Census reveals demographic wave

Demographic wave

My research featured as the lead story in today's Sydney Morning Herald (click image to read).

This key demographic shift will be felt most keenly in Melbourne's housing market.

Not only does Melbourne have far cheaper entry prices than Sydney, population growth in the Victorian has practically exploded higher. 

Mortgage rate tweaks set to bite

Home truths

Household net worth increased by $227 billion to $9.64 trillion in the first quarter of 2017.

Contrary to what you intuitively might expect, the total value of residential housing as a share of the total assets hasn't really changed all that much over recent decades, even today sitting at just a little over half. 

A big part of the reason for that has been due to the popularity and success of compulsory superannuation, while Aussies are also now hoarding some $1.06 trillion in cash and deposits, a thumping 22 per cent of financial assets. 

Average net worth per capita has come absolutely storming back since the March 2009 nadir, rising by an extraordinary 67 per cent to make Australia the world's second wealthiest country after Switzerland in per capita terms.

Now someone will no doubt Tweet me to say that the housing component should be subtracted - you can do it yourself, the numbers are right there above!

Average net worth per capita increased by ~$34,500 over the year to a record high of ~$394,000.

Housing loan debt also continues to rise to well beyond $1.6 trillion, making households twitchier about increases in mortgage rates than has ever been the case before. 

Mortgage debt has expanded at a slower pace than asset values, however, bringing the household debt to assets ratio down to 19.5 per cent, while the mortgage debt to land and dwelling values ratio declined again to 26.4 per cent.

The most noteworthy housing market change in recent months has been mortgage rates being ratcheted higher on interest-only loans. 

Given that the hikes largely took place after the end of March, it's likely that interest payable will rise throughout the remainder of 2017.

EOFY brings super returns

It's the end of another financial year today!

After an up-and-down sort of a year at times - and assuming the share market doesn't unexpectedly crash this morning - superannuation funds will return about 10 per cent for 2016/17 to notch up an eighth successive year of positive returns, as the share market continues to claw its way back.

From a housing market perspective, almost all commentators are now on board with the notion that the Sydney market has moved into a slowdown phase, which will have knock-on effects to household net worth later in 2017.

Banks will continue to push home loans hard, but investment mortgages will be harder to come by following a raft of tightening measures. 

Yet we also shouldn't ignore that every set of labour force figures released lately has been pointing to a Sydney jobs market that is firing on all cylinders. 

Population growth accelerated to about 91,000 in Sydney in 2016, despite internal migration to Queensland. 

Meanwhile, the unemployment rate has declined to 4.4 per cent, and job vacancies in New South Wales have risen to unprecedented highs, suggesting that many more jobs are being created. 

Anecdotally, I've heard from more than one source that some professional jobs in Sydney are attracting dozens if not hundreds of applications, though whether the applicants are unemployed, under-employed, or from interstate, who can say?

With first homebuyers sitting out of the market in recent weeks awaiting the introduction of new incentives - applicable to established properties priced up to $800,000 from 1 July - I wouldn't yet rule out a resurgent Sydney housing market later in 2017, at least in the bottom quartile of the market.

NSW job vacancies rise to record high

Vacancies rise

A data series always worth watching closely is the reporting of ABS Job Vacancies, because it suggests to us what might be coming, rather than what has gone before. 

And the news is overtly positive, with vacancies up by +11.4 per cent over the year to May 2017 to 189,200.

This is the highest result since February 2011, and implies that the economy is on a reasonably good trajectory. 

The trend ratio of unemployed persons per vacancy rose to above 5.1 in 2014, but has been improving ever since, to sit at under 3.9. 

Historically job vacancies have been a pretty good indicator of what might happen to the unemployment rate, and these figures suggest that the unemployment rate could be heading a bit lower from the present level of 5.5 per cent. 

NSW prospering

Job vacancies have exploded in New South Wales since 2013, almost doubling in four years to an all-time record high of 69,800. 

