Credit strangle continues for investors

Credit growth slows

Annual credit growth slowed to 4.5 per cent as at June 2018, well down from 5.4 per cent a year earlier, according to the Reserve Bank's latest Financial Aggregates. 

Broad money growth fell to an anemic 1.9 per cent year-on-year in June - the lowest level since Bobby Brown was #1 in the Australian charts with Humpin' Around in September 1992 - a disagreeable image I'm sure you'll agree (and the credit aggregates weren't too flash either).

Personal credit shrank 1.3 per cent year-on-year, and the annual growth in business credit slowed to just 3.2 per cent.

Housing credit held up reasonably well at 5.6 per cent.

The monthly growth in mortgages was all driven by owner-occupiers, with total investment credit actually declining for only the third time since these records began (just before Bobby Brown). 

With more investors also now switching to paying down principal, investor credit as a share of total housing market outstanding loans fell to 33.5 per cent, which puts investor market share broadly back in line with the average level seen over the past 18 years since June 2000 of 33.2 per cent. 

Although housing credit as measured here is slowing, the APRA ADI figures also released today grew at a faster clip, implying in turn that non-bank lenders are picking up some of the slack. 

Of of the larger players Westpac recorded solid growth in its home loan book, while Macquarie, Commonwealth Bank, and NAB notched higher totals for investment loans for the month of June.

In saying that, NAB's investor loan book has recorded only 2 per cent growth over the past year and CBA and ANZ are in negative territory, so there is potentially ample headroom for more investor lending to return forthwith (the 10 per cent growth cap has been shelved as redundant). 

Overall, housing credit still seems to be flowing freely enough, but the economy really needs to start generating household income growth to get things moving again. 

Building approvals rose in FY2018

Building approvals bounce again

Total building approvals very solid once again in June 2018, up 6.4 per cent on the month to a seasonally adjusted total of 19,133. 

Over FY2018 there were some 230,721 building approvals, a solid 4 per cent increase in FY2017 defying far gloomier expectations. 

There's also been a phenomenal ramp-up in non-residential building work approved, mainly in Sydney and Melbourne, although in both cases the peak now appears to have passed. 

Overall the construction pipeline remains very large provided developers and buyers can access financing arrangements, which is questionable. 

Around the traps

Home approvals have generally followed migration flows, with Greater Brisbane now at the strongest level on record, and Perth at the weakest. 

House approvals in Melbourne also remain close to record highs. 

Forecasters had predicted three years ago that Melbourne would see attached dwelling approvals would collapse in half. 

It's hard to imagine a forecast turning out more wrong than that, with attached dwellings rising and rising and rising, up to 34,498 in FY2018 as the Melbourne economy and population booms. 

In total nearly 63,000 dwellings were approved in Melbourne in FY2018, although population growth has been remarkably strong too. 

CoreLogic's monthly dwelling values report showed the median price for Brisbane units rising 1.7 per cent over the second quarter of the year.

And this rebalancing is to some extent reflected in a steadying of approvals following a long downturn, although the composition has shifted towards townhouses and away from tower blocks.

Finally, a cautionary note for prospective investors in Hobart housing as annual approvals continue to rise to a 95-month high. 

Hobart is a small city and mainland developers are understandably reluctant to venture south across the Bass Strait due to the inherent logistical challenges, but with supply tight and prices flying a supply response is now taking shape. 

Real estate is usually best approached as a medium-to-long-term investment, and small cities are more prone to seeing a greater percentage uplift in the dwelling stock during a boom, so summarily new investors should be careful not to be caught with their pants down.

Yeah, I know, improving economy and all that...just sayin'!

On the plus side most of what gets built in Hobart is detached housing which is built in a few months.

This stands in stark contrast to the big capital cities where huge apartment towers can take 2-3 years from approval to completion, risking a stock overhang at the peak of the cycle. 

Ill at ease

Let's talk about stress

I think it'd be fair to say that I'm healthily sceptical about much of what is published about mortgage stress.

After all, mortgage rates are very low indeed, unemployment is reasonably low (and falling to the lowest level since 2012), and 30-plus day arrears are generally low outside a few recessionary hotspots.

So, yeah. 

