Weekend reads: must see articles of the week

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Interim RC Report released

RC report out

The Banking Royal Commission quietly snuck out its interim report ahead of Grand Final weekend (which will feature the mighty Tricolours). 

Naturally, I haven't read the report yet - it's massive at about 1,000 pages - but the market reaction told a story.

No smoke-bombs then, clearly, since the Aussie banks index jumped higher immediately after the release...and stayed there. 

More to follow on this next week, once digested.

Go the red, white, and bluesters on Sunday!

Household debt ratio revised down (again)

Debt ratio revised lower (again)

A lot of water has flowed under the bridge since analysts excitedly reported that Australia's household debt would imminently hit a 'scary' 200 per cent of incomes (a textbook case of round number bias, since many mistakenly believed that this was equal to 3x incomes...oops!). 

In the event, the Reserve Bank figures showed today that the ratio of Australia's household debt to annual disposable income was revised down again in the March 2018 quarter from 190.1 per cent to 189.6 per cent.

The equivalent figure for June 2018 was 190.5 or 1.9x annual disposable income. 

The Reserve Bank figures are historic, of course, so clearly household debt will peak at less than 2x disposable incomes as previously expected, as incomes now rise cyclically and interest-only mortgages have been wound back.

Household incomes are set to respond to growth in nominal GDP, while households are increasingly switching or being switched to mortgage principal repayments, so the ratio will be in decline soon enough. 

I think we'll see some tax cuts soon enough too, thanks to the final Budget outcome, which was a massive beat. 

Moreover, these are grossed out figures - after accounting for the huge increase in mortgage buffers and offset accounts - a dynamic unique to Australia - when netted off the household debt to disposable income ratio is broadly unchanged since 2006. 

It's further worth noting that the official cash rate peaked in 2008 at 7¼ per cent, while today it's 1½ per cent.

So there's nothing unexpected in these figures from my perspective - debt ratios are almost bound to be higher given the shift to lower rates and the widespread use of mortgage prepayments and offset account balances. 

On the other side of the balance sheet, rarely mentioned, the ratio of household assets to income was an enormous 965.6 per cent of income, making Aussie households the second wealthiest in the world, behind the Swiss. 

Housing interest payments to disposable income ticked up to 7.5 per cent, notably higher than a year earlier, though well below the 2008 level of 10.9 per cent.

Finally the investor share of housing credit has declined from 39 per cent to 33 per cent, and is now well below the average level seen since 2004.

Clearly there were a few classification issues along the way, but this is good position to be in as the economy and the labour market continue to improve.

Barefoot Investor is back

Barefoot returns

Over the past 24 hours I've, bought, read, and taken notes on the latest book from Scott Pape, in just two sittings.

If you've been living under a rock for the past couple of years his previous book sold well over 1 million copies and is quietly driving a revolution in financial literacy across Australia. 

Here's the latest book, which is available for purchase now. 

Scotty needn't have worried, of course - the book is another ripper.

You could hardly expect anything less. 

It's quite overwhelming to consider the genuine difference this fellow is making to so many lives. 

Get yourself a copy and spread the word, because this is payback time for the banks.

Imagine how much better the financial world would be if only everyone acted in the best interests of their clients in this way. 

Job vacancies up 20pc to all-time highs

Job vacancies boom

Job vacancies surged to record highs in both New South wales (82,400) and Victoria (72,000) last month as those states get set to enjoy an extraordinary hiring boom.

There were broad-based gains across a raft of industries, including professional and technical services, financial and insurance services, healthcare and social assistance, mining, construction, accommodation and food, transport, postal and warehousing, arts and recreational, administrative and support roles, education, and more. 

The ongoing resurgence in the mining sector helped to lift job vacancies in Western Australia (27,600) to the highest level in half a decade, while Queensland (35,100) and South Australia (11,900) have improved significantly over the past couple of years. 

The Tasmanian economy is also firing, with the Northern Territory potentially the one serious laggard. 