There's been a bit of a softening in Queensland and Victoria since February, arguably following the softening trends in apartment construction. 

Some brighter news is at last filtering through in Western Australia, where job vacancies have risen for a fourth consecutive quarter to their highest level since 2014. 

The number of unemployed persons per vacancy in New South Wales has fallen to just 2.7, with gradual improvements noted across most states and territories on a rolling 4-quarter average basis. 

As ever, the quality of jobs created is somewhat open to question, with plenty of roles appearing to be of the administrative and support services type, while the healthcare and social assistance sector remains a standout performer as the population ages. 

Construction vacancies have held up well so far, but may come under pressure in due course. 

Still, with vacancies at their highest level since 2011 that's a decent indicator for employment growth as we cross over into the second half of 2017. 

Mining cliff seen off

Stabilising forces

It's sometimes under-appreciated how Australia's free floating dollar, monetary policy autonomy, flexible labour force, and comparatively low government debt have allowed the economy to adjust through a seriously tumultuous period.

At the peak of the resources construction boom in the third quarter of calendar year 2012 engineering construction activity peaked at $34.8 billion, yet by the end of 2016 had dropped by some 43.3 per cent to under $20 billion. 

This is what some people termed the "mining cliff", essentially the period through which resources projects transitioned from the construction phase through to production. 

And through all of that we never really did get all that close to a recession, though admittedly rising private debt levels did help to grease the wheels a bit.

Rebound

More than four years on, and engineering construction actually began to rise again in early 2017.

Some of this was to do with infrastructure projects - rail, road, and highways - and some was related to ongoing resources investment in existing projects. 

Activity rose quite strongly by +2.8 per cent to $20.3 billion in the first quarter.

Engineering work in the public sector was +10.2 per cent higher over the year, while the quarterly rebound was also helped by a +3 per cent rise in private sector activity in Q1. 

State versus state

Queensland took most of its medicine back in 2014 as a number of major LNG projects approached the production phase, but the worst has now passed and annual construction activity levels in the Sunshine State have now been rising for four quarters consecutively.

Annual construction activity has also been rising steadily in New South Wales and Victoria since 2015. 

At least as importantly, Western Australia is now at last getting pretty close to the nadir, meaning that WA is no longer suffering the chronic declines that have characterised that past three years. 

No boom on the horizon, then, but arithmetically speaking this is positive news for the economy, simply because engineering construction is no longer acting as a drag.

The next pressing challenge will be whether construction employment can remain at today's elevated levels through a combination of residential building and infrastructure projects. 

UK house prices hit new high

Stock levels low

The average UK house price jumped by 1.1 per cent in June, from £208,711 to a record high of £211,301.

This took the annual rate of growth up to +3.1 per cent, according to Nationwide. 

The jump in prices came in spite of a recent squeeze on household incomes.

Nationwide noted that the stock levels on agents' book were close to all-time lows.

Demographic tsunami

Demographic destiny

Although we like to think we're all very different, in generally speaking we tend to do quite predictable things are predictable times in our lives.

Hence the old saying: "Demographics is destiny".

I had some interesting feedback on my reporting of yesterday's Census news. Thanks.

Let's look a snout at another tier of the statistics today...

One for the ages

Dicing up Australia's population pyramid by age and it appears that there has been a fairly smooth increase of about 1.4 million in the 25 to 55 age cohort over the past decade - mostly the types of people that buy and sell housing.

Reaching over for my compound interest table tells me that is an increase of about 1.5 per cent per annum. 

The devil is in the detail, though. 

The last decade was not a strong one for the housing market in demographic terms, but after adjusting for the new figures from the 2016 Census we can see that's about to change. 

Australia's median age has continued to rise steadily from 23 at the time of the 1911 Census to 37 a century later, and up a notch further in 2016 to 38 it was confirmed yesterday.

Australia's migration and visa programmes have therefore become largely tilted towards the under 30s, and, more lately, to international students.

