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Dwellings under construction

Construction boom

At the last count - in the quarter ended September 2017 - there were 219,741 dwellings are under construction in Australia.

And that includes some 87,048 across New South Wales, mainly in Sydney.

There has been a swather completions hitting the market in more recent months, especially in Queensland, and that will continue for a little while yet. 

In particular there have high volumes of high-density stock coming online since September. 

See here for more.

Book of the Month (Money Magazine Australia)

Thanks to @MissMoneyBox for the photo.

Pick up your copy in any good book store.

UK house price growth since 2009

Ranging from +6 per cent in Aberdeen to +86 per cent for London, with Cambridge in 2nd spot.

Source: Hometrack

RBA losing credibility (says Credit Suisse)

Cred problem

Credit Suisse noted this week that the Reserve Bank's credibility is being eroded, as duly reported by the Scutt at Business Insider.

Well, yes, if you have a 2 to 3 per cent inflation target and you keep missing it quarter after quarter after quarter..sooner or later people are going to question your commitment to hitting it. 

The glass full...to overflowing!

What's more, in a speech a week ago on 'Household Indebtedness and Mortgage Stress' the Reserve Bank variously noted and concluded that:

-'non-performing loans remain very low at around 0.8 per cent of domestic housing loan books'

-mortgage repayments are not at a level indicating stress

-a large proportion of indebted owner-occupier households are ahead on their mortgage repayments

-a large proportion of households have protection against financial stress

-applications for property possession as a share of the total dwelling stock have declined since 2010

-lending standards have been strengthened and the quality of lending improved 

-'the number of households experiencing financial stress has steadily fallen since the mid 2000s'

-the overall level of stress among mortgaged households remains low

-the banking system is strong and well capitalised, and is supported by prudent lending standards

-the risks to financial stability 'therefore...remain low'

¾ million unemployed

Now that's all terrific news, not to mention a rather upbeat assessment. 

But, if true, this in turn begs the question: why do we have 723,800 people sitting around unemployed, with inflation continually shooting below target, wages growth meandering along at close to the slowest on record, while the risks to financial stability, quote, 'remain low'?

And that's before taking into consideration underemployment, and the hundreds of thousands of underutilised workers and employees wanting more work. 

Experiences in other developed economies with looser monetary policy suggest that the natural rate of unemployment (NAIRU) could now be lower than 5 per cent, and possibly a lot lower. 

A conundrum, indeed. It rather looks as though a significant chunk of the ¾ million unemployed are being sacrificed on the altar of financial stability? Keen to hear your thoughts! 

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People are leaving Sydney

Mass exodus!

People are upping and leaving, so says the Sydney Morning Herald.

And they are right - in fact, people have always left Sydney!

Immigration into Sydney from overseas, on the other hand, is tracking at the highest level on record.

And then there's the natural growth of the population, as births exceed deaths. 

The population of Sydney is expected to rise from about 5 million to about 7.4 million by 2046. 

A coming rental crisis?

Rental price growth

There's been a lot of talk of oversupply in Australia's housing market.

Although we don't really have 'too many' dwellings, what we have had is an unprecedented surge in investors and investor-owned properties from home and overseas. 

In other words, lots of rentals! 

This helped to push rental price growth down to levels not seen for a very long time, although Sydney and Melbourne have seen rents rise faster than some of the other cities. 

This dynamic is now changing, although it may not be evident in the rental market for some time. 

Domestically, investor loans have slowed. 

Just as significantly, investor activity from overseas has been absolutely annihilated.

And as I've said here before, I think the end result will be a rental crisis (I'm often wrong, of course, but never in doubt!), although it will take time for this to become evident. 

Slow burn

Now I know what you're thinking, Sydney has a record number of apartments under construction (true, at the last count, which was from June to September last year), and that rental price growth hasn't been especially strong for a long period now. 

That's also been true recently, though in another context rents in Sydney have still risen at double the rate of inflation over the past decade, despite the record surge in investors. 

