Pete Wargent blogspot

PERSONAL COACH | PROPERTY BUYER | ANALYST

'Must-read, must-follow, one of the finest analysts in Australia' - Stephen Koukoulas, ex-Senior Economics Adviser to Prime Minister Gillard.

'One of Australia's brightest financial minds, must-follow for accurate & in-depth analysis' - David Scutt, Markets & Economics Editor, Business Insider.

'I've been investing 40 years & still learn new concepts from Pete; one of the finest commentators' - Michael Yardney, Amazon #1 bestseller.

'The most knowledgeable person on Aussie real estate & most comprehensive analyst I follow in Australia' - Jon Tepper, Variant Perception, 2 x NYT bestseller.

Saturday, 20 October 2018

Who you gonna call?

Send for the PPT!

Halloween is still just around the corner, but Chinese stocks are looking more than a bit spooked right now. 

The index was whacked down to 4-year lows this week.

This has included heavy losses for the so-termed 'BATS' stocks (Alibaba, Tencent, and, um, those other ones...), despite Alibaba still recording enormous year-on-year sales growth.


Taking a longer-term technical perspective Chinese stocks have been in a two-decade uptrend.

Until now.

And when it comes to China this can only mean one thing.

It's time for some soothing messages...and to send for the Plunge Protection Team!

Swiss cheesed!

Swiss ousted as world's richest

If you were ever looking for evidence that money alone can't make you happy here it is: Credit Suisse confirmed that Australian adults are now the wealthiest in the world. 

While for obvious reasons Switzerland edged Australia into second place in terms of mean wealth per adult, the median wealth per Australian adult beat out all comers at US$191,453 this year. 


Switzerland's average wealth per adult of US$530,240 remained well ahead of Australia in second place at US$411,060 (still placing Australia well ahead of the United States, Japan, Canada, Norway, Singapore, New Zealand, France, Belgium, Netherlands, and the United Kingdom). 

1.32 million Australians had a net wealth of over US$1 million - in spite of a weaker currency than we had at the peak of the resources boom - while 1.6 million Aussies are within the world's richest 1 per cent of households. 

The number of millionaires in Australia is expected to increase by more than 40 per cent over the next five years. 

Resilient Australia: 'low inequality'

As everyone is so lightning fast to point out, property prices have played a significant part in Australian household wealth, although gross debt is only 19 per cent of assets. 

It's also common to suggest that Aussies have benefited unequally - which, of course, is always true.

Yet Credit Suisse reported a Gini coefficient of just 66 per cent, while only 6 per cent of Australians have a net worth of under US$10,000, which is remarkably (the UK figure is 18 per cent; in the US it is 28 per cent). 

Australia has 'low inequality' according to Credit Suisse, while the proportion of Aussies with a net worth above US$100,000 is seven times the world average.

Apart from its abundance of natural resources, the other real ace up Australia's sleeve has been its compulsory superannuation system, which has built up super pension wealth of A$2.7 trillion up to the end of FY2018, with increasing contributions to come over future financial years.  

Friday, 19 October 2018

Weekend reads

For the must see articles of the week - click here.

Victoria's secret: jobs

Victoria's secret: jobs

As promised, a quickie 45-second look under the hood at the latest jobs figures.

No wonder Melbourne's population has been booming, as its 'everything' construction boom saw the creation of 48,500 new employed persons on a net basis over the third quarter of the calendar year. 

So much for immigration limiting opportunity, Victoria is really firing it up (note to ScoMo's social media team: do not run with a Busta Rhymes gif).


This helped to keep trend annual employment growth at 290,600 or 2.4 per cent, well ahead of population growth at about 1.6pc per cent. 

Pleasingly, full-time jobs have accounted for about 7 in 10 of the new jobs, on a net basis. 


There has been a corresponding marked decline in the trend number of unemployed persons in Victoria of well over 40,000 over the past year as the labour market clicks into gear. 

Three decades earlier the population of Australia was 16.6 million, and today it is more than 50 per cent larger at a tick over 25.1 million.

The good news is that there aren't 50 per cent more unemployed persons, largely thanks to the improvements recorded lately in Sydney and Melbourne. 


A Federal Budget surplus is a shoo-in based on these figures, likely awarding the Coalition one final Hail Mary pass to turn around their abominable performance in the polls. 

Penultimately, the trend rate of youth unemployment continues to improve gradually.


