Pete Wargent blogspot


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Tuesday, 28 February 2017

New home sales soften

Weaker start to 2017

New home sales declined by a seasonally adjusted 2.2 per cent in January according to the Housing Industry Association (HIA).

This cycle has now been the longest new home building cycle in Australia's history, noted the HIA.

Detached house sales declined by 1.5 per cent.

Across the January 2017 quarter, however, sales of multi-units strengthened by 4.8 per cent to be 9 per cent higher than for the comparable prior year period. 

At least for the short term, the HIA forecasts a reasonably solid outlook for residential construction.

Condominium, Condo, Building

CAD narrows to $3.9 billion

CAD narrows remarkably

The tweets about Australia being in recession in the fourth quarter are doubtless quietly being deleted.

The current account deficit narrowed by a remarkable 62 per cent from $10.2 billion to just $3.9 billion in the fourth quarter, albeit mainly thanks to booming commodity prices rather than export volumes. 

Just a year earlier the deficit has been as wide as $23.1 billion.

The current account balance as a percentage of GDP is now in the best nick in 36 years. 

Net foreign debt has declined a little over the past 6 months, although the total outstanding remains over $1 trillion.

Recession avoided 

We'll have to wait until tomorrow for the national accounts to confirm GDP growth for the fourth quarter.

However, net exports will add a little to growth at +0.2ppts, neatly offsetting an equivalent drag from a draw on inventories. 

Meanwhile all that government debt hasn't completely gone to waste, with public demand increasing by +1.4 per cent, as such contributing +0.3ppts to growth in the quarter.

The government has been spending up on transport and other infrastructure projects.

The major banks see GDP growing by between +0.7 per cent and +1 per cent for the fourth quarter of 2016. 

In summary: no recession here. 

Kuwait, Fireworks, Display, Lights

Monday, 27 February 2017

Dodged bullet?

Technical recession averted?

It's been an incredible 100 consecutive quarters since Australia experienced a recession, and it looks as though this remarkable record will just about remain intact.

Today's Business Indicators figures from the Australian Bureau of Statistics (ABS) brought a bit of a mixed bag of news.

Mining profits exploded fully 50 per cent higher in the final quarter of the calendar year to be a rip-snorting 89 per cent higher than they were the March 2016 quarter.

This was mainly driven by prices growth (which feed in nominal GDP) rather than export volumes growth (which form a part of real GDP), so the national accounts will be an unusual beast this time around. 

Mining income also tore more than 22 per cent higher in the quarter to break fresh records.

Gross operating profits across all industries absolutely smoked expectations to be a massive 20.1 per cent higher in the fourth quarter (the market consensus had expected an 8 per cent improvement).

There hasn't been a quarter remotely like it for profits over the past decade-and-half, this remarkable jump being forged on the back of some massive increases in commodity prices. 

Mixed bag

Today's business indicators release wasn't all bullish by any means, with wages contracting in the quarter, although analysts expect to see better things from this metric in 2017. 

Inventories were up by +0.3 per cent, which was lower than the preceding quarter where there had been an apparently involuntary run-up in inventory levels.

But although this will be a drag on GDP growth in Q4 (-0.2 ppts) the result was not nearly as bad as some analysts had feared. 

Overall, the business indicators were perhaps a slight beat on expectations, and some analysts will be marking their GDP forecasts a notch higher for later in the week. 

In all likelihood this means that Australia dodged a technical recession after recording negative growth in the third quarter.

Regardless, whatever happens to real GDP growth, national income is clearly set to lift sharply, while nominal GDP will be maniacally strong for the December quarter.

Australia has done a remarkable job to notch up an unbeaten century in respect of quarters of economic growth.

The challenge now for Oz is whether it can turn an excellent century into a genuine 'Daddy hundred'.

Shot, Explosion, Broken, Bullet

Return of the Kiwi

Record NZ migration

Net migration into New Zealand hit a record high 71,300 over the year to January 2017, according to Statistics New Zealand. 

Some of the recent burst in migration had been driven by migration from Australia, as well as a large number of student visas.

