New home sales at the lowest level since 2013

Crunch time

More signs that the peak of the residential construction cycle has been and gone.

There was a 5.8 per cent drop in new house sales in June, and a 10.7 per cent drop in multi-units. 

Considerable variation around the traps, with substantial monthly drops in New South Wales, Queensland, and South Australia.

Source: HIA

The Housing Industry Association expects dwelling starts to decline for next 18 months. 

Housing credit ploughs ahead

Credit picks up

The Reserve Bank of Australia (RBA) released its Financial Aggregates figures for the month of June 2017, which showed annual credit growth picking up to +5.4 per cent. 

There was a welcome +0.9 boost in the month of June for business lending, taking annual business credit growth back up to +4.4 per cent. 

This mirrored findings by Equifax that business credit demand was on the rise in the June quarter.

Growth in personal credit remains negative. 

Although credit growth relating to investment property remained elevated in annual terms at +7.4 per cent, the monthly figures did indicate that a slowdown in this segment is underway. 

In truth, a great deal of misplaced energy could be spent analysing the split between outstanding owner-occupier loans - which, incidentally, have now blazed past $1.1 trillion - and investment mortgages. 

The big picture is that housing credit growth has actually picked up a bit from +6.3 per cent at the end of 2016 to +6.6 per cent at the end of the second quarter of calendar year 2017. 

If you like your financial aggregates served nominal, total housing credit increased by $113 billion to a total of $1.69 trillion over the year to June, which is the biggest year-on-year increase in the history of the data series. 

Arguably non-bank lending may have picked up following APRA's measures, although this hasn't shown up too much in other housing finance data to date.

Overall, APRA's cooling measures haven't got in all the cracks yet, and housing credit is still growing at a sprightly lick.

Strong 2nd quarter for retail expected

Odds & ends

Towards the back end of last week, the ABS reported that export prices dipped by -5.7 per cent in the second quarter of 2017. 

Nevertheless, export prices remain some +22.5 per cent higher than a year ago. 

Moreover, there is potentially a solid rebound in the post for Q3, driven by the bulk commodities.

In other news, the ABS also confirmed minimal inflationary pressures in its producer prices index release.

There's no doubting that the Reserve Bank will leave rates on hold at its August meeting this week.

Week ahead

Attention will be diverted to some other news instead.

Real retail sales are expected by market forecasts to come in with a strong +1.2 per cent result for the June quarter, with possible risks to the upside on a weak deflator. 

There has been an improvement in retail momentum in recent months.

Thus, the economy is shaping up for a decent run in 2017.

The greater challenge will come in 2018 when residential construction slows.

Wednesday's building approvals figures are expected to throw out a solid result for the month of June, especially for the sectors that aren't high-rise apartments.

Even so, ongoing weakness in Perth and in apartments in Brisbane should be enough to keep the downtrend intact, with dwelling starts to slow over the year ahead. 

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Melbourne to overtake Sydney within a decade

10-years of population increase

Figures released by the ABS today showed that Australia's population increased by 18 per cent or 3.8 million over the decade to 30 June 2016. 

That's a hefty increase, and a rate at which the delivery of infrastructure will struggle to keep pace.

Victoria experienced by some margin the largest growth in terms of absolute numbers at 1.1 million persons, followed by New South Wales (+996,600), and then Queensland (+840,900).

Capitals suck in population

77 per cent of the total population growth was experienced in capital cities over the past decade.

However, the trend towards the capitals is accelerating, with some 84 per cent of population growth in FY2016 taking place in those cities. 

The trend was particularly stark in 2016, driven forward by the most populous capitals of Sydney and especially Melbourne. 

Melbourne to overtake Sydney

The population of Sydney grew by +773,607 to 5,029,768 over the ten year period, for an increase of 18.2 per cent (compared to 9 per cent growth for regional New South Wales). 

Melbourne's population increased by an even stronger +964,556 to 4,725,316, representing a 25.6 per cent increase. 

Over the same time period the population of regional Victoria increased by a comparatively sedate 153,427.

Greater Melbourne's population growth was incredibly strong in FY2016, at a gold-rush-like +126,175.

If current trends were to persist the city population could exceed that of Sydney within a decade.

A lot can change in ten years, of course, but if anything more people seem set to leave Sydney for south-east Queensland over the years ahead, which could prove to be the decisive factor.  

Sydney & its super-frothy house prices

Frothy Sydney prices

Sydney’s crazily high house prices seem to have become a staple topic at barbecues and sausage sizzles across the harbour city these days.

With prices seemingly at or close the peak of the market cycle, should you even try to buy today, assuming you can afford the high entry prices?

