Emphatic rebound in engineering construction

Construction spikes

The ABS released its construction work done figures for the June quarter this week.

There was a moderate +1 per cent increase in building work done, driven by the non-residential sector, with residential building work done looking to be beyond the peak now.

And then there was a monster +22 per cent spike in engineering construction work done in the quarter to $24.7 billion.

After years of declines since 2012 this was a big result, driven overwhelmingly by a +$4 billion increase in Western Australia. 

There was some debate about whether this related to the import of a floating LNG platform, Prelude, and whether there would thus be no impact on GDP in the second quarter (i.e. the opposite entry might yet be recorded as an import in the balance of payments next week). 

I'm not sure what the consensus was, not that it necessarily matters all that much. 

If accruals accounting isn't going to be applied in full then you'd expect to get these quarterly anomalies from time to time (if the $4 billion does relate to the import of a floating platform then arguably the dollar amount should be amortised over the full construction period, but there were no explanatory footnotes to this effect in the release). 

The key point is that resources construction hasn't been in material decline for some time now outside Western Australia, and to some extent the Northern Territory.

And now construction activity isn't declining in WA either. 

Meanwhile, public sector building work done has also been expanding solidly, helping construction work done to rise by +9.3 per cent in Q2 2017.

With commodity prices having rebounded sharply, there is further compelling evidence here that Australia has successfully negotiated the resources construction cliff, in doing so chalking up another risk to the economy successfully averted. 

For the record, consensus market forecasts expect a solid result for GDP either way.

Land prices surge

Land prices hit record high

The Housing Industry Association (HIA) reported that land prices continued to rise sharply in early 2017. 

The median vacant lot price rose by +2.1 per cent in the first quarter of the calendar year to a fresh high of $253,525, according to HIA figures.

The price gains in capital cities have been stark through this cycle, rising by another +9.8 per cent over the year to March 2017 to above $290,000.

Capital city land is about 35 per cent more expensive than it was five years ago.

The bulk of the price gains since the financial crisis have been driven by the largest city, Sydney.

The median lot price in Sydney has increased from around $250,000 to about $450,000 since 2009.

Notably volumes have fallen sharply in recent years, suggesting that land release has been too slow to meet high levels of demand for greenfield sites.

Although price gains have once again been huge in Sydney over the 12 months to March at +11.1 per cent, the strongest increase in median prices was seen in Melbourne (+16.6 per cent).

There were also annual increases in Adelaide (+7.4 per cent), Brisbane (+3.6 per cent), and Perth (+2.7 per cent), with Hobart the only capital city to record a decline in its vacant lot prices. 

On a price per square metre basis, all of the mainland capital cities recorded a significant increase over the past decade. 

Barangaroo

Barangaroo update

A characteristically drab and chilly Sydney winter's day!

A quick look at what's happening down at the new Sydney suburb of Barangaroo.

Some new harbourside residential apartments, though not that many.

Much, much more A-grade commercial space!

The monumental international towers.

New ferry wharves...

The next commercial phase getting underway.

And a look back towards King's Street Wharf and Cockle Bay.

It's a huge project. 

At the other end of Darling Harbour, the gleaming new International Convention Centre and hotel have been constructed. 

Consumer confidence...bounces

Bounce...

Up to 113.5 this week - from a rather subdued 109.5 last week - according to ANZ-Roy Morgan.

At 113.5, consumer confidence sits just slightly above the long run monthly average since 1990 of 112.9.

Not likely to pick up much either until wages start growing faster, but since few people seem to be bothered by elevated unemployment it looks like things will just meander along. 

4-year low for new home sales

Building boom is ending

More evidence that the building boom is coming to an end. 

New home sales are now tracking at their lowest level since August 2013, and are well down from the record highs of 2015. 

Monthly sales dropped by -3.7 per cent in July, following on from a sharp -6.9 per cent drop in the preceding month. 

Source: HIA

The Housing Industry Association (HIA) media release noted that the decline was driven by a big drop in new apartment sales.

There was one "notable exception", being Victoria, where new dwelling sales remained strong in rising +9.8 per cent in the month. 

The HIA expects activity to decline for a number of years, albeit from record high levels.

ADI home loan exposure pass $1 trillion

Loan market changes

The share of interest-only loans fell sharply towards the 30 per cent proposed regulatory cap in the June 2017 quarter, as bank incentives to switch towards principal and interest products had the desired impact. 

Treasurer Scott Morrison will argue that the "scalpel" approach to cooling this sector of the market has been successful, forcing Aussies to begin paying back their mortgages sooner. 

For ADIs with greater than $1 billion in residential term loans, new loans to investors also dropped back to a 34.5 per cent share of the new lending market, now well down from 42.5 per cent in the June 2015 quarter. 