But as I've discussed in recent podcasts, life's often a helluva lot easier for those of us that took out mortgages at higher rates years ago and have seen them come down than it is for newer borrowers or those trying to save for larger home deposits. 

Doctor, doctor, my insurance expired...

One interesting soft metric to look at is recent trends in private health insurance. 

Hospital membership insurance in Australia has generally increased over time from much lower levels in the 1990s. 

And this continued for some of the older age cohorts in 2017, particularly for those enjoying life beyond the traditional retirement age. 

However, as a share of the total population, hospital membership has begun to reverse in recent years. 

And there was quite a notable 5.3 per cent drop in the 25 to 29 age group last year (click to expand).

Source: APRA

To some extent perhaps this isn't all that surprising or irrational, with the average premium for hospital insurance for younger people costing a significant chunk of disposable incomes, and most younger claimants clawing back on average far less than they paid in. 

The benefits of health insurance paid out increase substantially as you move up through the age brackets, so plenty more of millennials and younger Aussies have apparently opted not to bother.

Slow wages growth across the past couple of years must be a considerable factor in this equation.

Licensed to ill

Perhaps also unsurprisingly the Australian Capital Territory retained the highest coverage of hospital insurance at 55.4 per cent of the resident population. 

However, hospital coverage as a percentage of the population declined across all jurisdictions last year, continuing a downtrend which appears to have taken hold in 2016.

Despite a big ramp up through the mining boom, the Northern Territory still has the lowest hospital coverage at 40.4 per cent. 

Intergenerational cleft

Now for sure there might be any number of reasons for these declines, and this might not be an indicator of stretched household budgets at all.

Perhaps the comparatively high rate of immigration in the under 30s age cohort has made a difference to the statistics, for example, since such insurances are in many cases far less common overseas than they are in Australia. 

On the other hand given that more older Aussies are opting to take out insurance but 30,000 fewer of those aged 25 to 29 over the past two calendar years, you could equally make a case for mortgage and rental market duress having altered a few spending choices. 

Youthful males have always had a tendency to feel somewhat invincible, of course, and men aged 25 to 29 are particularly under-represented when it comes to hospital treatment membership - which is fine, as long as you don't get ill! 

A moderate discount for those aged under 30 will be available from next year, but whether that's enough to encourage more to take up coverage remains to be seen. 

Live by the supply shock...

Inflation gamechanger

I was excited to be invited to do the Business Insider Devils and Details podcast again a couple of months ago; all the more so given the hugely impressive alumni of the show. 

In recent weeks I learned a lot from listening to Justin Smirk of Westpac's deep-dive on the labour market, where he explained how and why how female employment growth has usurped that of males of late, as well as his in-depth insights on inflation and interest rates.

Last week we saw another very soft inflation figure, with the underlying inflation rate once again nestling below the target 2 to 3 per cent band.

What little consumer price inflation there has been has hardly been a result of rising wages and strong demand; in fact, most of the private sector measures have been very weak. 

Instead most of the inflation has been seen in spheres heavily influenced by the government: childcare costs, education, utility prices, and smokes, for example. 

High voltage

Since 2011 there has been a power surge in electricity price inflation impacting all of the major capital cities, and this has been a significant contributor to higher bills for households and consumer price inflation. 

However, Smirk highlighted in a note this week that although it had previously been thought that higher utility bills would continue to pressure household budgets, government intervention has already eased gas price pressures.

Meanwhile a surprise ramp up in renewables energy generation and investment plus government intervention in Queensland is leading to a collapse in electricity prices. 

The ACCC released a blueprint to reduce electricity prices earlier this month, too, so expect more of the same. 

According to electricity futures, electricity prices are now far more likely to fall throughout the remainder of 2018, and most likely for the first half of 2019 too.

Smirk sees this as a gamechanger for the inflation outlook. 

Don't expect any of this to be mentioned in the 'pressured household budgets' analysis, though - these typically only look at prices that are rising while ignoring the rest, preferring the shtick that the inflation figures don't reflect the true change in consumer prices (narrator's voice: this is literally what they do). 

Electric shocker

Shane Oliver of AMP has highlighted that excluding goods which tend to see sharp price swings (namely petrol, and fruit 'n' veg) private sector inflation is tracking only at about 1 per cent, and he doesn't see interest rates moving until the middle of 2020.  

