Pete Wargent blogspot


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Friday, 31 March 2017

Peak Pom!

Overseas born highest since gold rush

The percentage of Australians born overseas continued to rise to 28.5 per cent in FY2016, which is the highest share in over 120 years since the heady gold rush decades of the 1800s.

Australia has long been a country built on immigration, of course, but migrants are now hailing from Asia in numbers not seen previously.

Source: ABS

As European economies slowly recover the composition of new immigrants into Australia is changing dramatically, with some Brits (ta-ra!) and Kiwis also opting to return home after Australia's mining boom years, and fewer new migrants from those countries coming in their stead. 

There is no shortage of willing takers for citizenship from Asia though, with a walloping increase in the number of Chinese, Indian, and other Asian-born residents over the past 10 years. 

Over the past decade the number of Aussie residents from China and especially India has comfortably more than doubled, and the growth rates over the past year of 8 and 6 per cent respectively confirm that this trend is set to continue. 

The figures revealed a genuine concentration of Chinese and other Asian immigrants in Sydney and Melbourne, as residents of those two cities will doubtless attest.

By contrast, the number of Aussie residents born in Germany flattened and then eased back a touch (auf wiedershehen!), and the number of Italian born residents has actually dropped by 10 per cent (arrivederci!). 

Internal migration

In FY2016 there was a significant net migration away from South Australia (6,398) and Western Australia (7,703), as well as the usual net departures from New South Wales (11,349). 

I have already noted how this is helping to fuel record population growth in Melbourne

What has been less widely reported is the steady emergence of south-east Queensland as a monster population growth hub, a trend which will almost certainly intensify over time as the population ages ("he died so young he didn't even make it to Queensland" as someone said to me the other day). 

Population growth increased in FY2016 into Brisbane (41,135), Gold Coast (12,280), and Sunshine Coast (5,967), in part also driven by migration away from Sydney and elsewhere.  

As I noted here yesterday, over time this trend will swell to the extent that the extended 300km strip of coastline from Noosa to the Tweed will gradually become thought of as south-east Queensland or simply "SEQ" rather than individual cities. 

The regional population figures also showed how growth rates have been in a sharp decline in Adelaide, Perth, and Darwin. 

Household wealth burns up to $9.4 trillion

$1 trillion in cash

Household wealth increased by $328.1 billion to $9.4 trillion in the December quarter, largely thanks to the surge in Sydney and Melbourne house prices previously reported by the ABS

I read an article last week which noted that there is 'record' credit card debt, but the truth is that personal credit growth is actually negative and the household savings rate is very much in positive territory. 

Moreover, currency & deposits have been piling up to the extent that Aussie households are now sitting on a 'cash' pile exceeding $1 trillion for the first time ever.

There's some more good news for households in the post in early 2017 too, with the ASX recovering to glance a two-year high, and dwelling prices rising further. 

Australia's average net worth on a per capita basis rose to about A$387,000 in 2016, though truthfully whether you have experienced these gains was dependent on whether or not you own property.  

Even after accounting for the sharp decline in the Aussie dollar since the peak of the resources construction boom, this means that you have the Swiss and then Aussies are pretty much next up in terms of global household wealth. 

The build up in household debt has been well enough documented, but with capital pouring in from overseas and dwelling prices being set at the margin, residential real estate asset values have torn higher again in Q4 2016.

The net result from a headline perspective is that gearing ratios are in decline again, with the household debt to assets ratio now easing back below 20 per cent. 

The derived interest payable to income ratio increased from 9.9 per cent to 10.1 per cent, indicating that the proportion of household gross disposable income required to meet interest payments increased slightly in the quarter.

Despite this increase the relative decline in the mortgage burden in recent years has allowed incumbent homeowners to build up record mortgage buffers. 

It's been something of a rollercoaster decade with a share market crash and slow recovery, yet household net worth has more than doubled since 2005.