And to be clear it's immigration that's been driving the recent acceleration in population growth, not births.

Splitting out the Census figures by year of age thus reveals a significant demographic wave of the resident population about to move towards the typical homebuying age. 

As noted, the devil is always in the detail, and you need to drill down a level to get the really interesting stuff. 

For example, Sydney and especially Melbourne have a comparatively high share of their population pyramid sitting squarely in the 25 to 34 age brackets, but in Adelaide and regional South Australia the equivalent share is much lower, and so on. 

Even just rolling forward the demographic wave based on today's numbers it's clear that there is a monster surge in housing market demand on its way in due course. 

Project forward the recent surge in immigration, and it's likely to be stronger still.

But where will the demand actually be directed to, and towards what types of property? And will those property types and locations be under- or over-supplied?

Well, that's one for a future blog post. 

Bedlam in Melbourne

Construction BOOM

The third in the traditional trifecta of population growth posts concerns the rate of new dwelling supply.

At the end of 2016 there were nearly 217,000 dwellings under construction in Australia, including some ~152,6000 attached dwellings, leading to intensified interest in how the housing market might cope with the deluge.

The property market downturns in resources towns since 2012 have been spectacular, but from a policy maker's perspective housing markets in regional areas are of little interest.

Sydney and Melbourne, on the other hand, have joined the major banks in the "too big to fail" category, absorbing by far the greatest share of net overseas migration over the past five years, and together accounting for the bulk of growth in the economy. 

Bedlam in Melbourne

Yesterday's demographic figures derived from the 2016 Census showed that Greater Melbourne's population was growing at a truly extraordinary pace in 2016, probably somewhere in the region of ~128,000 based on the state level data. 

I'm not too sure how useful the concept of an oversupply actually is while the population growth is tracking at that rate, since even a construction industry operating at full capacity will have a heck of a job keeping pace. 

One thing we do know from international experience, however, is that as and when the local market or economy suffers a downturn then population growth tends to follow south.

For what it's worth, dwelling completions in Victoria rose to nearly 60,000 in 2016, although only 56 per cent of completions were detached houses, suggesting that the average number of persons per dwelling housed in the newly-completed stock may be a notch lower than in decades past. 

Plotted against record high state population growth for this data series of ~146,600 and the ratio of population growth to completions remained elevated at 2.44, despite record rates of construction. 

After accounting for dilapidation and demolitions, the net increase in the dwelling stock in Victoria was likely closer to ~52,000 in 2016, at least according to preliminary ABS estimates. 

Lights not on, anyone home?

The Census normally shows that about one in every ten dwellings is vacant at the time of the count. 

Indeed, I was overseas in London myself for the now-famous 'Census fail', while there are holiday homes and city crash pads to account for.

This time around the Census figures showed that a thumping 17 per cent of dwellings built over the four years to 2016 were vacant. 

This is a point to be debated another time, but anyone that has driven around the capital cities at night and looked at the apartment towers can scarcely be all that surprised by this statistic. 

Sydney swamped

Skating across the Australian Alps to Sydney, and we find different dynamics at play. 

Sydney is still attracting the most migrants from overseas, but is also losing residents interstate to Brisbane, Gold Coast, and Sunshine Coast, as well as to parts of regional New South Wales as retirees take their equity to Bowral or Bermagui (or statistically most likely, the temperate South Coast or the Hunter Valley). 

Sydney's population therefore grew by ~91,000 last year.

At the state level there were an unprecedented ~82,750 dwellings under construction in New South Wales at the end of 2016, including ~62,000 attached dwellings, tracking against population growth of ~116,400.

Furthermore, New South Wales also saw the completion of ~60,000 dwellings in 2016,  although only ~25,500 of the finished dwellings were houses. 

The Sydney story is therefore one of a record apartment construction boom, and after a prolonged period of underbuilding since 2007, the ratio of population growth to completions has now sunk to under 2. 

Generally I try not to get drawn into arguments about oversupply or undersupply, since these concepts are nebulous at the best of times.

