, adding to the long list of infrastructure projects.

Around the traps

Queensland is now creating the most jobs nationally, and cities such as Gold Coast are recording very low unemployment rates - at an annual average of just 4.8 per cent - with the Commonwealth Games visitors boost still to come.


That's a phenomenal quantity of new jobs being created in Queensland, but the quality to date may not be quite so inspiring, particularly in Brisbane.

Of the other regions around Australia, Geelong looks to be thriving, creating nearly 15,000 new jobs over the past two years, and the annual average unemployment rate declining from 7.8 per cent in 2015 to 5.8 per cent. 

The housing market in Geelong has also been firing.

There are still, however, some relatively high unemployment rates being recorded in the regions that are most defined by resources.

Platforms & ladders

Taking the gas

Construction work done came in at a thunderous $61.8 billion for the third quarter, the highest on record, with the distorted result again skewed higher by the import of an LNG platform.


Drilling into the engineering construction figures, if you'll pardon the pun, we can see the enormous spike in Western Australia largely relating to an imported LNG platform, sending total engineering construction a massive 68.4 per cent higher than a year earlier. 

Notably engineering work is also rising solidly in New South Wales and Victoria on the back of strength in infrastructure projects, with Queensland also now on a decent run in this regard.


Flats falling flat

Despite the record high quarterly result, residential construction is now in moderate decline, with the value of detached house building done sliding for three consecutive quarters.

Looking specifically at the building of attached dwellings such as apartments, work done is still absolutely flying in New South Wales, but is now teetering in Victoria, and dropping sharply in Queensland (down 22 per cent since the end of last year, and falling).


Melbourne increasingly appears to be at risk of failing to meet the strong demand for dwellings from rapid population growth.

The wrap

Construction employment has never been higher in Australia, both in terms of the numbers of directly employed, and as a share of the workforce. 

Infrastructure building looks to be strong, and indeed construction activity is at record highs in both New South Wales and Victoria.

The residential building boom, on the other hand, has now moved beyond its peak.

In particularly apartment construction activity is set to fall over the next few years, especially in Brisbane where fewer and fewer new residential projects are now being kicked off. 


Overall, though, this was an upbeat result, with high levels of activity driving construction price inflation to multi-year highs. 

Tuesday, 21 November 2017

APRA lays foundations

Smackdown

APRA announced at the end of March that lenders should limit new interest-only residential borrowing to 30 per cent of new loans. 

The impact of their announcement was "notable and immediate", with the share of new lending declining to just 23 per cent by the September 2017 quarter.

Based on preliminary figures, a similar result is expected by APRA in the December quarter. 


Many borrowers have also been encouraged to switch to principal and interest repayment too, resulting in interest-only loan balances outstanding plummeting by 7 per cent in the past six months.

Lenders are also growing their investment loans books well below APRA's arbitrary cap.

It remains to be seen whether they begin to start pushing housing lending harder again in 2018.

My guess is that they will.  

Stress in the west

Non-performing housing loans remain relatively low at ~0.75 per cent, if a little higher than APRA would ideally like to see. 

The steady increase since 2014 was driven by weakness in the Western Australian economy.


Next on APRA's hit list will be a review of loans with a low "net income surplus" and tighter scrutiny of estimated household living expenses. 

APRA also aims to tackle a blind spot whereby lenders are not always clear about other debt held by prospective borrowers. 

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By popular demand

Cooler, shakier

Back in February this year I went to the auction of a house in Bondi that had no fewer than several dozen registered bidders, with the final two prospective buyers bidding hell for leather and sending the final purchase price well over half a millon dollars over the guide price. 


By the end of March the market regulator APRA had understandably seen enough of all that, and introduced a range of cooling measures, and by the second half of the year stock on market levels were rising quite quickly from previously depressed levels. 

Auctions were still being reasonably well attended, but often with only a handful of serious but cagey buyers at each auction the mood was much more circumspect. 

The shift from strong price growth to a cooling market wasn't driven by an increase in the dwelling stock, at least not directly (in fact the number of houses in many parts of inner Sydney is in decline), nor by a slowdown in population growth (if anything, it's accelerated in Sydney).

The change in sentiment instead reflected a change in the balance of willing and able market participants.

Actually, population growth is rarely very strong in much of the eastern suburbs of Sydney, since not very much tends to get built - it's hard for the population to grow faster than the number of dwellings given new builds are mostly attached dwellings.

Prices are still being driven by supply and demand, of course, just not in the way that market analysis often understands it. 