Smirk believes that easing housing costs and falling electricity prices will dampen CPI to the extent that the headline rate of inflation won't even breach above 2 per cent for the remainder of this year or next year in its entirety.

Not surprisingly, then, Smirk doesn't see interest rate changes until 2020 either.  

For policymakers it's rather a case of live by the supply shock...

Weekend reads (blood moon)

Weekend reads

Summarised for you here at Property Update.

Subscribe for the free Property Update newsletter here along with more than 115,000 others. 

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Alas, no lunar eclipse or blood moon was visible from these parts at 6.21am.

On the plus side we could see an alluring Mars directly aligned above a new Bunnings Warehouse....Brissie!

Have a great weekend, readers.

Melbourne land price rises another 41 per cent

Melbournites don't wait to buy land

Melbourne's median lot value increased by another 41 per cent year-on-year to a record $359,000, according to HIA figures. 

That's up from just above $200,000 five years ago.

In Sydney the median lot value sits just below its peak at $469,500.

Lot sizes have been shrinking over time too.

Indeed, on a price per square metre Sydney's land price was more than 8 per cent higher than a year earlier. 

A 700sqm block in Kellyville sold for $1,200,000 this week, some 36 kilometres from the CBD and located close to the M7 motorway.

Sales volumes have declined significantly, which combined with rising prices suggests limited availability on the market. 

Overall, it's been another strong decade for land prices.

Australia: seasonally adjusted

People boom

Temporary entrant visa holders in Australia increased to a record high 2,229,838 in the first quarter of calendar year 2018.

This represents a year-on-year increase of more than 150,000, comfortably overwhelmingly any tinkering at the margin on permanent resident intake. 

The main driver of the increase over the past five years has been student temporary visa holders, soaring from 332,000 in March 2013 to a record 536,000 in March 2018, thanks to a lower dollar and a voracious appetite both from and for Asian students.

Australia is becoming seasonal

It's notable just how vast some of the seasonal quarterly swings in temporary residents are becoming these days.

For example, visitor visas exploded from 317,000 to 610,000 in the December 2017 quarter as a swag of tourists arrived for the Christmas period, massively spiking demand for hotels and short-stay lets for a month or two.

Student visas, on the other hand dropped very sharply to 384,000 in the December quarter, before jumping again by 152,000 to a record high 536,000 in the March quarter.

Building bridges...

There was a surge in bridging visas to 195,000 in March 2018 from 154,000 a year earlier, perhaps driven by a blowout in visa processing times. 

Some reporters inferred that this was related to asylum intake - however...

Rental indigestion

These massive seasonal swings may imply that we are just about to emerge from an unusually weak period for the capital city rental markets. 

Seasonality has always been in evidence in rental markets and short-stay lets, of course, but this trend is seemingly becoming more entrenched by the year. 

Last June the total number of temporary visas dropped by 137,000 in the second quarter of the calendar year, before rebounding hugely higher by 287,000 over the following few quarters. 

Sydney's rental market is currently struggling to absorb a record high number of apartment completions leading to a jump in reported vacancies last month, especially in the crane-laden middle-ring suburbs. 

However, Sydney is also the capital city which benefits most materially from the dynamic combination of tourism and international students.

Therefore it will be interesting to see whether the Sydney rental market experiences any pullback in vacancies over the next 6 months or so, since recent history suggests that there will be a tremendous surge in temporary residents between now and New Year.

Or maybe vacancies will just keep on rising...

Internal migration: Queensland's time in the sun

The ABS also released its migration statistics for the 2017 financial year today.

Old news, to some extent, but the statistics confirmed that Queensland saw a very large 48 per cent year-on-year increase in net interstate migration to the highest level in a deace. 

Brisbane is attracting more internal migrants on a net basis than any other capital city (rising from +10,000 to +12,000 in FY2017), while there was also strong internal net migration to the adjacent Gold Coast (+7,100) and Sunshine Coast (+6,100) regions. 

Of the other regional markets, Geelong (+4,300) was by far and way the standout as it captured the spillover from Melbourne. 