Last of all, and for my money the weakest part of the release, the annual growth in hours worked was muted to say the least, now sitting below 2 per cent. 


Too many box-tickers, perhaps!

Overall, jolly good numbers driven by Melbourne's population, construction, and now employment boom.

Unemployment plunges (as flagged...)

Unemployment plunges

Well, whaddya know? Don't say I never offer any value on my free news feeds :-)


The outgoing sample rotated out and the number of unemployed persons nosedived by a massive 37,200 to 665,800.

Debelle dropped a hint-bomb this week that published job ads figures have potentially been understating the strength of the labour market.

As consistently suggested on this blog business vacancy surveys have been pointing towards an unemployment rate heading to 5 per cent (and quite possibly well below). 

And, as flagged, in one fell swoop it was so, with the unemployment rate plunging from 5.3 per cent to a 77-month low of just 5 per cent in September 2018, the lowest reading since April 2012. 


Of course there then followed another fascinating case study in observers seeing what they want to see rather than what was actually reported.

If you still believe that the trend unemployment rate was flat you probably need to seek professional help rather than read anything further here, but here's the chart zoomed in for you anyway.


I'll look at the (full-time) employment gains in a separate post, but New South Wales has led the way over the past year with stunning annual employment growth of nearly 3½ per cent, sending the state's seasonally adjusted unemployment rate plummeting all the way down to 4.4 per cent. 

That's impressive, but the rate of improvement has been greatest by far in Victoria, where the seasonally adjusted unemployment rate dived again to just 4½ per cent. 


The smoother trend figures are plotted below.


Queensland has dithered, with its seasonally unemployment rate at least falling from 6.3 per cent to 6 per cent in September. 

But with Brisbane belatedly kicking off a suite of infrastructure projects and coal and LNG royalties soaring the good times could soon be rolling again in Queensland too.  

Altogether now: but the numbers are wrong!

Thursday, 18 October 2018

Hello Budget surplus?

Gosh. 

The 62% Fe Fines iron ore spot price is now strapping on the booster rockets, being up by some 16 per cent since early July.


At US$73.36/tonne the spot price for iron ore is at the highest level since March 7, with the Aussie dollar also nestling lower. 

Dalian futures strong. 

---

The Aussie jobs report for September is due out at 11.30am Canberra time. 

Debelle argued yesterday that the job advertisements figures may understate the strength of job openings, and more weight might be attributed to vacancy surveys.

The outgoing rotation group this month has a lower employment-to-population ratio than the average for the sample as a whole. 

Therefore despite the massive 44,000 jump in employment last month, there may be some upside risk to today's report. 

Wednesday, 17 October 2018

Devils & Details: Live and Unleashed!

Devils unplugged

Next month you will have the opportunity to see a handful of Australia's brightest financial and economic minds speaking at a live event at The Ivy in Sydney's financial district. 

I'll also be presenting, lol.

Click on the back of Colgo's head below for details!


Alongside Colgo and Scutty, here's some of the panel...


Awesome panellists - as well as Koukie, Whelan, and Michalakis - so it'll be a great event.

Come for the canap├ęs and adult beverages, stay for the bantz.

Tickets $50 - look forward to seeing you there!


Tourism is still booming, but not just from China

Swinging Irish

I recently saw another spurt of social media debate about whether Australia is economically speaking 'like Ireland'.

I must confess, I didn't read any of the content - in the two decades since I first came to Oz I've found that reading such bogus international parallels and fighting wars from a dozen years ago has done nothing worthwhile for me (but surely, to each their own!).

Instead, I prefer to look at and interpret the figures myself.

And here's what I note: the Aussie economy is presently growing at about 3½ per cent.

And the economy is expected by the Reserve Bank of Australia (RBA) to grow by another 3¼ per cent next year.

And growth is projected to be another 3 per cent the year after that.

So that's an economy that's growing at about 10 per cent in real terms over three years if the forecasts prove to be anywhere close to the mark.

Now, I've heard all these Armageddon scenarios over the years.

If the turd really did hit the fan - which according to money markets is priced as 'unlikely' - then Australia can cut its own interest rates close to zero, it can engage in its own quantitative easing, and it has its own free-floating currency, which acts as an automatic stabiliser.

Indeed, the Aussie dollar has already turned a neat trick in dropping back to ~71 US cents, which I believe is quietly leading us into a national income boom. 

We also have a budget that will be back in surplus in a matter of months (if it's not there already), so we have massive potential firepower in the form of fiscal stimulus if it's ever called upon for any reason. 