Thursday, 30 March 2017

Melbourne shatters population growth records

Capital city expansion

In percentage terms the resources capitals of Perth and Darwin have seen their population growth rates decline very significantly since FY2014, while many mining areas have slowed in sympathy. 

Greater Melbourne is now top of the tree by far with a blistering population growth rate of 2.4 per cent, followed by Greater Brisbane (1.8 per cent), and then Greater Sydney (1.7 per cent).

A weakened economy in Adelaide has seen its population growth rate continue to slide to 0.7 per cent as disenchanted residents drift interstate to Victoria, while Hobart has a population growth rate of 0.8 per cent.

Interestingly we are now seeing flat or negative population growth across the regional areas of a number of states, with the population actually in moderate decline in regional Western Australia, regional South Australia, and the Northern Territory outback.

In absolute terms Melbourne shot the lights out in FY2016 in recording massive population growth of 107,770, comfortably eclipsing the 82,797 increase in the Greater Sydney population.

Between them the two largest capitals accounted for more than 190,500 or some 56 per cent of total population growth. 

Population growth in Brisbane is also picking up the pace again as folks drift north from pricey and crowded Sydney, rising steadily to 41,135 in the financial year.

I've long felt that to some extent south-east Queensland will over time become seem as one long conurbation stretching from Noosa to the Tweed.

The latest ABS population density grid below hints at what I mean by that:

Source: ABS

The wrap

Overall population growth become even more focused on the two largest capital cities in FY2016.

Away from the capital cities total regional population growth around the country was just 61,167, with Gold Coast (12,280), Sunshine Coast (5,967), and Geelong (6,776) pitching in a fair chunk of this growth, and the Hunter Valley a fair amount of the remainder. 

But the real action has been in Greater Melbourne where population growth has all but torn the roof off to surpass 4.6 million.

Meanwhile, the population of Greater Sydney increased past 5 million in the month of June 2016.

The ABS noted that it took Sydney nearly 30 years to increase from 3 million to 4 million between 1971 and 2000, but the harbour city has added its latest million in about half the time.

Vacancies point to jobs growth ahead

Job vacancies rise

Good local news today as job vacancies rose by 9.4 per cent over the year to February 2017 in trend terms to a total of 186,400.

That's the highest result since all the way back in 2011, and suggests solid jobs growth ahead. 

The number of unemployed persons per jobs vacancy is now back below 4 and at its lowest level since 2012, though there is literally more work to be done here. 

The vacancies figures still have a Sydney-Melbourne flavour to them, in line with most other economic and demographic trends we're seeing right now. 

Well over 20,000 of the vacancies each were to be found in the healthcare and social assistance sector and the professional, scientific, and technical industries respectively.

Meanwhile manufacturing, mining, and construction have all picked themselves up of the mat lately. 


Victorian jobs boom


Sydney's labour force has previously been on a blistering run, with total employment across the state growing by a walloping 4.4 per cent in trend terms over the calendar year 2015.

This was not sustainable, and employment growth has now slowed to a crawl.

Victoria (and particularly Melbourne) has now taken up the mantle, with employment growth peaking at 3.8 per cent in trend terms in October 2016.

In truth, there's not been too much happening elsewhere...

When looking at the actual number of net new jobs created we see that Melbourne and Victoria have created...well, nearly all of the net growth in employment over the past year. 

There is a veritable slew of new data out today, so there's plenty to look at, including among other things new figures on migration and regional population growth for 2016.

I expect to see regional population growth having slowed further, with capital cities accounting for a near-record share of population growth.

Moreover, we can expect to see the strength in Victoria's labour market sucking more people in to Greater Melbourne. 

Stay tuned.

Wednesday, 29 March 2017

Mining cliff nears its dénouement!

Declines set to slow

Some 4½ years after the heady 2012 peak it looks as though the drop in resources construction will at long last be drawing to an end. 