Like most people, I look at what's happening in my local area. For example, I can see that the supply of rentals is very tight in the inner suburbs of Sydney, yet clearly a different dynamic is emerging on parts of the south-western fringe. 

Sometimes it's just easier to deal with hard data, and Sydney's rental price inflation (56 per cent) has outpaced the city's CPI basket (28 per cent) by a ratio of 2:1 since the beginning of 2007.

Most neutral observers would probably call that an undersupply that is now swinging back towards equilibrium, but with more than 1,000,000 vacant dwellings around Australia these days at any given point in time I reckon the best thing you can do is use your eyes and ears! 

Melbourne population growth blows the blinkin' doors off

Melbourne population explosion

While net overseas migration into Western Australia has fallen all the way back to where it was before the resources boom, more immigrants are once again making their way to Sydney and Melbourne. 

Meanwhile, folks are increasingly moving internally to Victoria from South Australia, Western Australia, and now even from Sydney, the net result being a population explosion in Melbourne. 

Other internal migration trends include Sydneysiders ramping up their cyclical migration north to south-east Queensland.

With net interstate migration to the Sunshine State soaring to a decade high in the final quarter of 2016 this means that population growth is also now picking up again in Brisbane and at Gold Coast. 

Doors. Blown. Off.

The population of New South Wales increased by +1.5 per cent to just shy of 7.8 million in 2016, but comparatively speaking the rate of population growth in Victoria was practically off the charts at +2.4 per cent. 

Of the other states and territories only Queensland and ACT saw significant population growth at +1.5 per cent and +1.7 per cent respectively. 

Adding in the natural population increase to the net internal and overseas migration sees Victoria's population growth hitting a previously unthinkable level at +146,600 in 2016, which is extraordinary.

Population growth has also picked up momentum in New South Wales (+116,400) and Queensland (+70,400). 

Splitting out the state population growth by calendar year shows just how big the leap in Victoria was in 2016, with Greater Melbourne and Geelong swallowing the bulk of the growth in headcount. 

Intercensal difference

Overall, these population trends generally continued pre-existing patterns, but some of the trends appear to have intensified.

The "intercensal difference" calculated by the ABS represents the difference between the newly Census-based estimated resident population (ERP) and the previously carried forward estimates.

In Victoria the intercensal difference was absolutely massive at +108,700, while Western Australia saw the opposite result at -58,400. 

This explains a lot about vacancy rates in the respective capital cities (which have risen sharply in Perth, but have tightened to 7-year lows in Melbourne).

Overall the national intercensal difference nationally netted off to +78,700, meaning that the population today is quite a bit higher than previously thought, now at about 24,570,000.

The three most populous cities in particular have seen their respective pace of annual population growth rising sharply, both cause and effect of the apartment construction boom on the eastern seaboard.

Both Victoria and New South Wales saw a record ~60,000 dwelling completions notched up in 2016, yet in the case of Victoria the rate of building has scarcely kept pace with romping population growth of +146,600. 

Population growing faster than expected

Acceleration

The 2016 Census is released today, and it will show that the Australian population is markedly higher than was previously estimated, and furthermore it is growing faster than previously thought.

The increase has not been due to natural population increase, with the mini-boom in births actually slackening off a little lately. 

Instead the main driver has been annual net overseas migration which picked up to nearly +209,000 in 2016, from +179,000 in 2015. 

Totting it up this means that population growth accelerated to +1.6 per cent or +372,800 in 2016, which is a sharp increase from +340,000 in 2015.

Thus the population clock today sits considerably higher than previously expected at 24,570,000. Only last week we thought the population was just passing 24.5 million.

This has a number of ramifications, not least for calculations of apartment oversupply.

On Census night there were also more than 1 million dwellings vacant or 11.2 per cent of the total dwelling stock, up from 10.7 per cent in 2011. 

The wrap

The 2016 Census detail will reveal a range of fascinating information, which will be the subject of future blog posts. 