However, the Aussie trend now appears to have ended, with permanent and long term departures from Australia now having peaked.

In fact, Statistics NZ reported that more than two-thirds of those migrating from Australia to New Zealand were actually NZ citizens returning home after the big Aussie surge driven by the resources boom. 

The main drivers of record NZ migration are now increases in Chinese, British, and South African migrants.

Netting off those leaving in NZ in the opposite direction across the Tasman for Australian shores, there was actually an inflow to Australia in January, thus signalling the end of the so-termed "Kiwi exodus". 

Chinese tourism boom

New Zealand also experienced a record 381,000 visitors arrivals in January (up 11 per cent from January 2016), more than 54,000 of whom came from China to coincide with Chinese New Year.

Looking at these monster numbers suggests that Australia could be in for some huge equivalent figures when they are reported in a fortnight's time. 

Shorters having conniptions?

Loan books expanding

Through 2008, outstanding loans to households by Australia's banks totalled less than $700 billion. 

The final 2016 numbers are not yet plugged into the chart below, but the monthly banking statistics suggest that the total by the end of the year will exceed $1.5 trillion. 

Australia has experienced strong population growth during this period, but nevertheless outstanding housing debt has been compounding at around 9 per cent per annum. 

Such a strong pace of increase in household debt is bound to be reflected in housing market conditions one way or another, and in Australia's case the result has been price increases in Sydney and Melbourne. 

This dynamic since the financial crisis has been arousing the interest of short sellers, including from overseas. 

Although house prices have declined in Perth, Darwin, and parts of regional Queensland in particular, to date the most heavily populated markets have held up well. 

If anything, housing market sentiment seems to be improved in Sydney and Melbourne again at the beginning of 2017. 

Changes to the lending environment

Regulators have encouraged several tweaks to lending criteria over the years since the financial crisis first erupted. 

"Low-doc" loans, once fairly commonplace, today only comprise a small share of the mortgage market, while 100 per cent mortgages have thankfully gone the same way.

In fact, new mortgages today overwhelmingly have a loan to value ratio (LVR) of 90 per cent or lower, although in reality many borrowers have used equity from existing properties to fund their deposits. 

Lending standards in Australia are higher than they were, but on some measures remain concerning.

For example, the share of interest only loans remains high by international standards, despite having declined from somewhat alarming levels in 2015. 

ASIC had previously reported that about two in three investor loans in Australia were interest only mortgages, and around a quarter of owner occupier loans - with the repayment typically increasing when the interest only period ends. 

Shorting: what and when

Short sellers rarely bet on house prices directly, rather they tend to be interested in the outcomes of a market downturn (and housing markets are necessarily always cyclical). 

Some will sell the stock of banks, others will look at developers or home building companies, materials companies, retailers of household goods, financiers, or the institutions that insure mortgages. 

Alternatively some may look at buying Australian government bonds, while one of the cleanest and potentially profitable ways to bet against the housing market might be to short the Australian dollar, which at 76.7 US cents arguably still has plenty of downside. 

Timing short bets is important

Maintaining short positions can be costly in terms of interest or dividend obligations, while opportunity cost of suboptimal market timing is another factor to be considered. 

There has been plenty of discussion of the potential impact of an apartment glut in Australia, but in the case of both Melbourne and Sydney accelerating population growth appears to be absorbed much of the new supply to date, although tens of thousands of apartments remain under construction.

The potential for non-resident buyers defaulting on apartment settlements has been another salient risk closely watched by sceptics, though to date news of any fallout appears to have been relatively contained.  

One market risk which cannot so easily be quantified is the potential for defaults in the scenario whereby mortgage rates increase, prices in secondary and lower socio-demographic areas decline, and a swathe of interest only loans reach the end of their interest only period.

Maths can get ugly

Anyone who had a standard variable rate mortgage in 2009 at above 8 per cent will recall that principle and interest repayments could be excruciatingly difficult.

Consider that a homeowner with a $600,000 interest only mortgage at 4.5 per cent today might be paying only ~$2,250 per month, whereas as and when the mortgage flips to principal and interest, were the mortgage rate to have increased to 6 per cent the repayments could be more than 50 per cent higher, even on a 30 year product.