Private sector engineering fell further in the fourth quarter of calendar year 2016, to be a thumping 29 per cent lower over the year. 

Thankfully, there was a 9 per cent uplift in public sector construction, helping to offset the decline somewhat. 

Construction activity in Western Australia continued to tumble from $12.6 billion in the June 2015 quarter to under $5 billion over the last quarter of 2016, but elsewhere activity has long since already flattened. 

Western Australia doesn't have too much further to decline, which is one plus point. 

But the real reason we should expect the end of the decline to be soon upon is that there is now more work getting underway, as highways and infrastructure are built, and as the reserves of existing resources projects are depleted, thereby requiring further investment. 

2017 should therefore see the last of the declines in engineering construction.

Mathematically, this is hugely important for the economy, for once mining construction is no longer acting as a drag on growth, we should find that the remainder of the economy is growing at a reasonable pace. 

Although there have been many challenges along the way, that Australia has avoided a technical recession over more than 25 years through the boom and bust is quite a testimony to the self-correcting forces in the economy. 

Stamp duty bonanza continues

Windfall for New South Wales

Stamp duty isn't a much admired tax.

Except by governments that is!

The arguments against stamp and transfer duties include that they discourage labour force mobility, while making life challenging for first home buyers.

It's not hard to see why governments like them, though.

Over the year to February 2017 the NSW Office of State Revenue (OSR) alone recorded astronomical receipts of $9.4 billion.

Stamp duty is now accounting for more than a quarter of state government revenue in NSW.

I noted last year how the NSW government has smashed its budget targets to leave itself with net debt of less than zero for the first time, largely thanks to this remarkable windfall. 

Land tax

A proposed alternative would be to put an annual tax on the unimproved value of residential land, including for the family home (there is already a land tax threshold in place, but it doesn't capture all homeowners due to an exemption on the family home). 

The main challenge is that with residential land values in New South Wales of $1,657 billion, the annual tax would have to be quite significant to raise the equivalent $9.4 billion.

Recent proposals have included an annual land tax of 0.75 per cent.

There are now just over 3 million dwellings in New South Wales, so another way to look at it is that households and owners of other residential dwellings may have to stump up on average $3,100 per annum to raise the equivalent amount of tax. 

A proposed land value tax would typically deliver comparatively little pain for those living in an apartment, since the land value content of such dwellings is relatively low. 

On the other hand I think of the retirees on my street who now have very valuable land under their homes, for which the annual land tax bill would be impossible for them to pay.

So the argument goes, by taxing people on their homes they will be 'incentivised' to move somewhere smaller and more appropriate for their needs. 

It could certainly happen over time, though it would be a brave move politically. 

Tuesday, 28 March 2017

Yuan-way bet?

Chinese whispers...

Nice to see the media warming to one of my long-running blog themes.

While the median apartment price in Sydney has increased by 49 per cent since August 2012, for Chinese buyers the price has increased by just under 21 per cent. 

And this while prices in some Chinese cities have exploded higher. 

This simple chart helps to explain why Chinese money continues to pour into Australian real estate. 

That said, it looks as though the Aussie dollar may have turned a bit of a corner against the Chinese yuan. 

Big show

Recent studies have concluded that Chinese buyers have been very prominent in Australia's main capital city markets.

Not that this could be much of a surprise to anyone actually active in those markets.

Even the official figures from the Foreign Investment Review Board showed that approvals had tripled in only two years.

I analysed these official data in more detail here

A veritable 'great wall' of money, you might say. 

Monday, 27 March 2017

More on Melbourne vacancies

SQM Research provides some great housing market statistics.

Here is something few would have dared to predict - vacancy rates in Melbourne, getting progressively tighter and tighter every year since 2011. 

Still heaps under construction, of course, but still the oversupply risk appears to have dissipated, at least for the time being. 

Source: SQM Research

The extent to which offshore investors have left apartments vacant is up for debate.