Melbourne continued to attract internal migrants at the expense of Perth, Adelaide, Darwin, and even Sydney. 

Sydney unemployment rate down, down, down

Sydney jobs boom continues

Sydney's unemployment rate fell again to just 4.086 per cent in June 2018.

The annual average unemployment rate for the harbour city is now well under 4½ per cent. 

Full employment for Sydney, then, which is great to see, with more than 100,000 new jobs added across the city in the 2018 financial year.

Wow!

The most improved city from an annual average unemployment rate is Greater Adelaide, now at under 6 per cent, well down from an alarming level at 7½ per cent a couple of years ago.

The glacial improvement in the annual average number of unemployed persons across Australia continued in FY2018 at 722,300, steadily easing down from 763,100 at the peak in FY2015.

The median duration of job search continues its year-on-year improvement, with the better numbers driven largely by the second-tier cities of Brisbane, Perth, and Adelaide. 

Summarily, pretty good employment growth and low inflation, for the time being.

There has been some talk of normalising interest rates, but overall unemployment rates outside Sydney remain about 1½ per cent,higher than they might be, so personally I'm not an advocate of the idea. 

The Beta boys are back in town

Focusing on quality...

The S&P/ASX 300 Accumulation Index returned a very healthy 13.24 per cent for the 2018 financial year. 

It's always interesting to watch fundies report to the market and read the explanations presented for why they've underperformed the simple benchmark of just owning the index. 

In fact, some of the high-profile 'alpha' funds have even gone backwards over recent years as the stock market index has kept powering higher. 

Of course, value-aligned funds may hold cash in anticipation of better opportunities in the future, so underperformance in any given financial year may partly represent risk management.

But try telling that to impatient investors.

Snark aside, building wealth isn't a pissing contest, and if you adopt a sensible long term approach then you should do just fine with a balanced portfolio. 

Over 20 years Australian shares have returned 8.8 per cent per annum, and global shares 7.4 per cent per annum, outperforming cash, fixed income, and REITS.

You can click the image below to expand - all returns are gross of tax and costs, and represent unlevered investments.

Source: Russell Investments

Residential investment property has returned 10.2 per cent per annum over the past 20 years, putting many levered investors absolutely light years ahead in this asset class.

Geared returns from the stock market, conversely, have been a disaster for many over the past decade.

Sadly many of our property investor clients of around 2011 and 2012 were formerly investors in the stock market with substantial margin loans and CFDs, and remain so scarred as to be lost to the beauty of growing dividend streams forever (click to expand).

Source: Russell Investments

The journey for residential property has been far less volatile too, in aggregate, with some small drawdowns in 2008 and 2011 of 3.7 per cent and 1.4 per cent respectively, as measured on a total return basis.

This compares with some monster drawdowns for the stock market, with both Aussie and global shares each plunging by well over 40 per cent in 2008.

Devil in the detail

These figures warrant caution, however.

While it's very easy to replicate an equities index return through owning an index fund designed for that purpose - often scoring better returns than the hotshot managed funds - you can't so easily buy the property market.

Instead you own individual assets within that market, so returns may vary wildly.

Furthermore, many property investors churn their assets too quickly and end up missing out on the benefits of compound growth, with the big gains largely taking place in the later years of an investment holding period. 

As the sage of Omaha, Warren Buffett once wisely said...lol, just kidding.

Trade price indices and detailed labour force figures are out tomorrow morning, catch ya then!

Disinflationary pulse returns!

Inflation undershoots again

Hello, 'ello...inflation undershoots the expectations of the most credible forecasters for a seventh consecutive quarter. 

Headline inflation came in at 0.4 per cent in the June quarter, mainly due to a 6.9 per cent leap in fuel prices, which may not be sustained, and a further increase in tobacco excise. 

More importantly, the underlying inflation figures were once again very weak.

Although the quarterly readings came in at a rounded 0.5 per cent for trimmed mean and weighted median inflation respectively, a closer inspection suggests that the disinflationary pulse may have returned.

Year-on-year trimmed mean inflation slowed from 1.91 per cent to 1.85 per cent in the June quarter.

And the weighted median slowed from an upwardly revised 2.11 per cent to just 1.88 per cent.