Mortgage repayment calculators don't always give the option to calculate what would happen in a 7 per cent scenario, but the answer on a 30 year product might be a potentially punishing ~$4,000 per month. 

With the amount of outstanding interest only debt having increased at an unprecedented pace through this cycle it's not too hard to analyse when this market risk will arise, and in turn which areas might see defaults increase. 

The most successful shorters will be those that can combine market timing with bets lined up against those companies with the most vulnerable financials. 

The big players

Market participants will be well aware of the attractive mortgage rates that the Commonwealth Bank of Australia (CBA) has been offering lately, and in turn the growth in the CBA investor mortgage book looks likely to bump up against the notional 10 per cent per annum cap set by the regulator APRA.

Unfortunately for analysts the market data reported for investor loans has been muddied by reclassifications from investor to owner-occupier loans.

For example, the Westpac Banking Corporation (WBC) switched more than $21 billion of loans between July and October 2015 taking outstanding investor credit down from $156 billion to $135 billion and in turn causing its year-on-year growth in outstanding investor credit to appear negative for some time. 

Despite the reclassification Westpac retains the greatest balance of outstanding investor loans, while Commonwealth has the largest total of outstanding household mortgage debt, although the quality of loans rather than the volume is what should be of interest to analysts. 

Investors today typically pay higher mortgage rates than owner-occupiers, with further tweaks a possibility in 2017. 

What shorters should really be paying attention to is which financiers, insurers and developers have been active in the highest risk markets, areas which have been discussed here on this blog previously.

Prospective borrowers should take into account the likelihood that mortgage rates may move higher over the years ahead. 

Stock Exchange, Trading Floor, New York

Saturday, 25 February 2017

Deuces are wild

Wild Sydney Saturday

Very busy in Sydney today, in spite the atrocious end-of-season weather, with prospective property purchasers and the traditional tyre-tickers out in force alike. 

Can't say for sure what's going on across the wider Sydney market, but in the eastern suburbs and inner west auctions were packed out with some seriously cashed up buyers and bidders.

Unlike in the United Kingdom where there are punitive inheritance taxes even for moderate estates, Australia has long since abolished its state and federal death duties.

It shows. 

There are some seriously cashed up buyers around in markets that have experienced strong price gains like Sydney, with dozens of bidders registering at auction, even for properties selling in the $3 million plus price bracket.

And accordingly there were some monster auction results east, west and north of the City today: from Marrickville to Maroubra to Mosman, from Drummoyne to Dee Why, to Bronte and Bondi.

Today's median auction price in Sydney was $1,420,000, some 18 per cent higher than a year ago. 

And here's that number in its historical context. 


Norman, Oklahoma, Lightning, Dangerous

Weekend reads: Must see articles of the week

All nicely summarised for you here at Property Update (or click the image below).

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Friday, 24 February 2017

London & the post-crisis recovery

UK city prices +6.9pc

Hometrack's UK 20 Cities Index saw house prices rise by 6.9 per cent over the year to January 2017.

London prices were up by 6.4 per cent over the year - which is actually the city's lowest rate of price growth for 42 months for the capital, as the premium sector has slowed significantly in response to stamp duty changes and related headwinds.

Since 2009, London and Cambridge have led the way in terms of price growth, with the capital city returning to the top of the tree with 85 per cent price growth. 

Price growth has been over 75 per cent in Oxford and Cambridge. 

Regional cities are in many cases struggling to surpass pre-crisis highs - the contract with the south east of England has been remarkably stark - but some regional cities potentially have upside. 

Source: Hometrack

Price growth in Manchester increased to 8.3 per cent in the year to January 2017. 

London, Tower Bridge, Bridge, Monument

Perth unemployment rate above 7pc

Perth labour market deteriorates

Over December and January Greater Perth joined Greater Adelaide in the unenviable position of having  an unemployment rate which has breached 7 per cent. 