Take a look for a moment at what happened during the financial crisis when investors stopped buying. Whoosh, rents rocketed. 

In any event, that data is all backward looking - what I'm talking about is the next five years. 

Why a rental crisis you ask? 

Firstly, I believe there will be a record demand for leasing rental properties. 

Yes, that's partly due to the record levels of immigration into Sydney, which I expect will remain very high over the coming years with the unemployment rate now heading to under 4½ per cent. 

But even just putting the charts and official statistics to one side, have a think about how many people you know that are renters these days? 

A lot of people, huh? More than ever before? 

The reality is with people changing jobs and moving around more frequently than ever has been the case before, it simply isn't practical to keep buying a home each time you move, especially with the stamp duty levies now at extraordinary levels. 

The demand side is one thing.

The other is the future supply of rentals. 

Recently, a range of measures have made it progressively harder for investors to bring rentals to the market in a way which works for them. 

Domestically investors are finding it far tougher to get interest-only loans unless they pay a higher mortgage rate, travel expenses are now disallowed, plant & equipment depreciation has largely been disallowed on established dwellings, and so on. 

The Labor party is also proposing further measures to restrict tax deductibility, and I don't pay attention to what anyone says on this, if apartment prices begin to fall materially ain't no adequate supply gonna get built come hell or high water. 

Ex-New Zealand, overseas investors now can't get access to onshore finance from Australia full stop, and even if they can they get it overseas they have to pay stamp duty and land tax surcharges to buy here, so unsurprisingly they are heading elsewhere. 

There have also been other tax measures aimed at expats, among a raft of other niggles. 

Anyway, contrarian calls such as this are always treated with disdain until proven right or otherwise - but let's just bookmark this post for when the construction cycle tapers off in a year or two. 

Gross domestic product

Rebound

The economy went through a couple of soft patches after the financial crisis and after the mining construction boom finished.

But it is now picking up again.

Let's take a quick look at a few of the actual numbers from the national statistician.

Growth in the economy

Over the year to September 2017, Australia's real GDP grew by +2.8 per cent. 

It is not negative in per capita terms; and nor is the trend slowing (it's been quickening a bit lately). 

The Australian economy grew +0.6 per cent in the September quarter 2017 itself, seasonally adjusted, according to the figures released by the Australian Bureau of Statistics (ABS). 

17 out of the 20 industries recorded growth, driven by Professional, Scientific, & Technical Services, Healthcare & Social Assistance, and Manufacturing. 

The others didn't.

Engineering construction, having dropped sharply after the resources construction boom peaked, is now rising again.

Compensation of employees (COE) increased in all states and territories, resulting in a national quarterly growth of +1.2 per cent and growth of +3.0 per cent over the year since the September quarter 2016.

The ABS itself reported that: “The increase in wages was consistent with the stronger employment and hours worked data that has been reported in the labour force survey.”

At the household level, incomes have been soft, but are now gradually rising again. 

Real net national disposable income - arguably the one measure which best captures living standards, if rather reliant on commodity prices - grew by +4.5 per cent over the year. 

Global financial crisis fading

It is obviously the case that the economy went through a softer patch, often referred to as the 'global financial crisis' or 'GFC' for short. 

There was also a nasty following period where the Eurozone threatened to tear itself apart, which is still ongoing to a certain extent.

Australia's economy held up far better than most, but as a commodity exporter has hardly been immune from those global concerns. 

Here's the GDP growth chart, both in real terms, and in per capita terms. 

It's become quite popular to blame immigration for slower per capita growth since the financial crisis.

But on closer inspection the figures appear to show that immigration has by and large tracked the fortunes of the economy - huge through the mining boom, more muted as the economy slowed, and now picking up again as the outlook improves. 

Now don't get me wrong, the economy has been disappointing, and the recovery painfully slow at times.