If all this sounds like jargon to you - which in fact, it is! - the target range of inflation is 2 to 3 per cent, but the official ABS reading of underlying inflation to two decimal places has slowed to just 1.87 per cent. 

Presumably this will push rate hike expectations out towards 2020, although we'll have to wait and see how financial markets react.

If you look very closely at the newly revised annual figures for preceding quarters you will note that we temporarily breached the target range of inflation...until we didn't again!

Non-tradables inflation was down a tick to 3 per cent, while tradables inflation stabilised at just 0.3 per cent. 

Finally, the annual rental price CPI slowed to just 0.6 per cent, with rental price inflation in Sydney slowing to 2.2 per cent, while in Melbourne it also slowed to 1.9 per cent. 

Rental prices remain negative year-on-year in Brisbane, Perth, and Darwin.

The wrap

With discounting and price deflation still in evidence in the retail sector, residential construction likely to slow from here, and rents going nowhere fast, we're likely going to need to see stronger wages growth before inflation picks up meaningfully. 

Why is this? 

There are any number of theories: the role of technology, foreign competition, an increase in the global labour supply, plus a casualisation of the Australian workforce. 

Quite possibly it's a combination of all of the above. 

The revised figures suggest that annual underlying inflation temporarily breached the target range before slowing again to just 1.87 per cent. 

Very little in the way of sustained price pressure to be seen here, then.

Migrants, jobs, housing

Cause an' effect

Lots of discussion about immigration is to be expected in the lead up to the Federal election, and as the Australian population clock approaches 25 million in the coming days. 

It's interesting to note that the locations where immigrants have mostly been moving to are also by far and away the strongest labour markets in the country. 

The construction boom in Melbourne is all set to push unemployment in Victoria down to below 5 per cent too, joining New South Wales which is already at 4.7 per cent. 

In fact, the construction pipeline in Victoria is so immense that I believe Melbourne will be the strongest economy in the country for years to come. 

Another benefit to these cities is that the immigrants have mainly be younger than the median age, with visa requirements tilted towards those under the age of 30. 

It's easy to be anti-immigration and blame migrants for traffic congestion and so on.

But Sydney and Melbourne also have dynamic economies unlike much of the rest of the country right now.

Cause or effect? 

It's hard to say.

But having lived in cities where the population is growing and a city/region where the population ebbed away for year after year, I know which dynamic is preferable...and it ain't the latter!

Incidentally, the younger age of migrants is a positive input for housing market demand in Sydney and Melbourne. 

The Census confirmed a tremendous decade-long surge in the cohort typically representing the first homebuyer age, which will in time stoke demand for inner-suburban apartments in these cities.

Thanks to immigration Greater Sydney and Melbourne have a much younger median age at 36 than cities such as Adelaide or Hobart at 39. 

Insolvent abuse

All stressed out

Such a huge volume of garbage is being written, filmed, podcasted, Facebooked, and blogged about about mortgage stress right now that it's nigh on impossible to keep up!

No fewer than one MILLION looming defaults I saw on TV this week!

Oh, really.

And as always just a year away, I'm sure.

One of the biggest stresses right now from my perspective is trawling through all the tripe.

Clearly time for a social media hiatus for me, I think! (apologies I meant to say 'shedloads', by the way, darned autocorrect lol).

The most important metric to watch as ever is the health of the labour market, with jobs growth still firing along and the unemployment rate continuing to decline to the lowest level since 2012, with further improvements expected over the next year or two.

Resetting the clock

So that's the good news. 

The latest 'flavour of the month' - and as I'm sure you've noticed over the past 15 years there's always a flavour of the month - is the reset of Australia's interest-only (IO) mortgages, an issue I wrote a detailed report on last year.

Things have panned out a little differently in terms of timing than might have been expected at that time. 

One interesting thing of note is that with much lower interest rates now available on principal-and-interest loans there has already been a significant voluntary swing towards the repayment of debt, and ahead of schedule in many cases. 

In fact by the end of March 2018 the share of outstanding IO loans by value had already dropped quite close to 30 per cent.

This is well down from 39 per cent in Q3 2015. 