Smoothing the unemployment rate figures as an annual average shows that of the main capital cities only Perth is in an unemployment rate uptrend as the heady days of the resources boom recede.

Nationally annual employment growth has picked up a little over the past three months, albeit not by very much, with a shade over +90,000 positions added on a net basis for employment growth of +0.8 per cent. 

Having been on a storming run in 2015, annual employment growth has slowed right up in Greater Sydney to +21,000, with only Greater Melbourne adding any meaningful figure to its workforce at +85,000. 

In aggregate, in fact, the rest of Australia has added no net new employment at all over the year to January 2017, which is a rather underwhelming statistic to say the least!

Regions struggling

CoreLogic released some telling research today which showed that while capital city land values have continued to rise, regional land values in Australia are falling, down by some -8.5 per cent in 2016, noting that:

"Capital city dwelling values are rising while many regional areas are experiencing value falls."

According to CoreLogic the capital cities seeing the greatest increase in land values over the year were Sydney (+20.5 per cent), Hobart (+13.1 per cent), and Melbourne (+9.5 per cent). 

On the other hand land price falls were notched in regional New South Wales (-2.4 per cent), regional Queensland (-11.5 per cent), regional South Australia (-5 per cent), regional Western Australia (-2.3 per cent), and regional Tasmania (-3.0 per cent).

With lot sizes having decreased, on a rate per square metre basis some massive regional falls have been recorded in 2016, including -24.9 per cent in regional New South Wales, -34.8 per cent in regional Queensland, -13.2 per cent in regional South Australia, -12.5 per cent in regional Western Australia, and -17.9 per cent in regional Tasmania.

The gap between capital city and regional prices has thus continued to widen to reach its greatest ever gulf. 

You can read CoreLogic's findings in much more detail here

While it's important not to generalise too much, it is the case that many regions of Australia saw employment bolstered through the resources construction boom up until 2011-12, a trend which then retraced after the commodity price cycle peaked. 

To look at Townsville as one example of a region which saw employment trends follow this pattern, total employment picked up strongly and peaked at 125,500 in 2011, subsequently declining by more than 25 per cent before stabilising. 

While the picture seem to have improved of late, with an unemployment rate of 12 per cent across the region to date there remains too much slack in the labour market to force wage increases. 

Recent research by SQM Research showed that the rebound in commodity prices may have helped mining town property markets through their nadir after a diabolical run. 

Handshake, Hand, Give, Business, Man

First homebuyers look to Brisbane

Reported n the Brisbane Times today (click image below).

iSentia hosed

Gosh, iSentia (ASX: ISD), a struggling value stock I looked at previously here didn't please the market through reporting season.

The company posted an EBITDA loss after restructuring, with ongoing concerns over its content marketing division.

Before reporting ISD had been trading at around $2.80.

ISD closed at $1.66 yesterday down from $4.95 in late 2015.

Firefighters, Fire, Flames, Outside

Earnings up, not a lot

Earnings trudge on

Average weekly earnings for males working full-time increased by only 1.8 per cent in the year to November 2016, according to the Australian Bureau of Statistics (ABS).

Thus earnings for men working full-time increased faster than inflation, but not really by much. 

Although coming from a substantially lower base, average earnings for females working full-time are faring relatively much better, increasing by 3.3 per cent over the year to November. 

Since May 2012 on these measures full-time total earnings have increased by 15 per cent for females compared to only 12 per cent for males. 

This in part may reflect that women have historically been paid and promoted far less than men, and in professional and services roles this imbalance is being addressed, albeit gradually.

Furthermore wages growth in male-dominated industries such as the mining and resources sectors has been very sluggish over the past year

Public sector wages rising faster

It was also notable from the ABS release that public sector earnings are rising at a considerably faster pace than in the private sector, with ordinary time earnings up by 3.4 percent and total earnings up 3.3 per cent for full-time employees.

This is likely to be good news for inhabitants of Canberra, where ordinary time earnings are on average higher than anywhere else in the country!  

Piecing all of this together, over the year to November 2016 full time adult average weekly ordinary time earnings ("AWOTE") increased by 2.2 per cent to $1,533.10, as reported by the ABS.