The Reserve Bank put out a long speech last week to argue that financial stability risks from household indebtedness and mortgage stress, quote, 'remain low', but then has also apparently ruled out cutting interest rates due to, erm, financial stability concerns. 

Not sure what that's all about, but it is what it is. 

And, of course, GDP isn't a perfect measure of economic strength, or how households experience life, or indeed a lot of things. 

For example, Australia's humanitarian intake has been ramped up in recent times, and those extra persons are unlikely to contribute greatly to growth in the economy - at least initially - to them, safety, security, and establishing a new way of life is infinitely more important than what some national statistic or other says. 

Some people get ill, or lose a spouse or sibling, or spend a period unemployed, or inherit great wealth, or experience an amazing business success, or have an 'integrated transport plan' drilled right past their home, or whatever else. 

None of which is well captured by one national statistic. 

It's true that some people have done better than others, which is pretty much always the case. 

GDP cannot and does not attempt to measure all these things, but it is at least one measure of output and productivity. 

Outlook brightening

Looking forward, in 2018/19 the economy is forecast to grow by 3¼ per cent.

And in 2019/20 the economy is forecast to grow by 3¼ per cent as well. 

Population growth is tracking at about +1.6 per cent, so if that's achieved it will comfortably see per capita GDP rising to fresh heights. 

So, there we have it, just a few facts and figures for a Sunday night! 

Sydney 2046

Infrastructure vision

Like many getting-a-bit-long-in-the-tooth Sydneysiders, I've increasingly been having recurring daydreams about selling a place at Bondi or in the inner west and trading it for a mansion at Maroochydore (or sometimes it's a mooring at Mooloolaba). 

Probably about once a fortnight I have these fantasises, on average, I reckon. 

And then reality bites.

I wake up and find that Infrastructure Australia (IA) has released another report, which always brings me back to earth and reminds me why I invested in inner-Sydney property in the first place. 

Future cities

As ever, IA's Future Cities report presents a range of scenarios.

There's a decentralised scenario which incorporates acres of building and hundreds of thousands of new homes in the south-west.

And then there's a centralised scenario where everyone crams like crazy into zones close to the Central Business District (CBD), and to a lesser extent Parramatta.

And then there's the medium-density scenario, which is a realistic mixture of the two, incorporating population growth across the city and on balance the most likely outcome. 

The scenarios have one thing in common: none of them envisages a Sydney in 2046 with a population of under 7.34 million. 

Although people are expected to live all over Sydney, the share of employment will remain heavily skewed to the CBD and city fringe, and to a secondary extent Parramatta. 

And there's a great deal of consideration of how people will get around with millions of extra people in essentially the same amount of space (as an investor, I've always gone for train links to the City or walking distance from the Sydney CBD). 

Nobody can predict the future, but one thing I will hang my hat on is a massive ongoing demand for rentals close to the middle of Sydney. 

From the horse's mouth...

'Between 2017 and 2046, Australia’s population is projected to increase by 11.8 million people. 

That’s equivalent to adding a new city, roughly the size of Canberra, each year for the next 30 years. 

About 75% of this growth will occur in Sydney, Melbourne, Brisbane and Perth.'

Population growth is a central driver of this change. 

In the next 30 years, Sydney’s population is projected to increase by 2.4 million people, growing to be a city of 7.4 million. 

Over the same period, Melbourne is projected to grow by 2.7 million people, to be a city of 7.3 million. 

Between now and 2046, Brisbane is projected to grow by 1.6 million people and Perth by 2.2 million people, delivering cities of just under 4 million and 4.3 million, respectively.

This means the Brisbane and Perth of tomorrow will become cities the size of Melbourne and Sydney today. 

While Melbourne and Sydney will become cities comparable to the current size of some of the world’s most significant urban economies, operating more like the Hong Kong, New York and London of today.'

More jobs & growth

More jobs

We've seen plenty of evidence that the labour market is picking up through 2017.

And that continues in 2018, with the trend skilled vacancies now heading up for 16 consecutive months. 