There’s no 'one size fits all' answer to that question, but here are a few important considerations...

Time horizon

With the jobs market more fluid than ever before, we are changing jobs, locations, and even careers far more frequently today than was the case for generations past.

With stamp duty levies on Sydney purchases now so high, it may only make sense to buy a home if you are reasonably confident that you will be in Sydney for at least a few years, and ideally longer.

The transaction costs of buying a property can sometimes be up to 5 to 6 per cent of the purchase price, and there are further costs to account for when you come to sell.

First homebuyer incentives

The New South Wales State Government has recognised this hurdle facing first homebuyers and from 1 July 2017 has abolished stamp duty on all homes bought by first homebuyers up to $650,000, while offering stamp duty relief for homes priced up to $800,000.

The NSW Government’s comprehensive package included other measures to promote affordability too (albeit they aren't really designed to lower prices).

Given the above, it may not be a bad time to purchase for first homebuyers, provided you have a reasonable time horizon.

At least historically, waiting for prices to crash in the most populous cities has not been a fruitful strategy for those aiming to get onto the housing ladder.

Record building boom

The above having been said, there are presently more than 82,000 new dwellings under construction across the state, the highest figure on record, so some areas are at a greater risk of falling prices than others.

These areas typically include the suburbs where most new dwellings are built, such as blocks of land on the city fringe, and high-rise apartments in some of the suburban construction hotspots.

‘Rentvesting’

With the uncertainty surrounding Sydney’s expensive housing market, more young aspiring homeowners are choosing to rent where they want to live, while buying an investment property elsewhere to get a toehold on the housing ladder.

If well planned and executed this can be an effective strategy. There’s even a new name for it: ‘rentvesting’.

What do you think? Keen to hear your thoughts!

Come to our Money for Life workshop on Saturday 7 October 2017, for straight-talking, no nonsense financial education (click image for details).

All points north

The chief of Stockland, Mark Steinert, has declared Brisbane's inner city apartment market oversupplied.

Uh-huh!

Though some of the building is commercial. 

There's a lot of stock to be absorbed, though fortunately there has been a ramp up in internal migration especially from Sydney.

Indeed 'A Current Affair' did a short piece yesterday on the great northern migration getting underway.

A well-covered topic on this blog, of course, including here: The big move north is underway.

Sydney labour market strengthens

Sydney leads

Australia's total annual employment growth has lifted to +2 per cent, taking the total number of employed persons up to 12.2 million, representing a material improvement in 2017.

After a remarkable 3-year run, Sydney hiring is off and running again, with total employment growth surging back towards +2.5 per cent, and employment +64,500 higher year-on-year. 

Despite the relatively high level of unemployment on the Central Coast, across Greater Sydney the unemployment rate has now fallen to just 4.36 per cent. 

The annual average unemployment rate for the harbour city is now at the lowest level since the financial crisis, helping to explain why mortgage arrears have been falling from already low levels to even lower levels. 

Perhaps small wonder that the Sydney housing market has held up so well looking at these numbers.

Brisbane has seen an big uplift in inbound internal migration, but appears to be struggling to absorb the intake with gainful employment as apartment construction slows.

Accordingly, the Brisbane unemployment rate has lifted somewhat.

"Gizza job!"

The median duration of job search across Australia has improved, if marginally, from 20 weeks a year ago to 19 weeks in June 2017. 

While Hobart has been improving on this measure, it now takes 22 weeks on average to find a job in Adelaide, which is a concern. 

Finally, a look at Townsville employment as a bellwether for the resources-influenced regions shows that total employment has rebounded from the lows of 2016. 

The wrap

Overall, the labour market seems to have turned a corner in 2017, albeit with the proverbial turning circle of the QE2.

And the results do remain quite unbalanced around the states. 

Sydney looks set to most enjoy the benefit of low interest rates for another couple of years, which may in turn result in the return of stronger wages growth. 

Job vacancies up by a quarter from 2013

Increase in 'quality' jobs

The recovery in the labour market has been slow, surreptitious, and shallow, so you'd easily be forgiven for having missed the bottom, but job vacancies do indicate a steadily improving immediate outlook.

After a solid result in the month of May, trend vacancies improved again by +0.9 per cent in June 2017.

Vacancies are now +23 per cent or +32,100 higher than at their October 2013 lows, and sit at their highest level in five years.

Notably Skill Level 1 jobs have seen a +25.3 per cent since increase since the lows of ~50,000 in August 2013. 

Skill Level 5 jobs have increased more modestly by +14.8 per cent since their 2015 low of 19,400. 