The trend in private sector vacancies scorched more than 20 per cent higher over the year, while the trend annual increase in all sectors was 19.3 per cent, taking the total number of vacancies to the highest ever level at 240,900. Goodness!

More hiring ahead

There will be some half-hearted attempts to talk down the result by the Opposition, but the facts don't lie: at under 3 per cent the number of unemployed persons per job vacancy now has a 2-handle for the first time since the mining boom...which is surely great to see.

Of course, the labour force has expanded significantly too as discouraged workers come back into the fold alongside record high female participation (the rise in dual income households being an under-appreciated boon for housing markets).

But even accounting for this the figures point to an ongoing decline in the unemployment rate towards 5 per cent, and lower still for New South Wales and Victoria.

Hirin' now!

Overall, this release was very positive news, with the economy continuing to improve in the two most populated states, and the resources states generally now on the up too.

All this means that Australia has never had as many jobs to be filled as it does right now.

Good stuff.

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The Hometrack UK 20 Cities House Price Index increased by a further 3.9 per cent over the year to August 2018. 

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It's been a wild week of bickering for Australian housing market commentary thanks to yet another (now-traditional) 60 Minutes beat-up.

But in the background the fundamentals of the economy quietly continue to improve: exports, tourism, government revenues and the Budget balance, hiring, engineering construction, and so on (resulting in a risk rating upgrade to AAA neutral). 

One of the neat things about our mortgage broker liaison is that since brokers take 'snapshots' in time, we can take a mortgage application from today and re-run it against the lending standards of yesteryear.

While the results do vary quite a bit, typically a homebuyer applicant might see their borrowing capacity cut by about 10 per cent from where things were a year ago due to tightened lending standards, while for some portfolio investors the equivalent figure can be much greater.

In fact, many portfolio investors simply won't be able to borrow at all in the present environment. 

On its own this probably won't have as big an impact on the housing market as some people think (cf. the United Kingdom, where tighter mortgage lending criteria have failed to stop house prices from rising to fresh highs in nominal terms).

Firstly, that's because homebuyers don't always borrow the maximum amount permissible.

And secondly, it's because most investors don't own more than 1 or 2 properties - thus portfolio investors are only one small part of the pie, albeit an important one at the margin.

In fact, the average loan size is still being written at or around record highs, but in lower volumes now.

ANZ updated its somewhat more sober house price forecasts today, expecting prices to decline by just 2 per cent in 2019 - a mere 20-fold improvement on the lame 60 Minutes offering - with a market peak-to-trough fall for Sydney and Melbourne expected of no more than 10 per cent. 

ANZ also noted that it was more upbeat for the housing market prospects of Brisbane, Adelaide, and Canberra, as well as many of Australia's regional housing markets. 

Looking forward, the sheer strength of the hiring figures makes it hard to disagree with that assessment. 

Engineering boom is back

Stabilisers kick in to action

The final Budget outcome documents this week showed that government net debt came in at 18.6 per cent of GDP, being a tidy $13 billion below earlier Budget estimates.

Net debt remains relatively low, then, and will peak lower than previously thought, while the interest burden is low at about 4 per cent of revenues. 

Even so, there's been a lot of whingeing about government debt - but in the event it's exactly what was needed to stave off the dramatic resources downturn with some well-timed infrastructure investment.

Few data series show the scale of resources cycle better than the engineering construction figures which exploded from the early part of this century until peaking out in 2012. 

Although it's become common to point at immigration as the root cause of slow wages growth, population growth was running much faster at that time at around 1.8 per cent per annum - albeit largely into the resources states - while wages were growing at or around 4 per cent per annum for some years before the downturn eventually happened. 

Back to the boom years

Those were heady days looking back, with in-demand workers often receiving pay rises simply for not leaving a job (or even sometimes bonuses practically just for turning up).

Skilled employees that felt inclined to change jobs could choose from an array of available positions. 