Skilled vacancies increase by +10.6 per cent to 183,600 over the year to January 2018, according to the Department of Employment after notching yet another monthly gain. 

The index is now +31.4 per cent or +43,900 vacancies higher than at the October 2013 low point and rising solidly. 

There were robust gains around the states, although the trend for South Australia has been meandering a bit. 

Easier to find work

The median duration of job search also now looks to be falling. 

The fastest city to find a job in has been Sydney for some time (now down to 9 weeks in January), but Melbourne (9 weeks) and Brisbane (9 weeks) also joined Sydney this month. 

Job search figures are highly seasonal, so this will be a trend to watch as 2018 rolls on. 

At the other end of the scale, while it took under 5 weeks to find a job in Perth at the peak of the mining boom, that number has been rising over the past decade towards 19 weeks on an annual average basis. 

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Best earnings growth since 2014 (led by NSW & QLD)

Pay gap closing

It's been a pedestrian half-decade for salaries, especially if you're a man.

And that continued in 2017, with the average pay for males growing by about +2 per cent for ordinary time earnings. 

An awful lot of energy is directed to blaming immigration for this, but as with many other data releases the figures have generally followed a pattern of being very upbeat before the peak of resources construction, and then far more modest as we've come down the other side. 

That's particularly been the case in the resources states such as Western Australia, South Australia, and Queensland where average earnings growth was very strong up until 2012, and then cooled. 

This dynamic is perhaps most evident in full-time male total earnings. 

At the sectoral level, unsurprisingly mining was the weakest performing industry, with earnings essentially flat over the year to November 2017 - or down in real terms - although mining remains the highest paid sector of the economy with an average wage exceeding $134,000. 

The next highest paid roles tend to be in IT, where the average wage is now approaching six figures, and finance & insurance at just over $97,000. 

Pay gap closes

There was somewhat brighter news for female earnings, which grew by about +3 per cent, helping to close the pay gap slightly. 

Consequently the ratio of female to male earnings is now at the highest level in almost a dozen years, although clearly the gap remains substantial. 

Healthcare & social assistance pay was a significant part of this story, but females also saw real pay increases in financial services, science & tech roles, real estate, mining, and construction. 

The wrap

Earnings growth was still modest for males, but the increase in female earnings lifted the overall growth in average weekly earnings to +2.4 per cent over the year to November 2017.

That's the best result since late 2014, which represents further evidence of a steadily improving outlook, with the average wage rising to $81,619. 

The encouraging earnings growth was seen in New South South Wales (+3.3 per cent) and notably Queensland (+3.1 per cent), where wages are now rebounding. 

In South Australia the average wage declined in nominal terms as the state has struggled to create productive employment and is suffering from a brain drain to Melbourne. 

Sydney unemployment rate keeps falling

Sydney tightens

Sydney's annual average unemployment rate fell to just 4.58 per cent in January 2018.

The annual average has been lower, in 2008, when the unemployment rate briefly snuck below 4.2 per cent. 

In Adelaide the annual average fell to 6.49 per cent, in Perth it fell to 6.14 per cent, and in Melbourne to 6.1 per cent.

So there have been some improvements. 

However, only Sydney has anything remotely approaching a tight labour market on this evidence. 

The good news for Queensland is that both hiring and participation are picking up.

And it's happening not just in Brisbane, but right across the state.

Cairns and Townsville in particular are also now recording stronger rates of employment growth, after the downturn.

Meanwhile the coastal Queensland locations such as Gold Coast and Sunshine Coast have been improving for some time on the back of the lower dollar. 

Queensland high-rise boom unwinds apace

Apartment building slowing

Residential building work done for non-houses dropped by some 25 per cent in Queensland in 2017.

And this construction trend will continue in 2018 as the sector continues to rebalance towards equilibrium.

Not quite so many cranes expected in 2018 then, at least in the residential sector! 

As construction slows Brisbane's apartments are gradually filling up, as I looked at in a bit more detail here, but it's taking time for the stock to be absorbed.