Given that it's now nearly August (where has this year gone, eh?) based upon the present trajectory it appears likely that the share of IO loans is now well below the average levels seen over the past decade. 

Of course, some borrowers may not be able to roll over existing IO loans under the new tighter lending standards.

And, yes, some borrowers may even be forced to sell a property (although lenders aren't incentivised in any way to send borrowers to the wall), while higher repayments are sucking some of the energy out of the housing market and the wider consumer economy. 

This is old ground, of course, well covered previously in speeches by the Reserve Bank of Australia and APRA.

The big picture is that 30-plus day mortgage arrears rates are tracking at about 1 per cent in New South Wales, and about 1.2 per cent in Victoria. 

After around half a decade of recessionary conditions following the resources downturn Western Australia has an arrears rate running at about 2.7 per cent, and the Northern Territory about 2.8 per cent. 

Personal insolvency

Another interesting metric to follow is personal insolvency activity as reported by AFSA.

Bankruptcies have fallen sharply over the past decade, broadly as expected after the financial crisis.

Total personal insolvency activity did show a meaningful year-on-year increase of 5.6 per cent over the 2018 financial year. 

This was mostly driven by Western Australia as shown in the graphic below (you can click on it to expand).

Note that the population of Australia has also increased strongly by about 4 million over the past decade, so in absolute terms a rise in total activity shouldn't be entirely unexpected. 

Around the traps

Indeed, although insolvency activity at the state and territory level is often reported as being at 'record highs', it is often only at 'record highs' in the same way that my age is at a record high today.

After all, the estimated resident population is at all-time highs too, being about to tick past 25 million within the next few weeks. 

Looking instead at a more sensible personal insolvency rate per 1,000 heads of population shows that Western Australia has recorded the sharpest increase since 2013.

Elsewhere insolvency activity levels have largely either improved or barely budged.

If you look with a magnifying glass activity levels in New South Wales have just moved off their lows, albeit only back to the levels seen in 2015 (and tracking at about half the levels seen in 2009).

Queensland typically records the highest levels of insolvency per capita, in part due to the severity of its tropical climate, including regular Cyclones, flooding, drought, and some other weird biblical stuff.

There are also elevated levels of mortgage arrears apparent in Gladstone and some parts of Central Queensland heavily influenced by the resources sector, which is not unexpected given the magnitude of dwelling price declines. 

Panic attack city!

Personally, I can't say I'm all that worried about the medium term impacts on the housing market of tighter lending standards, interest-only loans, higher mortgage rates, or whatever else is supposedly going to cause a huge crash. 

But let's suppose I'm totally wrong - always possible! - and for some reason the housing market collapses into the assumed horrible cascade of defaults.

What happens then if we sink into a dire recession?

Well, nobody knows for sure, but I've run through some scenarios with people far more intelligent than me both in Australia and overseas, and here's what they think:

Firstly the Aussie dollar falls sharply, helping to rebalance the economy relatively quickly and encouraging foreign investment in Australia.

Secondly, interest rates are cut hard and fast, encouraging consumers to borrow again.

So there are two dynamics that present a different range of scenarios from Spain or Ireland (don't ask - it's always supposed to be Spain and Ireland).

And thirdly, the government has any number of levers it can pull to stimulate housing market activity, including grants for homebuyers, incentives for downsizers, stamp duty discounts, relaxing foreign buyer rules, and so on.

Yes, granted, there are some possible scenarios where interest rates go higher for different reasons.

Government intervention

Some people don't like to hear this line of thought which includes government stimulus, preferring to argue that housing should be allowed to become cheaper. 

This sounds good on paper, and I don't necessarily disagree in theory, but in reality it's not a route that governments like to go down voluntarily.

And remember prospective first homebuyers don't want dwelling prices to fall either after they've bought a first home.

For these reasons policy is more likely to be directed at encouraging demand with first homebuyer incentives and pushing for higher household incomes to improve affordability.

Not that affordability is a pressing issue in many areas outside the two largest capitals, and certainly not in the doomsday housing market scenarios now being reported on a daily basis.

When the interest-only reset issue passes, it'll be on to the next big thing, no doubt. Probably rising mortgage rates.

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The big news this week will be the Q2 CPI or inflation figures on Wednesday morning.