One of the more thought-provoking talks I've seen in recent times was delivered Scott Keck at Charter Keck Kramer, in which he discussed why Australia doesn't really have a meaningful oversupply of dwellings, and never will have. 


Of course, there can be a stock overhang when the market anticipates demand incorrectly - especially of big apartment blocks which take longer to build - but since projects that aren't selling don't get built, the impacts should be temporary. 

Well worth a watch, many thanks to Robert Baharian of Baharian Wealth for sharing it.

Wage curve ball

It's always a bit of a worry when analysis leans towards the view that the immutable laws of supply and demand don't work any more, and we've arguably seen a bit of that in relation to wages growth  lately (and, for that matter, inflation).

It wasn't that long ago that wages were absolutely belting along during the mining boom, but after just a few short years of low wages growth plenty seem to believe that this is the new normal, possibly forever. 

A buddy of mine in London recently told me he'd just received a substantial, six-figure golden handshake (bonuses...remember them?) for signing a new contract, something that was all but unheard of a couple of years ago.

But with the UK unemployment rate falling to 42-year lows, skilled workers are slowly but surely becoming harder to find again.

The challenge for Australia is that the unemployment rate is relatively speaking still quite elevated at 5.4 per cent, so there's probably a hefty amount of slack that needs to be taken up before we solid wages growth return.

At least things are heading in the right direction. 


For reasons that are hard to fathom, some commentators even believe that the Reserve Bank will hike rates while wages growth is tracking at just ~2 per cent, though I can't believe that for a minute. 

In the meantime, a number of lenders have been quietly lowering mortgage rates again, including for investors and interest-only loans. 

Monday, 20 November 2017

The car in front is an import

Shuttered

Automotive production continues to plummet, with annual volumes nearly 50 per cent below their December 2010 level, and falling fast, so the new car you buy next year will likely be made somewhere else. 


The Department of Employment projected that the factory closures at Elizabeth in Adelaide (Holden) and Altona in Melbourne (Toyota) could cost 27,500 jobs over the years ahead, leading some commentators to predict the end of days for Australia.

Indeed, some gloomy reports even speculated that the closures could snowball into hundreds of thousands of jobs losses, which always seemed a bit far-fetched given that the shutdowns have been discussed for years.

It was wise to be prudent and wait for the halting of operations to pass, which has now occurred, but if there were to be any earth-shaking initial impacts then they weren't yet in evidence in the October 2017 employment figures.

In the event, total employment exploded +355,700 higher over the year to October, sending the unemployment rate careering to a 4½ low, and with the ABS also now putting job openings at the highest level on record

Furthermore, the more timely SEEK job advertisements figures showed openings tearing 25 per cent higher in South Australia and 18 per cent higher in Victoria, so it's probably safe to say that the world hasn't ended for Adelaide or Melbourne. 

Interestingly some of the sectors creating tens of thousands of new job openings lately have included engineering, technicians, manufacturing, including machinery operators & drivers, trades & services, and transport & logistics.

Long term production employees at Holden and Toyota might have received a meaningful payout, potentially even providing a mini-boost to the local economies. 

"Pivot, pivot, pivot..."

There has been much criticism of the government for not propping up the loss-making auto assembly industry. 

Luci Ellis of the Reserve Bank of Australia rattled off the counter-arguments in a blazing speech on economic rationalism last week. 

There's no doubt that the auto industry is facing a fair amount of uncertainty and potential disruption over the years ahead. 

For example, a great deal has been made on the newswires this week of Tesla's forays into driverless trucks, electric vehicles, and "insane" roadsters.

Interesting stuff, though whether a company which has barely produced anything to date - let alone sustainable profits - will prove to justify a market cap north of US$50 billion (and an enterprise value of a baffling magnitude) can only be known in the fullness of time.

It's a good story, I'll grant it that!

Greatly exaggerated

For all the excitement of electric rigs and electric supercars that can accelerate ridiculously fast (albeit not on Australia's congested highways, lol), the death of the humble road vehicle has been somewhat exaggerated. 

Annual unit sales increased to 1,181,418 in October, marginally the highest result ever notched, powered by record Sports Utility Vehicle sales. 


At just under 99,000 the seasonally adjusted monthly sales were a little below the all-time monthly peak set last year, a fact which some have tried to claim represents stretched household budgets.

A more realistic narrative is that low interest rates and tax incentives pulled forward demand in New South Wales, where anyone and everyone considering purchasing a new vehicle must have done so in 2016. 