Trend job vacancies were on the up for all occupational groups in FY2017, but the strongest increases were for machinery operators and drivers - which were up by +21.5 per cent over the financial year, albeit from a small sample group - as well as technicians, and trades workers. 

State versus state

Naturally, the employment outlook for employment is always important for the respective city housing markets.

But this is doubly so in 2017.

Since there has been an unprecedented volume of apartments under construction the three most populous capital cities need to be able to sustain strong immigration rates in order to absorb the new stock, in addition to attracting international students. 

New South Wales appears reasonably well placed in this regard, with the Department of Employment reporting some 65,500 vacancies. 

The ABS survey has also previously recorded a super-strong 69,300 vacancies for NSW, an all-comers record high for any state on that measurement (this index was put on ice for a while during a period of budget cuts, accounting for the mysterious gaps in the chart). 

Following a recent surge, Victoria has now seen a +5.9 per cent trend uplift in vacancies over the financial year to a solid enough 45,100.

In many ways Queensland faces some of the greatest challenges, with thousands of new apartments coming online, yet employment having been held aloft by public sector hiring and, well, jobs related to apartment construction! 

There was some promising news in the Sunshine State with trend vacancies up by +7.9 per cent over the year to 31,600, making Queensland the second strongest year-on-year performer on this measure. 

South Australia has recently been the surprise package on this index, with a +13.3 per cent trend annual increase.

However, there were declines in Tasmania, the ACT, and a substantial double digit trend decline in the Northern Territory. 

Finally, having nosedived by -28.8 per cent over the two years to September 2016, trend job ads in Western Australia have recovered somewhat to be 9.6 per cent above their September 2016 nadir.

The wrap

Clearly it's a far cry from the heady days of the mining boom when you could sometimes get a pay rise or even a bonus just for turning up to work, such were the skill shortages in certain sectors.

Nevertheless it's good to see that vacancies have been rising solidly over the last five years, albeit with a couple of stumbles along the way. 

On this evidence, Sydney and Melbourne will continue to attract the bulk of immigrants, while Melbourne is also attracting workers from all over Australia, rendering its forecast apartment glut a big fat fizzer.

Weakest June quarter inflation in 14 years

Do the hawk...

Oops! Inflation was remarkably weak in the June quarter at just +0.18 per cent, the softest inflation result for the second quarter of the calendar year since 2003. 

Thus, not only is core inflation tracking below the target 2 to 3 per cent range, now headline inflation is too, at just +1.9 per cent. 

To be fair, though, here was another moderate annual increase in non-tradables inflation - a proxy for domestic price pressures - so the inflation pulse arguably still at least has a...erm, pulse.  

As widely expected, automotive fuel prices pulled the headline result down in the quarter. 

Looking more closely at the seasonally adjusted and analytical series, both of the core measures came in at +0.5 per cent for the quarter, although the weighted median was within a hair's breadth of being rounded up to a +0.6 per cent reading.

Over the past year both core measures came in at just +1.83 per cent and +1.84 per cent respectively.

Other soft spots for inflation included the intensely competitive clothing and retail sectors.

Rents weak...nationally

Many readers of this blog have a good deal of interest in the housing market, so let's have a quick shufty at what's happening to rents around the traps. 

Annual rental price growth remains weak at just +0.6 per cent as a weighted average of the eight capital cities, which is the equal lowest level in 23 years, a direct consequence of the building boom combined with record numbers of Mum and Dad landlords. 

There were some wild variations around the capital cities, however.

The headline result was impacted heavily by increasingly sharp year-on-year declines in Perth (-8.1 per cent), and another weak result for Darwin (-7.2 per cent). 

Brisbane rents were only flat over the past year as the impact of the inner city apartment oversupply threatens to ripple through to the wider apartment market. 

There was a much juicier +4.2 per cent annual increase in rents in the tight Hobart market down in resurgent Tassie. 

In Sydney, rents (+2.5 per cent) continue to comfortably outpace inflation, and indeed over the past decade rents in the harbour city (+54 per cent) have increased by exactly doubled the growth in the index for all groups CPI (+27 per cent). 

The wrap

Overall, it was a stunningly low inflation result for the headline inflation figure, which should keep the interest rate hawks in check for now. 

If you look more closely at the analytical series, though, you could arguably make the case that the weighted median inflation figure is gently drifting back towards the target range, while the annualised trimmed mean figure was essentially flat when you drill in to an extra decimal place. 

With several indicators of improvement in the economy, and with the Reserve Bank's own inflation forecasts suggesting that the middle of the target range will be hit sometime around the middle of the next decade, we could well be in for a loooong period of rates on hold. 