The share of high loan to value ratio (LVR) loans has also diminished considerably over the past 10 quarters, which makes life tough for first homebuyers, but arguably reduces mortgage exposure risk in aggregate.  

Despite these changes in the composition of exposures, lending growth remains strong, with total ADI exposures rising by +7.3 per cent over the financial year to $1.54 trillion. 

That's an increase of +$105 billion over the 2017 financial year, ever-so-slightly less than the +$107 billion increase seen in FY2016. 

The growth in ADI exposures to owner-occupiers was particularly strong, rising by +8.1 per cent to beyond $1 trillion for the first time. 

Activity in new low-doc loans and other non-standard loans continued to decline, as has consistently been the case now since 2009. 

The wrap

Overall, there was not much of a slowdown in evidence here, even if the composition of lending has shifted. 

Furthermore, non-banks have been growing their mortgage books apace - the dollar value of Pepper's residential loan originations soared by +17 per cent in H1 2017, for example. 

After accounting for these changes it's questionable that there has been any meaningful slowdown at all in the pace of mortgage lending. 

Home values up

Up +10 per cent over the past 12 months, according to CoreLogic.

Source: CoreLogic

The fastest growth over the year was notched by Melbourne, and then Sydney.

Wicked leaks

Lend leaks

Staying down in Sydney tonight, at Darling Harbour.

Yes, it's as freezing as it looks - probably colder, if anything.

To the left of shot you can see the first three giant towers down at Barangaroo, part of one of Lend Lease's enormous flagship projects. 

Lend Lease (ASX: LLC) actually reported its FY2017 results this morning, which confirmed a solid+9 per cent lift in post-tax profit to $758.6 million. 

The market wasn't greatly moved, of course, since the group inadvertently dumped a stack of market sensitive information out to to the public at the beginning of the month, including the unaudited EBITDA (oops).

As accounting stuff-ups go, it was a rather impressive one (disclosure: I made similar goofs in my listed company career) though in the end relatively little harm was done, save a little embarrassment.

Defaults under 1pc

Reading through the investor presentation it was interesting to note a +20 per cent uplift in residential unit completions in the 2017 financial year.

Approximately 90 per cent of apartment completions have already settled, with a default rate of under 1 per cent.

This follows on from similarly low default rates reported by other developers during earnings season.

This is very important, for there had been fears of a wave of Chinese investor defaults following on from local lenders pulling up the ladder.

To date, this does not appear to have transpired.  

In other news, S&P reported a drop in loan delinquencies from 1.21 per cent in May to just 1.15 per cent in June. 

Declines were recorded "across the board" for 30,60 and 90 day mortgage arrears, with a corresponding fall in outstanding loan balances, with Queensland showing the biggest drop in arrears. 

This broadly mirrors what you'd expect to see given extremely low mortgage rates for homeowners, and a national unemployment rate that has been trending down for several years now.

No stress?

Countless media articles have claimed that mortgage stress is rising - often referred to as a "perfect storm" no less! - perhaps based upon household cash flow surveys.

But in reality so many households have been repaying ahead of schedule into offset accounts that it wouldn't be a surprise if some net monthly cashflows showed an outflow. 

With the aggregate value of the housing stock exploding to $7.1 trillion against mortgage debt of around $1.6 trillion, it also wouldn't be a surprise to me if some of the benefiting households have taken a breather on their earnings either. 

In any event, with the possible exception of Western Australia mortgage arrears remain low to date, which is about the only indicator that matters, when all's said and done. 

4BC Radio show segments: 4 Corners & all that...

What's going on in Australian property?

I was on 4BC radio yesterday from 8am to 9am with the legendary radio and real estate industry stalwart Kevin Turner.

Firstly, we discussed the use of gearing and loan to value ratios in Australia.

Click the images or links below to listen to each segment. 

Below, we then discussed what influences property prices in Australia. 

We also discussed gentrification, and where to look for suburbs with the potential to gentrify, as well as so-termed property 'hotspots' (and why you might want to steer clear of them). 

Finally, we spoke about the Queensland property cycle, which you can listen to by clicking the image below.

There's only so much depth I can get into in a one hour radio show, of course.

For a full day event of more practical information, come and see me speak live in Sydney - book quickly to get the Earlybird special price before it expires.

Weekend reads - must see articles of the week

Summarised for you here at Property Update (or click on the image below).

To take advantage of the Earlybird special offer on our live event in Sydney - which now expires very soon - see here!

Copper up +50pc as well

Dr. Copper price surges

Some long overdue brighter news for copper-rich South Australia.

With the price of copper now riding all the way up to US$3.045/lb from below $2.00/lb in 2016, some of the state's copper producers will be thriving again. 

Globally, activity has been picking up, with the Eurozone now growing along with the rest of the world's economies.