With more than 1.18 million sales recorded over the past year traffic congestion will get worse rather than better, adding to the urgency for the delivery of transport infrastructure projects, of which there are many now in the pipeline. 

A final observation, the trend in new motor vehicle sales in Western Australia has now been rising for 9 months consecutively. Western Australia saw 8,570 new motor vehicles sold on a seasonally adjusted basis in October, a solid increase of +8.2 per cent from a year earlier. 

While much commentary is focusing on more downside, a number of indicators are pointing towards brighter times ahead in the west. 

Sunday, 19 November 2017

Swiss cheesed

200,000 more Oz millionaires

2017 saw another large increase in global wealth, increasing by 6.4 per cent or (USD) $16.7 trillion to $280 trillion, driven by equity prices and non-financial assets, including housing.  

Global wealth is projected by Credit Suisse to hit $341 trillion by 2022, driven largely by rapid growth in countries such as China and India. 

The US continued an unbroken run of gains since the financial crisis in 2017. 

The Eurozone saw the creation of 620,000 new US dollar millionaires as the currency picked up, and Australia once again punched above its weight in adding a further 202,000 millionaires, taking the total up from 958,000 to 1.16 million. 

Switzerland's wealth per adult has increased by by a thunderous 130 per cent since the turn of the century in US dollar terms to $537,600, albeit largely due to shifts in the exchange rate, according to the Credit Suisse 2017 Global Wealth Report. 

Among the countries in the world with available figures over the long term, Switzerland stands alone in seeing no decline in wealth inequality over the past century. 

Home to just 0.01 per cent of the global population, Switzerland alone accounts for some 1.7 per cent of the top 1 per cent of global wealth holders, with several thousand ultra-high net worth individuals with personal wealth in excess of $50 million. 

Lucky country

Switzerland is something of an exceptional case as a tax haven, but next in line comes Australia with a mean wealth per adult of $402,600, partly driven by "high property prices in the capital cities", somewhat perversely.

Australian household wealth gains have averaged 12 per cent per annum since the turn of the century, and the average debt to assets ratio is surprisingly low at only 20 per cent. 

68 per cent of Australian adults have a net worth of above $100,000, which is some eight times the world average. 

Meanwhile, New Zealand's wealth per adult moved ahead of Norway into fourth place in 2017. 


Wealth inequality is relatively low in Australia, with a far smaller share of the population having a net worth of under $10,000 than the United Kingdom or US. 

Indeed, when measured in median terms Australia's wealth per adult of $195,417 is not too far off the highest in the world, with only Switzerland edging us out at $229,059. 

There are now 36 million high-net worth individuals in the world with a net worth of $10 to $50 million.  

Some 2 million of them are located in China - nearly 40 times as many as at the turn of the century - with a further 6.3 million in India and other Asia-Pacific countries.  

Perhaps not unrelated to this, Australia is projected to be home to 1.7 US dollar millionaires by 2022, up from 1.16 million today. 

Saturday, 18 November 2017

Drain the swamp

Swamp thing

Since the hiring freeze was lifted, Canberra has seen by far and way the strongest household income growth, with gross income per capita in the ACT up from $101,600 to above $110,000 over the past two financial years.

Nice work if you can get it!

At the other end of the scale household income per capita declined in Western Australia in FY2017, back to below the level seen in the 2014 financial year in nominal terms. 


Disposable incomes followed a very similar pattern, with Canberra absolutely miles ahead of the rest, by a magnitude of almost 50 per cent. 

Surprisingly the Northern Territory has been the strongest performer over the past five years in per capita terms, with disposable incomes rising by +24 per cent. 


Queensland incomes have really struggled since the peak of the resources construction boom in 2012, and income growth has been relatively modest elsewhere.

These numbers are derived from the state accounts, and as ever some household are faring better than others. 

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Heads up

Inward bound

As the economy and especially hiring have picked up, so too has immigration, with long term arrivals into Australia hitting a record high 777,440 over the year to September, for a year-on-year increase of +5.5 per cent. 


Lots of Aussies head overseas too, of course, though ABS research has found that long term departees commonly end up back in Australia pretty quickly. 

Short-term arrivals also hit a record high of 8.72 million over the year to September.

Although the pace of growth here appears to be slowing, the Aussie dollar is now declining again after a brief interlude, which should spur tourism faster, higher, and stronger in 2018.


Oh, and there's the Commonwealth Games boost to come next year too.

Uni corn

Drilling deeper into the figures, unsurprisingly education arrivals are at an all-time high.