A 6 per cent jump in petrol prices this quarter may push the headline rate of inflation up a little, contributing about 0.2pps.

However, the annual core rate of inflation could still miss the bottom of the target range, with a seasonally soft result expected for the June quarter and electricity bills having calmed down a bit. 

Statistical trickery

Arguing the toss

Another substantial surge in jobs was reported for June, with total employment up by a seasonally adjusted 50,900 in the month.

This led to the usual quibbles about whether the figures are 'right' or not. 

This seldom happens when the number are below expectations.

But when there's a beat...every time!

There are even occasional calls to ditch the seasonally adjusted figures entirely in favour of the smoother trend data, but I'm not sure I buy that.

What are the trend figures, after all, but a representation of the same numbers from the survey? 

The further you disaggregate the figures the more prone they are to throwing out unusual results. 

For example, Macquarie highlighted an oddity in that the bulk of jobs growth over the past four months was accounted for by youth employment, especially from the female cohort.

The detailed labour force figures at the regional level are similarly prone to volatility, which is why the ABS reports annual average figures in addition to the original survey results. 

Labour market improving

For all of the grouching, the labour force has continued to tighten gradually over the past few years. 

For the monthly doubters, the seasonally adjusted unemployment rate has now fallen by more than one percent from 6.38 per cent in October 2014 to 5.37 per cent in June 2018.

If you prefer to use the trend rate, then that's plotted below for you too. 

The unemployment rate is now at the lowest level since 2012. 

Another piece of pessimistic statistical trickery is to highlight the underutilisation rate while neglecting to report the more telling volume measures of underutilisation.

In other words, yes lots of people want more hours of work, but the numbers of extra hours wanted has been declining over the past four calendar years too. 

This is good news, and it should be embraced as such!

Welcome to the recovery.

Past performance...

The past is in the past

Past performance - it's no guarantee of future returns.

It's often said that the next 25 years won't be the same as the past 25.

And that's no doubt true.

After all, if they were then we'd have to see something quite extraordinary happening to interest rates.

And as for the housing market, as Doc Cameron Murray's extrapolation below shows, the national median house price would rise to nearly $3 million by 2043, with a house in Sydney costing about $6.35 million.

Source: Cameron Murray

Never say never, but I'm opting for a more sedate outcome than that!

Funding costs

Short term funding

I haven't written much here about short term funding costs for Australian lenders, for the most part because the impacts to date have been so moderate.

It's tempting to channel one's inner-Churchillian spirit here ('never in the history of market commentary has so much been made...' etc.), but the point is relevant to the extent that the cost of money globally is becoming more expensive.

Australia's short term funding costs are down from their recent highs, possibly induced by financial year-end pressures, but do remain approximately 25 basis points or so above their long run average. 

This is important to homeowners given that banks and other lenders may look to pass these costs on to borrowers (gotta maintain them $10 billion profits!). 

If you listen to the fixed income gurus that really understand this stuff, the drivers of banks' funding costs can seem confusing and nebulous, but the Business Insider Devils & Details podcast is a great place to start (the proxy used above is 3-month bank accepted bills less the Reserve Bank's expected cash rate).

One of the reasons I haven't much touched on this is that Aussie banks have been obtaining only about a fifth of their funding from short term sources (sometimes more for smaller lenders), so the importance of these figures has been overstated by excitable commentators, as is the case with almost everything these days. 

The remainder of total funding composition is mainly made up of domestic deposits, equity, and long term wholesale debt. 

In March this year the Reserve Bank put out a paper to show how the funding composition of banks has changed since the financial crisis, gradually shifting towards funding sources that are considered more stable. 

Mortgage buffers

The cheapest mortgage deals on the market right now still include 5-year fixed rates from just under 4 per cent, and variable rates from about 3.6 per cent, with comparison rates somewhat higher than these advertised deals.

So mortgage products are clearly still relatively speaking very attractive in historic terms.

Of course, what's of interest is the extent and impact of mortgage rate increases when they really do filter through, so it's one to watch (and for individual borrowers, it's something to budget for).

Fortunately new borrowers are typically assessed at a rate of more than 7 per cent, so there's plenty of buffer being built in by lenders over recent years.