In fact, all 45 countries in the OECD are now growing together at the same time, which is the first time that has happened since 2007.

And it's not just copper that is benefiting from global growth. 

The iron ore price been has been on a huge run-up since June, while Australian thermal coal prices have also soared to above $100/tonne.

Together these two commodities alone comprise nearly 40 per cent of Australia's index of commodity prices, as measured by the Reserve Bank.

BHP Billiton reported an outlandish surge in profits this week - a profit of $7.4 billion from a statutory loss of $8.3 billion last year, leading to a tripling of the dividend - which was largely attributable to a doubling of the coking coal price since fiscal 2016. 

The prices of zinc, aluminium, and nickel have also been tearing higher.

After a correction of about 8 per cent in June and July, Australia's commodity price index remained more than 17 per cent higher year-on-year last month.

And on this evidence, there are more gains to come.

Meanwhile, it appears that the feared mining 'capex cliff' is finally over, some 4.5 years after it began.

So it seems that the lingering clouds are at last beginning to clear for Australia's economy after nearly half a decade of drag from declining resources construction. 

Winning strategies for 2018 & beyond (double ticket offer)

Money for Life

Come and see me speak live in Sydney, where I'll be discussing:

-how to start saving and investing

-the magic of compound interest

-how best to tackle the Sydney housing affordability conundrum: to buy or to rent?

-the outlook for the economy and housing markets

-the latest demographic trends

-construction hotspots: the property markets and dwelling types set to become oversupplied, and undersupplied

-infrastructure boom - where will the next major projects be found?

- a peek into the future - what will Australia be like 20 years from now?

-the Australian regions poised to flourish and flounder

-how to reset your financial thermostat...permanently

And a whole lot more besides.

If words aren't your thing, here's a short video, in which I get harassed by magpies. 

There are now less than two weeks remaining on the Early Bird special price, which also includes a special double ticket offer this week. 

Book today!

To book your tickets, visit the Quadrant 2 web page.

Sydney economy back into pole position

Sydney jobs surge

Employment growth picked up to an even stronger +242,600 or about +2 per cent in July 2017.

Quite good numbers!

Employment has now increased by a somewhat impressive +671,000 in three years, or +5.8 per cent.

That's well ahead of the rate of population growth, and also enough to push the unemployment rate into a downtrend.

Sydney has displaced Melbourne as the economy creating the most jobs over the year to July 2017, at more than +71,000. 

Melbourne created +58,200 new jobs on a net basis, with Brisbane tracking at a much more moderate +19,000.

Sydney's annual average unemployment rate continues to trend down, with the monthly unemployment rate in the harbour city well below 4.5 per cent in July. 

It now takes just 12 weeks to find a job in Sydney on average - well down from 17 weeks two years ago - which compares very favourably to a turgid 23 weeks in Brisbane, and a morose 25 in Perth.

Despite Sydney's low unemployment rate, there have been relatively few signs of stronger wages growth in New South Wales to date, with annual wage prices rising only by about +2 per cent across the state. 

The below chart hints at some possible reasons why, including a recent pullback in the participation rate, although this measure tentatively appears to be trending up again.  

Nevertheless, stronger wages do look set to return in due course with jobs being created at this pace.

Townsville rebound underway

Finally, for something different, a brief look at one of the more interesting regions.

For a long while I've been of the opinion that Geelong in Victoria could be be the best performer of the housing markets away from the capital cities. 

After a prolonged downturn, you could potentially now add Townsville to that list, looking from a purely macro perspective.

New projects are getting underway - Townsville stadium commenced construction this week - and bigger fish are waiting in the wings, most notably the controversial Adani mine, which could well lead to an employment boom locally.

And after some fairly high profile industry closures in recent years, employment is now trending up again. 

These are all macro indicators only, of course, and indeed I haven't even been up to NQ for a couple of years.

In a report concerning mortgage arrears last week Reserve Bank of Australia (RBA) included Townsville as one of the underperforming mining region housing markets since the peak of the mining boom.

In fact median prices are below where they were all the way back in 2008 on the RBA's chart.

However, SQM Research's leading indicator index, which records an upturn in asking prices, shows that this is already changing. 

If you're considering investing in property in Townsville, then you definitely need a more detailed and localised understanding than I have, so I recommend you speak to an expert. 

Real Estate Talk

Catch me on the Real Estate Talk show here (or click the image below).

If you're in Brisbane you can also catch me on 4BC Radio live this weekend from 8am to 9am on the Real Estate Talk show. 

It's time for Queensland to shine

Queensland picking up

Hot on the heels of the SEEK survey, comes another positive set of job ads figures.

Total job advertisements are now +26 per cent higher than at the 2013 nadir, according to the Department of Employment. 