The next big international student intake won't show up until the February 2018 figures, but 2017 has been a record year for enrolments, and no doubt a lucrative one.

If you've felt that the inner city centres have become busier in recent years, then you'd be right, with the international student phenomenon being largely an urban trend. 


The Reserve Bank's Luci Ellis highlighted in a barnstorming speech on economic rationalism this week how so many recent migrants arrive on student visas and then end up staying Down Under.

This is a boon for education exports, and then later represents a demographic dividend by providing a stream of qualified workers of a young age. 

The Ellis speech was an absolute corker and essential reading, showing how immigration can raise participation and average living standards, as well as explaining where future growth in the economy will come from.

Finally, annual short-term visitors from China boomed to 1,347,400, which is +13 per cent higher than a year earlier. 


Very strong numbers all round, and the next few years should now be characterised by a welcome surge in transport and infrastructure projects. 

Friday, 17 November 2017

Wanna be startin' somethin'

Northern Powerhouse

We all know that employment growth since the peak of the resources construction boom in 2012 has been all about Sydney and Melbourne.

Until now!

Queensland is suddenly off to the races, with trend employment growth blazing +4.62 per cent higher across the year to October, by far its strongest annual result since before the financial crisis. 


Of course, it's harder for the most populous states to record such a large percentage increase, but even so, this has suddenly become too big a move to ignore. 

Some questions we've not had to ponder too often in Queensland since 2007 include: where, why, & what are the new jobs? And will it continue?

Where? Pretty much all around the state, as I've looked at here previously (Queensland is the one mainland state where employment is not excessively capital city focused). 

Queensland is also coming from a relatively low base, after a rough trot, and much of the hiring has been part time in nature. 

The likely drivers of the upturn might range from a surge of Chinese visitors and the dollar-driven tourism industry, the commodity price rebound creating jobs upstate, a slew of public sector and NDIS hiring, and perhaps some late spillover or multiplier from the now-fading residential construction bonanza.

Agriculture exports have been strong, so that's another possible bright spot, plus some increased aggregate demand creating services jobs as interstate migration has picked up.

Just from driving around various parts of SEQ, there are evidently an awful lot of roads being built right now, while there are several significant infrastructure projects underway or about to commence in Brisbane.

SEEK...& ye may find

We'll get more detailed numbers in due course on the historic hiring.

But what of next year, will Queensland jobs growth be sustained or sustainable as we count down to the Commonwealth Games? 

The answer looks to be a qualified "yes".

SEEK's job advertisements data for October 2017 just showed Queensland ads pumping 19 per cent higher than a year earlier, which tends to be a decent leading indicator for hiring.

Notably, some of the most improved industries nationally included those which Queensland is heavily exposed to.


Early days, of course, but every good upswing had to start somewhere!

Thursday, 16 November 2017

This is how we do

Lucky 13

Another pretty good result for the Aussie economy, with total employment notching a 13th consecutive gain, the best stretch in 23 years. 

Headline employment growth was pretty modest, but there was another significant swing towards full time positions - with the economy adding +236,000 full time jobs since the beginning of the calendar year - and the previous month's result was also revised up, keeping the strong trend intact.


In fact, total employment was a massive +355,700 higher over the year to October 2017 for an increase of +3 per cent, way ahead of the growth in the working age population. 


The annual trend in hours worked was a solid +3.1 per cent growth, the strongest in 7 years.


And the unemployment rate continues to fall, down to a 57-month low of 5.4 per cent.


Hard to argue with those numbers. 

Magnetic north

Queensland added another +12,600 jobs in the month to see total employment lead the nation at +90,500 over the year, just ahead of New South Wales at +88,500. 

After several years of stagnation Queensland has recorded enormous employment gains in percentage terms, a huge synchronised upswing across the state taking the trend in annual employment growth up to a colossal +4.62 per cent. 

Many of the new jobs have been part time positions on a net basis, but Queensland was the only state to see its participation rate jump in October (from 65.5 per cent to 65.8 per cent), and unlike other states employment growth has not only been focused on the capital city. 

South Australia's unemployment rate has improved from around 8 per cent in 2015 to under 6 per cent. Jobs growth has been solid if relatively modest in the state, while declining participation and interstate migration to Melbourne and elsewhere have likely helped to pull down the unemployment rate a little.

In New South Wales the unemployment rate continues to trend down, now to a post-financial crisis low of only 4.71 per cent (and just 4.6 per cent in seasonally adjusted terms). 


Despite this, wages growth in New South Wales is still only tracking at +2.1 per cent.