Meanwhile the full-time adult average weekly total earnings in November 2016 was $1,592.40, which was also a rise of 2.2 per cent from the same period last year.

Mining states

The original figures - not seasonally adjusted - can naturally be a little volatile at the state level.

What they do show, however, is that male total earnings for full-time workers are still on average highest in the resources states of Western Australia and the Northern Territory, reflecting that solid bonuses can be earned in this sector, while fly-in fly-out workers (FIFO) may be well compensated for their time spent working remotely.  

This trend has persisted is in spite of the mining industry recording the weakest year-on-year growth in wages

The wrap

Overall, it's clear that while real earnings are still rising in Australia, the gains have been relatively moderate of late.

At the present time, therefore, the prognosis appears to be best for households with two incomes given that female full-time earnings are rising at a more sprightly pace than their male equivalents. 

What's more, it's in the public sector and in the services sectors such as healthcare, social assistance, education and training that the fastest wages and earnings growth in taking place.

The outlook for resources regions is in many instances bleak by comparison. 

Dollar, Money, Earn Money, Internet

Thursday, 23 February 2017

Declining mining CapEx still hurting WA

CapEx still weak

Total private new capital expenditure declined by another 2.1 per cent in seasonally adjusted terms in the December quarter to $27.6 billion. 

Capex has declined by 15.5 per cent over the year following slight revisions to the prior quarter. 

Mining investment continues to plunge, now down to $9.4 billion from a quarterly peak of $24.3 billion in the second quarter of 2012, with yet further drops expected. 

There have been some moderate improvements in manufacturing and services capital expenditure respectively, although to date these have been relative chicken feed compared to the smashing falls in the mining sector. 

The decline in mining capex continues to hurt Western Australia, where total quarterly capital expenditure has fallen from $15.8 billion in the December quarter in the heady days of four years ago to just $7.2 billion, with further declines in the post. 

Despite the gloom in Western Australia, nationally the decline is now in all likelihood far closer to the end than to the beginning.

In fact, in other states capital expenditure is generally tracking reasonably well, if not swimmingly. 

The first estimate for total capital expenditure - which historically has always come in low - was an uninspiring $80.6 billion for 2017-18, which was a disappointing 3.9 per cent below the corresponding prior year estimate. 

This was a clear-cut miss against market expectations.

Notably the first estimate for "other industries" - essentially services  industries- was 8.3 per cent higher than in the prior year at $46.8 billion. 

However, the first estimate for mining capex remained a painful 20 per cent lower year-on-year, which really is another huge decline given what has already gone before! 

The wrap

There is some grounds for optimism here given that services investment is now steadily increasing. 

Despite this, mining capital expenditure still has some way to decline, particularly in Western Australian and the Northern Territory. 

How you experience 2017 and 2018 will largely depend on whether or not you live in Western Australia or in a resources region. 

The services industries, at least in the most populous capital cities, look set for a mainly positive year ahead. 

Gold-Construction, Australia

MOAR apartments...


The Meriton Tower is the tallest building in Brisbane presently, but it won't be the tallest building in the city for too much longer.

The new SkyTower at 222 Margaret Street will go taller again at 274 metres and comprising some 1,119 apartments. 

Mostly one- and two bedroom affairs, apartment prices commenced at around $425,000.

About 20 per cent of the apartments sold have reportedly gone to offshore buyers. 

The SkyTower will only be the tallest building for a short period of time itself, until a new development at 300 George also goes all the way up to 274 metres, which is presently the building height limit for the Brisbane CBD due to aviation restrictions. 

Property developer Billbergia and AMP Capital are behind the Skytower project, with Hutchison acting as the builders. 

Mining cliff all but finished

Construction flat in Q4

Engineering construction declined by a further 2.2 per cent in seasonally adjusted terms through the December quarter to be 18.6 per cent lower year-on-year at $19.3 billion.

As you can see in the chart below, engineering construction - mainly related to resources projects - peaked at the heady levels of nearly $35 billion back in 2012, but has been retracing ever since. 