Australia has now become much more Asian, with more of us born overseas, but fewer Aussies are identifying themselves as religious types

Meanwhile the typical mortgage repayment actually fell between Census periods with mortgage rates having dropped sharply since 2011. 

Somewhat surprisingly, only 7.2 per cent of households were paying 30 per cent of their income towards a mortgage, representing a sharp decline since the last Census, with the rise of interest-only loans a likely factor here. 

As we will see in the next post, Sydney and particularly Melbourne are expanding their respective populations at a furious pace. 

A matter of principal

Demographic shifts

One of the things to watch out for this week with the release of the 2016 Census will be hackneyed calculations of the average number of dwellings, the average oversupply of dwellings, and so on. 

These calculations are useful to a point, but you can't really analyse real estate like that - you've got to get out there and in the market and see what your eyes and ears and telling you.

Take the example of Melbourne where until quite recently it was widely expected that there would be an oversupply measured in years worth of stock.

And yet as the years have rolled on vacancy rates have got consistently tighter, and tighter, and tighter, now declining to a 7-year low.

Source: SQM Research

Yes, there's the impact of Airbnb to take account of, but overall the oversupply issue has been a fizzer in Melbourne, at least to date. 

The Sydney and Melbourne markets are now moving into a new phase of the cycle, with oversupply less of a concern than significant changes to lending standards announced at the end of of March 2017.

All change...the P&I cliff

I briefly summarised here the changes required by APRA to residential mortgage lending, so there's no need to recap. 

In short, bigger deposits, and a clampdown on interest-only lending. 

Normally with a credit squeeze or macroprudential changes one expects to see an initial shock and then the market adjusts to the new normal relatively quickly. 

But this time around things could be a little different, and the impacts may be more keenly experienced, and for a longer period. 

Following on from the 10 per cent cap on the growth of investment mortgages, the most important change since March has been APRA now aiming to limit the flow of new interest-only lending to 30 per cent of total new residential mortgage lending.

From speaking to brokers the word on the street is that the regulators are requiring this to take place right now i.e. the 30 per cent cap to be fully effective by July 1. 

At first glance you might say that reducing the flow of new interest only mortgages from 36.9 per cent in the March 2017 quarter to 30 per cent from July 1 might not be that big a deal.

And, let's face it, overall this a positive move for the market, since having up to 45 per cent of new loans interest-only was hardly a healthy or sustainable dynamic. 

Some pain ahead

The thing that's different about these changes is that with the flow of new interest-only lending limited to 30 per cent of the total, some existing borrowers will discover that they are unable to roll over their interest-only loans, and they will be forced to start repaying principal. 

While some investors refinanced their loans out for half a decade last year, others on skinny yields will be caught short at the end of their interest-only period, and will be forced to begin paying down some of their loans.

The changes will be far from all negative - ultimately banks need to lend to make profits, and some enticing deals may become available on principal and interest (P&I) mortgages, and so on.

And, if nothing else, the property markets should in time re-establish a better balance between homebuyers and investors. 

Overall, however, this is a change which will suck some of the air out of Australia's real estate markets, and will in turn eventually reduce the stock and flow of available rental properties. 

Moreover, there will be plenty of investors that have seen no capital growth and now face the potentially unedifying prospect of a negative cashflow to boot. 

In the wash-up, one can't help but feel that investors that opted for quantity over quality of investment properties might be left staring down the barrel of some unenviable choices. 

Census due next Tuesday

2016 Census release

Last week, I noted here that Australia's population clock had quietly ticked past 24.5 million.

On Tuesday morning during the week ahead, we will eagerly await the official release of the 2016 Census. 

This comprehensive data series will include:

"...national, state/territory and capital city data for selected key person, family and dwelling characteristics, including age, sex, religion, language and income".

There will certainly be a trove of interesting information to be treasured and pored over. 