The figures for engineering construction have been all over the show across recent quarters with some wild spikes in Western Australia due to the import of LNG platforms.

Looking at the smoother trend figures brings positive news.

Post-mining boom engineering construction is no longer dragging back the economies of Western Australia and Queensland, paving the way for an economic recovery for the resources states. 

Good to see.

At the national level residential building work done fell by about 5 per cent in 2017 as supply and demand look to swing back into balance.

However, this was more than offset by the rebound in engineering construction and a range of infrastructure & other non-residential projects

Overall, total construction work increased by a just under 5 per cent to sit at more than $50 billion last year. 

Wages improve at a painfully slow rate

Wages up a bit

Wage prices - one of the most keenly anticipated releases of the year! Let's take a run through it in half a dozen charts. 

Firstly, quarterly wages growth came in above market expectations at +0.6 per cent.

And the annual rate of wages growth rose for a second consecutive quarter to +2.1 per cent. 

So that was a mild positive. 

Yet it says something about how low expectations have fallen when the Aussie dollar cheered a result within which private sector wages increased by just +1.93 per cent in 2017. Ouch.

Public sector wages growth was notably stronger at +2.44 per cent. 

Both sectors have picked up from previously softer levels, while public sector wage prices have outpaced the private sector since 2013. 

At the state level Victoria is now in pole position with wages growth of +2.4 per cent.

This doesn't fit entirely squarely with the meme that immigration is to blame for low wages growth (since Melbourne has by far and away the highest rate of population growth in the country), albeit the rebound was largely driven by pay deals in the public sector. 

Wages growth in Western Australia is off the mat and lifted a little to +1.5 per cent, but the Northern Territory is sagging with wages growth dropping to just +1.1 per cent as the growth in both the real economy and the population of the territory stagnates. 

Wage price growth in Queensland (+2.2 per cent) and New South Wales (+2 per cent) was back in the pack.

The big picture is that in nominal terms wages are growth at about half the rate we saw before the financial crisis. 

Interestingly, Western Australia also saw electric wages growth when its population was booming, and the state has recorded the strongest wages growth over the two decades of available data. 

At the industry level mining sector wages (+1.4 per cent) are still acting as a downdraft, while retail trade and real estate wages were also very soft in 2017. 

Healthcare and social assistance, which has been the major growth sector for employment in recent years, saw the strongest wages growth at +2.8 per cent. 

Finally, wages growth has comfortably outpaced the cost of living increase for a long period of time, but lately the figures imply that this may not have been the case for many workers in the private sector. 

The wrap

While a second consecutive lift in annual wage price growth will generally be greeted as a positive sign, there is no getting away from the fact that private sector wages growth continues to track at extraordinarily soft levels. 

I guess if you were being optimistic you'd say that things are looking up, and the numbers do support that view, but it looks to be a bit of a slog ahead. 

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Vacancy rates drop in January

Rental vacancies tighten

I've noticed many rental properties letting much more quickly in Brisbane in recent weeks.

Whether or nor this is the beginning of a trend for 2018 remains to be seen. 

SQM Research reported that nationally vacancy rates tightened from 2.5 per cent to 2.3 per cent in January, partly due to the seasonal variation over the Christmas period. 

In Sydney the vacancy rate fell from 2.6 per cent to 2.3 per cent in the month of January.

However, that's still higher than the 1.9 per cent recorded a year earlier.

Indeed, smoothing the numbers on a 6mMA basis you can see that Sydney's rental conditions have been easing, and rental price growth may now moderate from here. 

Hobart's vacancy rate increased to 0.4 per cent in January, but a severe rental shortage in the Tasmanian capital is putting continued upwards pressure on rents. 

Canberra also recorded a tight vacancy rate of 0.9 per cent in January, with Adelaide at 1.5 per cent, and Melbourne at 1.8 per cent. 

The trend in Perth's vacancy rate, although still elevated, is also improving.