No doubting the main driver, though - unprecedented and sustained population growth

Sydney year-high clearance rate

Investor rush

CoreLogic reported the highest preliminary clearance rate of the year for Sydney at well above 80 per cent from more than 1,000 planned auctions.

Domain reported a preliminary clearance rate of just above 80 per cent with a median auction price of $1,300,500.

Melbourne posted a similar clearance rate.

The median Sydney auction price was 11 per cent higher than a year ago, when the reported auction clearance rate was only 61.4 per cent.

The freakishly high median auction price result of 25 February has dropped off the 4pMA chart below. 

Next week a much lower price on 4 March will drop off, meaning that another record high is a shoo-in.

This mirrors what most dwelling price indexes are now showing, which is median dwelling prices rising to new highs in 2017.

There has been plenty to suggest that investors are piling in to the market to 'get in' ahead of any potential changes to tax legislation. 

Despite higher auction numbers, total listings are below where they were last year in each of the most populous capitals, indicating markets that have tightened.

Sunday, 26 March 2017

Achtung shorts!

Resources pain

I recently wrote a short piece here at Property Update about the mixed fortunes of regional Queensland's housing markets. 

Mortgage delinquencies relating to regional Queensland have long been higher than the average in Australia since widespread flooding in the state in 2011.

But now delinquencies across parts of the state with exposure to resources are rising sharply further still. 

And remember that reported delinquency rates can lag falling prices, particularly when there are high vacancy rates and high rates of unemployment.

As resources construction continues to decline over the next year, some of these housing markets will be veritable disaster zones if they aren't already.

I've spoken to investors that were market participants in the mining town markets in 2012, and the news they deliver has been universally calamitous. 

For obvious reasons I don't discuss specific securities on this blog. 

But stocks with exposure to various housing markets of regional Queensland are likely to cop some serious fallout. 

Don't pay the rack rate; nobody pays the rack rate!

Rack rate

It was a bit of a quiet afternoon on Saturday, so thought I'd lob up to stay up on the Sunshine Coast for a couple of nights.

When I looked up the hotel cost on the hotel's website it was nearly $400 per night!

I didn't pay that rate, of course.

After all, who pays the advertised rack rate these days?

Better call Saul: Rental losses are falling

There was an interesting media story this week where Saul Eslake noted that the recent hike in investor mortgage rates could result in a "hit" to the budget totalling hundreds of millions of dollars. 

It was a good yarn, albeit one which stopped somewhat short of telling the full story. 

In fact between the 2008 and 2014 tax years the average net rental loss has cratered by 64 per cent.

Given that mortgage rates have declined substantially since 2014, the budget impact today of negative gearing appears to be heading towards trifling. 

In any case - omitted in Eslake's calculations - higher mortgage rates will simply lead to higher bank profits, and in turn a higher corporation tax take. 

The banks like to argue that they have faced rising funding costs, but in reality funding costs fell in 2015 and fell even further in 2016.

Yeah, I know, the banks are doing it tough out there now. 

Evidence? Check out Commonwealth Bank's outrageous record profit of more than $4.9 billion for the first half, up yet again by another 6 per cent from the prior corresponding period. 

Meanwhile, rents have been rising, so over recent tax years net rental income has been steadily moving towards zero as more property investors record net rental profits on their tax return (remember these numbers need to be tax effected at the relevant marginal rate). 

Indeed, the number of landlords declaring a net rental loss is all but unchanged since the 2008 tax year despite Australia's rising population.

Back to those rack rates...

According to the Reserve Bank of Australia's Statistical Tables the standard variable rate on investor loans was already up to 5.55 per cent by January.

But here's the thing: who is really paying such a high rate of interest today, when investor loan products have been available from around 4 per cent?

Probably not that many people, I reckon.

For evidence? Take a look at the national accounts.

With the population having increased by about 16 per cent from 21 million in 2008 to 24.4 million today, you'd expect to see interest charges rising over time.