Curve ball

Interestingly, and as noted by the great Peter Martin, the Census will likely find that the resident population comprises more or fewer of us than estimated, in which case the population clock will need to be re-set. 

Unfortunately, this time around the collection of the Census proved to be a somewhat wobbly affair, with the website imploding due to the sheer weight of the traffic overload. 

Following the glitch, no fines were to be issued for people not completing the forms on Census night. 

Typical Aussie

Early Census information released in April by the ABS showed that the average or typical Australian is:

"...a 38 year old female who was born in Australia, and is of English ancestry. She is married and lives in a couple family with two children and has completed Year 12. She lives in a house with three bedrooms and two motor vehicles."

Given that the website was down for a long period of time, however, naturally enough the larrikin response on social media noted that the average Australian...well, couldn't log on to the Census. 

So, there is a chance that the 2016 Census could reveal some rather unexpected results, with knock-on implications for assumptions about the adequacy or otherwise of dwelling supply, labour force ratios, and so on.

We'll just have to wait and see. Stay tuned! 

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Winter cooling

Sydney cools

The Sydney auction market is cooling as finance is harder to come by, especially for investors and those wanting to use interest-only loans. 

The preliminary clearance rate reported by Domain was a shade under 70 per cent - now tracking well below the frenzied peak - while CoreLogic put the preliminary figure a but higher at 73 per cent.

The median auction price for houses was $1,515,500, some $142,500 or 10.4 per cent higher than on the same weekend last year.

Similarly the median auction price for units was up by $76,000 or 8.6 per cent from the same weekend last year to $955,000. 

Overall the median price of $1,335,000 was the third highest on record. 

Return of the first homebuyer

A factor skewing the median price higher was that some first homebuyers are reportedly sitting on the sidelines until next weekend when the new incentives will have kicked in post-July 1.

From next week, therefore, there may be some renewed upwards pressure on entry level stock priced up to around $800,000. 

Overall, though, the credit squeeze has changed the dynamic of the market considerably, and price pressure is easing. 

In some inner suburbs such as Erskineville, Glebe, Enmore, Newtown, Haberfield, Darlinghurst, Surry Hills, Redfern, and Pyrmont I've already noted a looming shortage of rentals, with vacancy rates sinking to as close to zero as you'll ever see.

Sydney is having an absolute shocker at the moment with its traffic congestion, partly due to the disruption caused by the light rail construction.

Therefore it's no surprise that areas experiencing a rental shortage are those with great city access.

It's a different story for some of the suburbs where commuters need to drive into the city for work.

Over the next year as investors are increasingly squeezed out of the market there will likely be an increasing number of news stories reporting a Sydney rental crisis, at least for certain locations and sought-after property types. 

Contrast these tight rental markets with the overbuilding and homogeneous glut of rentals on Sydney's city fringe, 60 kilometres to the south west. 

UK house price growth since 2009

UK home prices +4.7 per cent

Hometrack reported that the annual rate of house price growth in the UK picked up the pace to +4.7 per cent in May 2017, with its 20 Cities Index rising by +5.3 per cent.

In London, annual price growth slowed to +3.3 per cent (down from as high as +13 per cent a year earlier), which is the lowest rate of price growth in the capital in five years.

Hometrack noted that there are signs of the London market bottoming out. 

The price trends within the city showed that price inflation in the lowest value areas was still tracking at +4 to +6 per cent, but offset by price falls in some of the more upmarket boroughs. 

Contrary to some media reports, since 2009 London prices have increased substantially to be up by about +85 per cent, edging out Cambridge as the strongest performing housing market.

At the other end of the spectrum are Scottish cities such as Glasgow (+12 per cent) and oil-impacted Aberdeen, as well as Newcastle in the north-east of England. 

Source: Hometrack

According to Hometrack, price growth rippled out the the large regional cities over the last quarter, including in Birmingham (+3.8 per cent), Nottingham (+3.8 per cent), Manchester (+3.3 per cent), and Newcastle (+3.5 per cent).

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