Dr. Copper heal thyself

Copper rally

Well it's been a long time coming, but the copper spot price has rallied hard to a 2-year high.

The price of copper is often taken to be a predictor of turning points in the global economy. 

This move likely signifies strong expected demand, particularly from China, and possibly tighter supply in China too. 

Meanwhile, the iron ore price is up 22 per cent year-on-year after a rollercoaster ride, which is helping Western Australia's recovery along. 

And the commodities news is better still for Queensland:

CPI to come

So that's a tidy little cluster of positive news ahead of today's inflation report at 11.30am.

While forecasts expect headline inflation to levitate some way into the target 2 to 3 per cent range, the more important core readings of inflation are forecast to remain just below 2 per cent. 

Inflation readings have stunned financial markets and expectations for interest rates before, however, so this could potentially be one of the most interesting data releases in months. 

Stay tuned!

Winning the battle with credit cards

Credit where due

It's true that Aussies are using credit cards more these days - I swipe mine more often myself now that you don't have to remember the PIN every time you use the card.

The total value of outstanding balances is a little higher than 5 years ago, but lower when adjusted for population growth, and quite a bit lower after accounting for price inflation. 

Meanwhile, more of us have gotten smarter about using interest free periods.

See my analysis featured in the number one article on SMH today (click image to view). 

Working

Broad based improvement

Hiring has improved significantly in 2017, particularly for full-time jobs, which will be a welcome relief for the Reserve Bank of Australia.

Another sometimes useful indicator we can look at is the employment to population ratio, which is less volatile that many of other labour force estimates (since estimates of the resident population are also less volatile). 

Scanning the trend in the employment to population ratio it initially looked as though the labour market had reached a trough in 2014.

But then there was a setback, which some commentators attribute to then Treasurer Hockey's 'austerity' measures, which attempted to drag the Budget kicking and screaming back into surplus. 

Now the trend employment ratio is improving again, up from 60.9 per cent at the beginning of the year to 61.3 per cent in June 2017, with both the male and female cohorts rebounding. 

As you can see, nationally the employment ratio tends to be considerably higher these days than it was in the 1980s due to the vastly increased female participation in the workforce. 

This also has important implications for the housing market, for there are now many more dual income households than there were, increasing household incomes, and in turn borrowing and purchasing power. 

Despite the recent improvement the national employment population ratio remains 1.5 per cent lower than in 2008, when the employment to population ratio ran all the way up to 62.8 per cent in a starburst of fiscal stimulus packages. 

State versus state

Most states have seen a bit of an improvement in recent months. 

Possibly the surprise package here is Western Australia, which has rebounded nicely as jobs growth has picked up.

This has partly been driven by resurgent commodity prices, although at least part of the improvement in labour force ratios has been due to negative net interstate migration, with disaffected workers now migrating back to the eastern states. 

We've seen similar trends in the Northern Territory, where the employment to population ratio ran even higher at above 70 per cent in the early part of 2017, but population growth in the Top End is now threatening to turn negative.

Still, it shows that the medium term prospects in the resources states may yet prove to be better than many imagine. 

CoreLogic index

Home values index

As so often seems to happen in July, home values are off and running again.

Source: CoreLogic

Come & see our live event in Sydney

Money for Life Workshop

As noted earlier in the year, I'm only presenting at two live events in 2017.

For details of your last chance to see me, see here (or click the image below).

This high quality event features five experts in their respective fields combining their knowledge, skills, and experience, to deliver a powerful one-day workshop. 

We're limited to 1,000 tickets so please book early...and share widely!

Look forward to seeing you there!

No tightening bias in evidence

Waiting for tonight

With its burgeoning tourism boom, gosh aren't Sydney hotels becoming rather expensive these days?

This week we looked into booking an 8-night stay in the harbour city for the first week of October and received one quote back from the Four Seasons at a somewhat ambitiously priced A$43,000.

One assumes that was for the penthouse suite.

As a mildly amusing aside my wife once encountered Latino pop diva Jennifer "J. Lo" Lopez in the elevator during one of our stays at Sydney's Sheraton on the Park (two young girl fans asked her for a hug, but alas Jenny from the block politely declined).

Like most people that aren't pop empresses, I will not be shelling out 43 grand for my short stay, although the website being perused still came back with a surprisingly punchy $4,000 quote for the Novotel at Darling Harbour.

Since virtually nobody pays hotel rack rates these days, I reckon the sojourn will end up being about three quarters of that price, but it's another indicator of a state capital economy that is humming along right now.