After a torrid time since 2013, Queensland is now leading the way forward, with the strongest annual increase from around the states. 

Rebound

Many of the finest opportunities over the decade ahead will be found in the Sunshine State.

Townsville is set for an economic lift following a torrid few years, while Cairns, Gold Coast, and the Sunshine Coast will continue to benefit from the Chinese tourism boom.

Then there is the Commonwealth Games coming up in 2018, which will be another welcome boost for Brisbane and the Gold Coast. 

Of course, the above figures are only one measure of what's going down (or up) in the Queensland economy.

ANZ's 'Stateometer' covers a considerably broader set of measures, and showed Queensland accelerating back to life in the June quarter. 

There are still a few significant challenges ahead, particularly in the construction sector, but the medium term prospects appear to be increasingly upbeat.

Job ads not too shabby

Jobs market firing up

Job ads are now a very solid +12.6 per cent higher than a year ago according to SEEK.

Aside from a brief 14-month period in 2007/8, the index has never been higher - although there are more part time jobs advertised today. 

Ads continued to accelerate in New South Wales (+7.3 per cent) and Victoria (+14.1 per cent).

But it was heartening to see that the southern states are now contributing, with a scorching +22 per cent increase in Tasmania in particular. 

The strongest performing industry was mining, and this was reflected by improving numbers in Western Australia (+16.8 per cent), South Australia, and the Northern Territory. 

Queensland also produced a vastly improved result, up by +20.2 per cent over the year, the best result since 2011. 

Advertised salaries are also rising solidly, while the number of applicants per advertised position is also in a pleasing decline. 

Lovely jubbly.

Melbourne voted most liveable city (again)

For the seventh year in a row, Melbourne has been voted the world's most lievable city by The Economist. 

The world's most liveable city without an airport train!

Will Australia be hiking rates soon?

No.

No sign of wages growth picking up yet.

Inflation is likely to be revised lower in the fourth quarter too.

End of 2018, maybe.

Iron ore +50pc since June

Hello...

Bazinga!

Amazing news for owners of shares in Fortescue Metals Group (ASX: FMG), which reported a monster net profit after tax of $2.7 billion (US $2.1 billion) today. 

That's an increase of +112 per cent from the prior year. 

The dividend was tripled to 45 cents per share, while future payout ratios will be higher too.

That's one heck of a payday for Mr. Forrest. 

The dividend in FY2015 was only 5 cents per share. 

FMG racked up US$3.5 billion in free cash flows in FY2017, helping the group to massively reduce its debt pile. 

Fortescue aims to have its costs down to US$11-12/wmt in FY2018, which is a truly extraordinary cost performance from US$48 in FY2012. 

Meanwhile, the price of Australia's most valuable commodity has a rocket under it.

The below charted benchmark iron ore spot price closed just shy of $80 at $79.93/tonne. 

That's now well over $100/tonne in Aussie dollar terms.

A budget bonus indeed, to help at least in part compensate for lower than forecast wages growth!

FMG's share price soared by +6.36 per cent to $5.85.

Melbournites don't wait to buy land...

Melbourne outstrips regions

It seems that Melbournites are not waiting to buy land...they are opting buy land and wait.

At least for now.

Melbourne has accelerated to record monstrous population growth in recent years, while the regions of Victoria have largely flatlined ex-Geelong.

You can make your own assessment of whether high population growth is impacting the Melbourne housing market, but the land sales figures look pretty damning. 

The pressure appears to be starting to tell, as vacant land sales are being gobbled up at the fastest pace ever recorded, according to Oliver Hume's quarterly data.

Model of a modern Valuer-General

Rising land values have been a key input into rising house prices in Melbourne.

Median vacant land prices in metropolitan Melbourne increased by +3.7 per cent in calendar year 2016, according to the Valuer-General, rising from $219,000 to $227,000.

Median house prices in metro Melbourne rose for a fourth consecutive calendar year from $600,000 in 2015 to $635,000 in 2016.

Median unit values increased far more steadily over the year, up from $487,000 to $494,000.

The ratio of land prices to house prices on this data series hasn't changed a great deal over more than three decades, to some extent reflecting what is actually being measured, with the vacant land sales often located in fringe or secondary locations.

Perhaps this is the subject for a longer blog post another time, but the Valuer-General report always cautions about too many generalisation being drawn from the headline numbers. 

House and land prices in regional Victoria have lagged Melbourne substantially over the past 10 years to 2016, at least in aggregate.

Metro Melbourne median house prices have now more than doubled over the past dozen years, and have quadrupled since 1998. 

In 2016, regional house prices rose by +2.6 per cent to $320,000.

This represents an increase of $100,000 or +45 per cent over 10 years, before accounting for stamp duty and repairs, maintenance, and other holding costs.