When I'm in Britain the UK TV nostalgia channels always seem to have relocation show repeats about Brummies that moved to Western Australia to drive trucks for 3 or 4 times their old salaries in Brum. 

One cognitive bias that frequently afflicts readers of financial markets or data is to look back and compare to preceding peaks, even if that was an outlying period.

The good news is the government borrowings have proved to be a masterstroke is guiding Australia through this very sticky period, with the trend in engineering construction activity surging 15 per cent higher over the past year all the way back up to $24.3 billion. 

The 3-year change in some states has been thunderous, including in New South Wales (+52 per cent), Victoria, South Australia (+50 per cent), and most especially Victoria (+71 per cent). 

Engineering activity is also rising again in 2018 in Western Australia and Queensland, with only the Northern Territory now acting as a drag. 

Deutsche Bank says it sees signs of  nascent wages growth lift-off.

And of course they'll be right, as the pipeline of work has begun to pump higher again.

Pipeline surges (welcome back WA!)

Almost unnoticed the rolling annual value of engineering work kicked off has blasted to above $100 billion for the first time since the mining boom, at $101.7 billion.

The last time we saw that level was in 2012. 

Some great news is that as well as Victorian transport and infrastructure projects this resurgence has also been driven by a huge lift in heavy industry work in Western Australia. 

We knew this was coming, of course, because mining exploration work has been firing up for quite some time, but it's great to see some rubber hitting the road now. 

As for prediction time? 

I expect the unemployment rate to fall to well below 5 per cent in New South Wales and Victoria, and wages growth to rise back towards 3 per cent, easing any apparent stress on household budgets. 

Great to see engineering work back in demand.

Budget balance comes screaming back

Surplus in sight

So much for the risk of a downgrade, the Budget has come screaming back to a deficit of only $10.1 billion or 0.6 per cent of GDP in 2017-18, with the risk rating actually upgraded to AAA neutral last week. 

With nominal GDP growing by 4.7 per cent the result was miles ahead of expectations, even those of only four months earlier, let alone the $29 billion deficit projected at the time of the May 2017 Budget.

There was a huge increase in revenues over 2017-18, with jobs growth and compensation of employees shooting the lights out (although wages growth has remained low), as well as a big surge in company tax.

Company profits are at record highs - as I looked at previously here - and some high-profile operators are now in a tax-paying position again, having used up years of carried forward losses.

Meanwhile payments were also well down over the year.

Source: Budget Outcome 2017-18

Cherelle Murply of ANZ dropped the latest numbers into the chart below.

The deficit is the smallest in a decade, having continued to decline from 4.2 per cent of GDP in 2009-10 when the economy was in need of serious stimulus.

Net debt will also peak lower than expected.

As you can see the budget could potentially be back into surplus in no time at all. 

Source: ANZ

With an election looming by the middle of next year it's more likely that the Coalition will loosen the purse strings a little in an attempt to turn around some very ordinary-looking polls.

More signs of an improving economy.

2 months to lift-off

Legit, from Domain.

QLD 4005, such a great postcode.

Stark turnaround for Queensland

Sun to shine on Queensland

From Westpac (click to expand).

Source: Westpac

Indeed so.

Nice to see.

Bottom falls out of the Top End

Natural selection

Years ago I lived up in Darwin.

It's a cool place - at least figuratively, if not literally - and certainly very different from the sometimes drab sameness of suburban life in the big smoke.

One of the things I liked about it was how almost everyone turns out when there's an event in town, such the V8 Supercars and INXS playing live (or whatever). 

Mindil Beach Sunset Markets quite rightly attract a buzzing crowd every weekend too.

Meanwhile, the National Parks of Kakadu and Litchfield are a must-see-to-believe, especially in the Big Wet (although most Aussies talk of there being two seasons - wet and dry - Kakadu's traditional owners recognise six different seasons, understanding the subtle transitions between them). 

The odd earthquake aside, Darwin has the best winter climate of any city I've experienced, perfect dry heat in the low 30s all day every day, and never a cloud to be seen.