Sco-Mo crows

This was a modest headline result, but with quite a few snippets of good news in the underlying figures.

If experiences overseas are a worthy indicator, then it'll take a while for unemployment to fall enough to see meaningful wages growth returning, but clearly things have been moving in the right direction. 

After a series of dire polling, Treasury's Scott Morrison was lightning quick to put out an upbeat announcement to note that upbeat jobs figures, um, do not need to be announced:

"Talking about jobs is not something we have to announce. It is just what we do."

Way to go, Sco-Mo...Katy Perry would be proud!

Of borrowers & buffers

Panel beater

I've been busy at the 1,600-strong UBS European Conference 2017, held at the Landmark London in Marylebone, and have learned a tremendous amount from a range of experts, while the Rt Hon David Davis MP also aimed to reassure the City about the forthcoming Brexit. 


I was thrilled to partake in a panel presentation on consumer indebtedness in Anglo-Saxon countries.

On the panel with me were the Chief US Economist of UBS, and the legendary one-time Sydneysider James Aitken, who's been over in the Smoke for some 18 years now. 

Completing the panel was Mathias Drehmann from the Bank for International Settlements (BIS) in Basel, which was a tremendous privilege for me. 

The BIS and Drehmann have produced some terrific research papers over the past decade and more, some of which continue to be discussed regularly in Australian financial circles today. Drehmann's extensive work has shown how the impacts of new mortgage borrowing are often felt 4 to 5 years after the loans are initially taken out.


Exceptionally different here...

It was especially enlightening for me to spend some time later chatting with the personable Drehmann, who originally hails from Stuttgart, a city where I studied in the Oberstufe back in the 1990s. 

Australia has been something of a puzzle for Drehmann and the BIS, for its models on debt service ratios (DSRs) have implied that Australia should have experienced financial instability or banking crises since 1980. 

It was fascinating to discuss why this has not proven to be the case. At least part of the answer comes down to semantics, and how exactly one defines a 'systemic crisis'. After all, in 1989 two of Australia's banks experienced stress and received capital injections from the government. 

And then in late 2008, while Australia avoided a technical recession, authorities were forced to take a number of measures to shore up the banking system, such as enhancing deposit insurance, introducing debt guarantees, and intervening in the capital markets through the purchase of mortgage-backed securities.

Even so, Australia has maintained a gross level of household debt since at least 2006 that is higher than many other developed countries have been able to sustain. 

At your service

Population growth, and Australia's highly urbanised demographics are two factors which are regularly mentioned in explaining high household debt, although we also know from international experience that population growth tends to be pro-cyclical.

The Reserve Bank of Australia (RBA) has found some merit in larger cities being able to cope with more leverage. The BIS itself found that Korea has been able to sustain exceptionally high debt service ratios compared to other countries, and its largest city Seoul has a population more than double that of Sydney. 

In Drehmann's relatively decentralised home country of Germany, on the other hand, debt service ratios have typically been much lower, and home ownership rates have been lower too.

The BIS acknowledges the limitations of its approach in using aggregate numbers for countries, and necessarily adopts a macro or helicopter view (Drehmann was intrigued to learn more about the very Australian concept of loss-making investment loans, for example). 

While debt service ratios can serve as useful early-earning indicator for crises, history doesn't always rhyme or act as a reliable guide to financial stability, since the relevant data typically only stretches back to 1980, there is more debt around today, and the distribution of debt has changed. 

Of borrowers & buffers

The RBA has dedicated a good deal of time analysing Australia's household debt, and has highlighted a wide range of factors in both causing the run-up and then sustaining consumer indebtedness.

If you had to distil their arguments down to just two points, then you'd probably highlight borrowers and buffers.

Since 2002, the increase in household debt in Australia has been overwhelmingly attributable to households in the fourth and fifth income quintiles, typically the borrowers with the most ability to service the debt.

And, secondly, a factor specific to Australia is the popularity of offset accounts: in aggregate households have buffers with some 2½ years of scheduled repayments at current interest rates. 

A challenge for Australia is that the growth in household disposable incomes was absolutely hammering along at about 7 per cent per annum through the 2000s, but since 2012 annual growth has been tracking at closer to only 3 per cent, with few signs of improvement to date.  

To end on another cautionary note, Aitken presented some fascinating statistics on loan defaults and historic crises, showing that non-performing loans at the margin can trigger significant stress.

Even in some of the most acute of downturns, most borrowers kept up their repayments. 

Image result for ubs european conference 2017