Housing markets firm

Following the introduction of new incentives there have been some early signs of a first home buyer reawakening in Sydney and Melbourne, thereby confirming that there are no meaningful price falls on the immediate horizon.

Indeed, the preliminary auction clearance rates reported on Saturday evening pitched in at the highest level in six weeks. 

There has also been a good deal of premature arousal about rising mortgage rates.

It's true that investor loans have seen rates tweaked higher, but generally speaking commentary has focused too much on standard variable rates and not enough on discounted rates.

The fact remains that - for all the talk or rising funding costs - depending on the loan-to-value ratio home loans can still be secured from 3.69 per cent.

Just like with hotel stays in Sydney, while some unassuming people will pay the advertised headline rate on mortgages, most will shop around and get considerably better deals. 

In the absence of much housing market excitement to write home about, all eyes will be turning to Wednesday's inflation figures, and in turn the trajectory of the official cash rate.

Despite some speculation about imminent rate hikes, the Reserve Bank Minutes certainly did not indicate a tightening bias.

In any case as residential construction starts to turn down this will likely act as a material headwind to growth in 2018.

Improving jobs figures

There has been a marked improvement in the jobs figures since late last year, but even now youth unemployment remains fairly elevated at about 13 per cent.

Youth unemployment can sometimes be quite a useful indicator of economic strength - younger employees are often the first to have their wings clipped when times are tough, but may be hired again when conditions and the outlook improve. 

In New South Wales the trend unemployment rate has declined to just 4.75 per cent, with strong jobs growth in Sydney across recent years pushing the unemployment rate in the capital down as low as 4.4 per cent. 

Although Sydney's strong economy is attracting immigrants from overseas in droves, the latest internal migration figures show that thousands of residents are using their boosted equity to retire from the Sydney workforce to the regional south coast and to the Hunter Valley.

Sydneysiders are also increasingly migrating to Queensland for a cheaper cost of living, as tends to happen at this stage in the cycle. 

With such a low unemployment rate, upwards pressure on Sydney wages should now be returning in due course. 

Melbourne's record population growth is being driven by internal and overseas migration, and the unemployment rate sits some way higher. 

Slack ahoy

Despite the improvement in labour force figures, there are few signs of significant inflationary pressures and it's far too early to be talking about rate hikes in earnest.

The Reserve Bank Board appears confident that forward-looking indicators suggest further improvements are in the post for the labour market, but also recognises that the rate of under-employment remains elevated.

Even in New South Wales the underutilisation rate is still some way above where it was before the financial crisis shock, and all of the other major states sit some way higher again. 

Inflation still benign

With wages growth generally soft, it should be no surprise that core inflation has been consistently missing the target range to the downside.

Although the CPI figures are rarely weaker in the second quarter of the calendar year, Bloomberg's survey of economists suggests that this trend of core annual inflation missing the bottom end of the target range may well have continued in the June quarter. 

While there will be a post-Cyclone spike in fruit prices pushing the headline rate of inflation well above 2 per cent, this will to some extent be offset by falling automotive fuel prices at the bowser.

Finally, a rarely recognised potential twist in the tail is that the inflation figures are known to be upwardly biased, since the measures are fixed for a number of years. 

And with the expenditure classes set to be re-weighted for the December quarter, this could add even further downwards pressure on inflation in due course.

Some observers therefore believe that if interest rates do move next year then it's more likely to be down than up.

On balance, though, the most likely outcome seems to be rates on hold for the foreseeable future.

Roll on Wednesday...

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Kiwis trickling back to Oz

Kiwi exodus ends

Statistics New Zealand reported that net annual migration into NZ hit another record high over the year to June 2017 at +72,300. 

Annual net migration into NZ has been increasing steadily since 2012, but over the past three years has surged to record highs, despite a recent pullback in Indian student visa arrivals.

While the boom has been driven by Chinese migrants, as well as a big uplift in Brits and South Africans, the number of Australian migrants to New Zealand has now passed its peak, if only just.

Through the peak of the mining boom Kiwis were moving to Australia in droves, lured by high wages and labour shortages in the resources states.

In recent times this trend reversed as New Zealand's unemployment rate fell, and a shortage of domestic construction workers arose due to the rebuilding of Christchurch.

Through the first six months of 2017, however, Kiwis have been very steadily trickling back towards Australia, at least on a net basis. 

Temporary visa trends

At the beginning of the year I noted that there were nearly 2 million temporary visa holders in Australia, including over 677,000 New Zealanders as subclass 444 visa holders.

In particular, the number of student visa holders has been powering ahead, helping in part to explain why the feared apartment oversupply in Melbourne has failed to materialise as expected.