The summer weather, on the other hand, can range from harsh humidity to downright brutal and Cyclonic. 

Although I love the place, I think it would be fair to say that a lack of diversity of choice is a net negative for the Top End, including within the labour force. 

There were stacks of jobs in resources and in the public sector during my time up north, but not very much else. 

Employment rates and full-time salaries are high, and official unemployment rates remain very low.

But the mining boom years have faded and people are steadily drifting back where they came from.

Actually, not that steadily now...quite quickly!

I also recall simple things like going for a takeaway or a coffee being phenomenally expensive, although for all I know maybe that's changed as the mining sector has cooled. 

From boom to bust

From 2003 dwelling prices soared relentlessly in Darwin for a decade, rising by more than 180 per cent by the middle of 2014, by far the biggest increase of any of Australia's 8 capital cities over that period. 

Since the peak of the resources construction boom time prices have dropped back by 18 per cent, including by 6 per cent over the 2018 financial year alone. 

During the boom years thousands of Aussies were relocating from interstate up to the Top End lured by the high wages on offer.

But although the sector experienced a second wind post-financial crisis as China stimulated its economy, even the mighty $54 billion (hello overruns!) Inpex/Ichthys LNG project hasn't been enough to stem to the inevitable downturn.

And now the NT is losing residents interstate in droves, with more than 3,500 upping sticks on a net basis over the year to March 2018. 

With life expectancy increasing, you typically see more births than deaths these days, so the population of Australia increases naturally even without its prevailing strong immigration programme.  

But in the NT the outflow of residents interstate is overwhelming both net overseas migration and the natural increase, to the extent that the population of the territory has actually declined by 1,000 persons over the past six months to 246,700. 

There are few weaker dynamics for a housing market than an outright decline in the population, if sustained. 

No doubt the local authorities will be putting in place incentives to entice families to move up north. 

In short, arguably no state or territory presently has a more concerning range of metrics in its economy or housing market. 

In arrears

Last week I looked at how each of the most populous states is faring with regards to 30+ day mortgage arrears.

In short, not great in Western Australia, pretty comfortable elsewhere. 

Let's now consider the other four states and territories.

As you might expect the NT had the highest rate of prime and non-conforming 30+ day arrears at 2.67 per cent as at July 2018, although this had declined just a little over the preceding two months of available figures from 2.82 per cent. 

Elsewhere arrears rates were reasonably low in South Australia at 1.50 per cent following a marked improvement, very low in thriving Tasmania at 1.31 per cent, and extremely low in the Australian Capital Territory at 0.74 per cent. 

Generally mortgage arrears are a little higher than a year earlier across the board, despite falling unemployment rates, in part due to interest-only mortgages being reset.

Hopefully the NT can turn itself around soon!

Armageddon looming for Australia?

Revenues boom

Some folks are trying ever-so-hard to convince everyone that Australia is heading for an economic collapse.

Nothing new there, of course, but unfortunately for the gloomers nobody seems to have told the economy itself, which saw growth accelerate to a 6-year high of 3.4 per cent in FY2018.

Meanwhile the resources boom is now paying serious dividends with annual exports booming to a record high of $406 billion. 

And despite the disruptive Tropical Cyclone Joyce having lurked over the Pilbara - leading to the blip over the back end of 2017 - we've racked up a cumulative international trade surplus of some A$25 billion over the past 21 months. More records. 

In fact, there's plenty more where this came from with LNG export values breaking record highs by the month, tourism and education exports firing, and the iron ore price touching a 6-month high this week (now hovering around a very lucrative A$95/tonne).

Oh, and there's a coal price boom as well. 

Back towards full employment

From a Federal Budget perspective it's important to see people in work, and the good news is that employment surged by +306,400 or 2½ per cent over the year to August 2018. 

Over the past two years the economy has added a stunning +642,200 jobs for growth of 5.4 per cent!

With that rate of employment growth it can be no surprise to see that the trend unemployment rate has dropped to the lowest level since 2012. 