Yet the amount of interest payable on dwellings today is lower than it was in 2008.

The total interest payable by households on outstanding mortgage debt implies a considerably lower average mortgage rate than the quoted 'rack rates' (record mortgage buffers and the use of offset accounts have likely played a role here too). 

The wrap

With mortgage rates having declined since the last available full suite of tax data for financial year 2014, the impact of negative gearing on the Federal Budget would now be getting fairly close to zero.

Meanwhile, state government figures show that revenue offices are cleaning up from investor activity, with New South Wales alone swallowing up an outlandish $9.4 billion in stamp and transfer duties over the year to January 2017.

Negative gearing doesn't really represent a 'loss' to the budget as such - rather it is a timing difference, with the 'loss' typically recouped as investment properties become cash flow positive over time, or in capital gains tax at the point of sale.

With relatively few new dwellings being bought or constructed by owner-occupiers, the government also saves further by constructing comparatively little social housing.

The reality is that after accounting for the undoubted disruption to residential construction, the economy, and to housing markets, Federal Budget savings from changing negative gearing rules today would be approximately diddly squat.

Treasurer ScoMo won't be going there. 

Saturday, 25 March 2017

Mad for it

Manc recovery gathers pace

The UK 20 Cities house price index rose by 6.4 per cent over the year to February 2017, having increased by 7.8 per cent over the year to February 2016. 

The 5 year average growth for this index has been 6.5 per cent per annum, as the UK market continues its post-financial crisis rebound. 

Nationally there has been some loss of momentum, but price growth is rippling out to some of the regional cities. 


Manc moves to the top of the tree for UK house price growth at 8.8 per cent over the year to February 2017, with Pompey, Bristol, and Glasgow also scoring highly. 

London prices were 5.6 per cent higher over the same period, although HomeTrack has noted a slower turnover in stock in the most expensive markets, including Bristol and Oxford.

On the other hand stock turnover has increased in some regional cities away from London, which likely bodes well for disruptive players in the real estate markets such as Purplebricks. 

Source: HomeTrack

Aberdeen was the worst performer of the 20 cities in the index following the painful correction in oil prices.

Manchester is buzzing, and has been on our radar for some time now. 

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Friday, 24 March 2017

Build baby build

Detailed labour force quarterly

Total employment increased by 80,000 over the three months to February 2017, according to the Detailed Labour Force Figures reported yesterday by the ABS. 

Over the year to February, employment was up by 190,400, the strongest pace of growth in a year and well above the long run average.

Very good on paper!

Rather too good, in fact, in the event.

To cut a long story short, upon checking with the ABS, it seems that the figures were just not right.

A slight glitch in the matrix, one might say.

Construction crazy

The quarterly gains were driven by a large 45,500 increase in construction employment.

Mining employment is also now seen to be rising again. 

On the other hand, the rebound in manufacturing employment seems to have popped, and employment in the retail trade sector has apparently been crushed over the past year, down by a thumping 62,700. 

A bit of a mixed bag, and one which suggests to me that the economy has become too heavily reliant upon the residential building boom.

Construction employment has now soared to 1,114,800 from a total workforce of about 12 million, which seems incredibly high - well above historic norms - and probably peaky. 

Remarkably the rebound in total mining employment to 241,700 means that employment in the industry is now only 36,700 below the 2012 peak. 

Where are the jobs?

Perhaps I'll look at the regional jobs growth another time.

Just to note here for now that Sydney has consistently seen the lowest unemployment rate of the major capital cities, and Adelaide the highest. 

Hobart takes out the most improved award. 

Brisbane is now seeing population growth picking up as expected, which over time will help to tackle the inner city apartment glut, though this is also putting pressure on detached house prices in sought after school zones. 

But to date Greater Brisbane doesn't appear to be creating the jobs to keep its unemployment rate down.

And it needs to.