The quarterly decline was more or less offset by a 1.3 per cent increase in building work done to $26.7 billion, leaving total construction work done in the fourth quarter all but flat at -0.2 per cent.

Mining cliff nearing the end

In Western Australia engineering construction declined once again to $5 billion in the fourth quarter, down from as high as $12.6 billion only six quarters ago.

WA still has a bit further to fall on this measure, though probably not all that much now, particularly given the enormous rebound in iron ore prices.

Iron ore projects pump out high volumes and reserves tend to be depleted quickly, and as such further investment will be required in existing projects in the Pilbara.

This is one reason why the chart below now appears to be flattening out.

Another reason is that in all of the other densely populated states, including Queensland, engineering construction is no longer in decline. 

It's now 4.5 years since mining investment peaked, with engineering construction down by a punishing 44 per cent from the September 2012 peak. 

In all other states and territories engineering construction work is now flat or positive, although to be fair activity in the Northern Territory will decline a bit further at some point as the Ichthys project investment spend dries up. 

All of this in part explains why the Reserve Bank of Australia is so apparently upbeat in its outlook - within a year engineering construction will have completed its retracement, and thus will stop acting as a drag on the economy for the first time in years.

Building work flourished in 2016

Total building work done has powered higher through this cycle, largely driven by residential construction in the largest capital cities rather than non-residential projects.

The rolling annual figures do now look peaky, though. 

Although the value residential construction work done increased again by 5.7 per cent in 2016, it seems likely that the top will soon be in.

Looking specifically at the construction of attached dwellings (being townhouses, units, and apartments) this sector was still going like the absolute clappers at the end of 2016, particularly in Sydney and Brisbane. 

That said, the top may soon be in here too, with Melbourne apartment construction work done having already apparently peaked back in the June quarter of 2016. 

The wrap

Overall this was a fairly flat national result for construction work done, which as ever masks divergent underlying trends.

Construction work done will be a moderate drag on GDP growth for the fourth quarter.

Although the economy may record a weak result for real GDP growth, at least as importantly nominal GDP and gross national income are set to record a storming run thanks to the commodity price rebound.

The good news is that after 4.5 years resources construction activity at long last looks to be approaching the end of its sweeping downturn. 

However, while residential building approvals suggest that housing construction will remain solid for the next year or perhaps longer, apartment construction in particular looks likely to fall sharply sooner or later.

Excavators, Site, Vehicle

Wednesday, 22 February 2017

Wages growth still stuck in a rut

Wages growth in a rut

Private sector wages grew by just 0.4 per cent in the December quarter, while public sector wages grew by 0.6 per cent, according to the Australian Bureau of Statistics (ABS). 

Over the year private sector wages growth of 1.8 per cent was well behind the 2.3 per cent growth seen in the public sector.

Nationally across all sectors annual wages growth remained stuck at 1.8 per cent, equalling the record nominal low seen in the preceding quarter. 

Mining struggles

Perhaps not surprisingly the weakest wages growth was seen in the mining sector at just 1 per cent in 2016.

The strongest wages growth was seen in services sectors such as healthcare and social assistance (2.4 per cent wages growth in a strongly expanding workforce), and education and training (2.4 per cent). 

Manufacturing wages grew by 1.8 per cent, as did wages in the construction sector. 

Reflecting the weakness in the mining sector, Western Australia had the weakest growth in wages in 2016 at 1.4 per cent. 

Improving Tasmania moved to the top of the pile with wages growth of 2.4 per cent, while conditions have also improved a little of late in New South Wales (2.1 per cent) and Queensland (2 per cent).

It's interesting to note that over the history of the data series - and particularly through the resources boom - Western Australia has posted by far the strongest increases in wages, and thus some mean reversion may be in play. 

Despite annual wages growth of only 1.8 per cent, wages growth continues to outpace inflation, and as such real wages have continued to grow. 

Overall, a weak result as widely expected, but the huge rebound in commodity prices together with some other brighter data suggest that the nadir of the quarterly wages growth cycle may soon have passed.

Picture by Ryan McGuire