The unemployment rate has fallen to 4.7 per cent in New South Wales and 4.8 per cent in Victoria, the territories are already at or below 4 per cent, while Tasmania and South Australia are now improving rapidly.

More employed and fewer unemployed. 

An embarrassment of revenues

All of this is leading to a veritable flood of government revenues that could theoretically have the budget back into a rolling annual surplus in no time at the present rate of progress. 

So fast has the improvement been, of course, that this leaves the Coalition set to open its chequebook in the lead-up to the 2019 election.

With the government's interest expense burden so low at just 4 per cent of revenues there's significant upside potential for infrastructure spending over the next year, while realistically there are likely to be some tax cut sweeteners heading the way of the electorate. 

As for the risk of a rating downgrade so eagerly and widely reported over the past two years, this was swept away by S&P affirming Australia's AAA rating today, while upgrading the budget outlook to stable. 

AAA rating

Anyway, I'm a Coalition stooge, so I'll leave it with S&P Global to fill in the blanks:

'RATING ACTION

S&P Global Ratings revised its outlook on the long-term ratings on the Commonwealth of Australia to stable from negative. We also affirmed the ‘AAA’ long-term and ‘A-1+’ short-term unsolicited sovereign credit ratings on Australia.

OUTLOOK

The stable outlook reflects our expectations that the general government fiscal balance will return to surplus by the early 2020s.

We expect steady government revenue growth supported by the strong labour market and relatively robust commodity prices, to be accompanied by expenditure restraint.

We also expect property prices to continue their orderly unwind, and that this slowdown won’t weigh heavily on consumer spending and the financial system’s asset quality.'

And furthermore:

'Australia is a wealthy, diversified, and resilient economy, with GDP per capita of an estimated US$56,500 in fiscal 2019.

Along with the resilient and high-income Australian economy, this reflects the low risk appetites of the major banks, which dominate the industry, supported by conservative and proactive regulatory and governance frameworks.

We consider Australia’s banking system to be one of the strongest globally.'

Armageddon!

Weekend reads - must see articles of the week

The key articles of the week are summarised for you here at Property Update.

There's some good stuff worth reading here this week, on what's changed in the housing market.

You can subscribe for the free newsletter here.

Have a smashing weekend all!

All in the timing

Pascoe on negative gearing reform (click to read at the New Daily).

Where is the Aussie population growing?

Population growth

We've already looked in a bit of detail at the latest Aussie demographic statistics, which showed a bit of a slowdown in net overseas migration, and a meaningful ongoing swing in internal migration away from New South Wales and towards south-east Queensland.

Where, then, is the Aussie population growing and set to grow most?

Let's take a look back at the 2016-17 figures, and try to project forward from there by dusting off the crystal ball and looking at the latest jobs growth figures. 

Greater Melbourne increased its population hugely by +129,400 or +2.7 per cent in 2016-17.

This is supremely strong headcount growth, both cause and effect of an expanding construction boom on an unprecedented scale for Victoria.

The monthly unemployment rate for Greater Melbourne dropped to just 4.9 per cent in August, down from well above 6 per cent back in 2014 as the economy floundered.

This recent marked improvement hasn't yet flowed through to Melbourne's annual average unemployment rate, but make no mistake full employment is edging closer in Victoria.

Greater Sydney wasn't too far behind in increasing its population by +107,400 or +2.1 per cent in 2016-17, taking the harbour city's total population to around 5¼ million at the time of writing.

The jobs bonanza for Greater Sydney continued in August 2018, with year-on-year growth in total employment of +89,100, and this week's skilled vacancies figures from the Department of Employment pointing to further hiring and brighter things ahead. 

The Greater Sydney unemployment rate was considerably lower than that of Melbourne at just 4¼ per cent in August, and it continues to trend lower. 

When will wages start to rise? Will wages start to rise? Key questions!

Despite strong population growth the Aussie economy is steadily making inroads into the total number of unemployed persons - mainly thanks to the two big capital cities - which puts the unemployment rate at the lowest level since 2012.

Brisbane/SEQ the 3rd growth hub

Greater Brisbane is looking to rediscover the resources boom vibe and its population increased by +2.2 per cent or +50,800 persons to 2.41 million in 2016-17.

Thereafter followed a huge drop, with Adelaide and Perth reporting population growth rates of under 1 per cent, according to Australian Bureau of Statistics (ABS) figures.

You can pick out your own favourites in the ABS table below. 

Source: Australian Bureau of Statistics

In percentage terms there was considerably quicker population growth in other parts of south-east Queensland, at both Gold Coast (+2.6 per cent) and the Sunshine Coast (+2.6 per cent).

And, finally, Geelong in Victoria (+2.7 per cent) has been riding on Melbourne's coattails with abandon.

These remain three of the regional cities that have thrived lately.

Looking forward...

With Sydney and now Melbourne recording respective unemployment rates of under 5 per cent, it seems likely that these two capital cities will continue to attract the great bulk of net overseas migration, at least for the foreseeable future.

The figures released this week suggested that Sydney will, however, lose many incumbent residents to Greater Brisbane and south-east Queensland.

In terms of absolute population growth nowhere else really features materially at all outside the three main hubs.

But in percentage terms I'd hang my hat on Queensland's coastal cities, Geelong, Canberra, and possibly Hobart.

Brisbane looks to rediscover that mining boom vibe

Sunnyside up

Queensland is gradually looking to rediscover that resources boom vibe.

Brisbane-based economist Nick Behrens of the QEAS explains how population is now flowing towards employment opportunities at levels not seen in the years since the resources downturn. 

And, following a lean few year post-mining boom, things are clearly on the up again.

Let's take a look in two parts. 

1 - Around the traps

As promised the Coalition has wound back immigration a little, although in historic terms net overseas migration remained high over the year to March 2018 at +236,800.

The three most populous states mopped up well over 85 per cent of that total, an unusual-looking blip for Queensland in the December 2017 quarter notwithstanding (click the charts to expand). 

Internally, movements are all about Queensland now, with net interstate migration exceeding +24,000 and rising to the highest levels in well over a decade. 

Births continued to exceed deaths by a total of +143,900 over the year to March.

Adding in the natural increase of the population, therefore, we can see that New South Wales (+113,100), Victoria (+137,400), and Queensland (+83,300) are now the three main population growth hubs.

Interestingly, the growth in the estimated resident population of both Victoria and New South Wales last year was considerably higher even than previously thought, to the extent that I've had to recalibrate the chart scale to accommodate Victoria's gold-rush-like population boom. 

2 - Queensland in focus

Queensland recorded net overseas migration in the December 2017 quarter of just +1,489, but this rebounded to +11,642 in the March quarter - there's seasonality, of course, but this looks unusually volatile.

No matter, plotted below are the components of estimated annual resident population growth in the Sunshine State over the past two decades. 

As new inner city apartment starts slow to a crawl this means that some parts of Brisbane and south-east Queensland are now moving towards an undersupply of dwellings again, following several years of flat out construction rates. 

The smoother rolling annual figures show this more clearly. 

For a detailed breakdown of where people are moving to and why I recommend taking a read of Nick Behrens' work here.

The news is upbeat for Brisbane, recording its quickest population growth since 2012/13, a growth rate of 2 per cent making it once again one of Australia's fastest growing cities. 

Jobs challenge

The skilled vacancies data released by the Department of Employment yesterday confirmed two things.

First, just how poorly Brisbane has fared from a jobs creation perspective compared to the rest of the state since 2010, as denoted by the index reading of well below 100.

And secondly, that things are in positive territory again now for the state capital, with vacancies rising by 3 per cent over the year to August 2018 to 20,400.

Source: Department of Employment

With a number of infrastructure projects pending and underway, Brisbane should be able to ramp up employment growth over the years ahead. 

Roma Street Parkland, Source: Visit Brisbane