Another thing which will likely prove to be a furphy is the widely-spruiked massive oversupply of properties, which in my opinion outside a few pockets will prove only to be a temporary state of affairs (with most properties constructed in Australia being pre-sold rather than built speculatively). 

Record arrivals into Australia

The ABS released its latest arrivals and departures figures today, which showed annual permanent and long-term arrivals tearing higher again to 821,660, which is up by 6 per cent from a year earlier, and the highest figure on record.

In Australia, migrants tend to settle in three places: Greater Sydney, Greater Melbourne, and south-east Queensland, in that order.

So factor this chart into those dwelling oversupply calculations.



The good news is that both migrants and the incumbent population are finding jobs and unemployment has fallen very low in Sydney and New South Wales, and has recently been falling very fast Victoria and South Australia. 

The RBA's Debelle noted in a speech yesterday that job ads figures are losing their relevance because they don't pick up new recruitment websites, internet adverts on LinkedIn or other social media, or on large corporation websites.

According to more reliable business surveys, job vacancies are now at the highest level on record. 

So employment is expected to continue outpacing population growth, unemployment is expected to fall, and wages growth is now picking up again across the board. 

Tourism boom

The other demographic factor that is property-positive is the epic boom in tourism, with total seasonally adjusted short-term arrivals jumping to a record 794,400 in August 2018, well up from an upwardly-revised 774,100 in July.

Total annual short-term arrivals are at now a record 9.15 million, leading to a surge in Airbnb use and other short-term property portal lets. 

Queensland has rediscovered its mojo, with annual arrivals rising at a solid lick to 2 million and tourism having increased since the Commonwealth Games (however you choose to interpret that). 


Chinese visitors are now tracking at ~125,000 per month (or ~150,000 per month inclusive of Hong Kong), but the growth in visitors is now coming from other sources, such as India and south-east Asia. 


And finally, student movements also hit a record high in August.


The wrap

For all the negativity within Australia, globally it's still seen as a place to be.

And, in fact, this is now proving to be the case more so than ever before, not less. 

Of course, it's clear that in some second-rate areas there might be an overhang of undesirable apartments, which you'll get at the peak of a construction cycle.

It's worth remembering that migration into Australia is highly seasonal, and the next busy months won't be until January and February 2019. 

But the supply of well-located land remains unchanged.

---

Edit

Henry Sherrell, formerly a policy analyst at the Migration Council and of the Department of Immigration, a Research Officer into Labour Mobility and Migration at the ANU, later of the Lowy Institute, and most recently of the Parliamentary Library - I think that's roughly right, anyway...basically he's written a lot of submissions and knows a LOT about migration trends - out of interest requested an overlay of estimated net overseas migration (which slowed towards the end of 2017) and long-term arrivals (which have blown higher in 2018).

As you can see below, up until the end of 2017 the patterns were very similar.


And since the end of 2017 long-term arrivals has taken off.

The net overseas migration figures lag significantly and haven't been released yet beyond March 2018 yet. 

My reading of this is that it may imply an acceleration in net overseas migration is happening right now in 2018. 

Down, down...share prices are down

Shareholders blowing their groceries

But for a dime for each time I'd heard that if Buffett invested in Aussie stocks he'd own Woolies.

I'd be almost as rich as the big fella himself!

I haven't much followed that logic.

After all, Wazza could buy Australian shares if he wanted to, and...ah, never mind.

On a personal note, I must confess that I've never liked Coles and would choose Woolies as a place to shop in preference any day of the week. 

But as a Brit raised on Waitrose, Sainsbury's, and M&S I was never particularly enamoured with either of the main Australian brands.

They've generally offered ordinary choice and quality, at not very ordinary prices. 

It's been a long past 11 years for Woolies shareholders with the share price down from around $35 to $27.80 or so at the last count. 

The widely-spruiked 'Buffett stock' meme gathered a serious head of steam in 2014, before the price crashed by 45 per cent as the company ran into trouble.


The journey has been far from a total washout, with dividends arcing steadily higher over the years. 

But then in 2016 Woolies posted its first loss as a listed company of $1.2 billion, leading to the final dividend to long-suffering shareholders for that year being cut by 54 per cent (and the annual dividend slashed almost in half), with a recovery since underway. 


Amazon cometh

The reason this is now of interest - to me at at any rate - is that Amazon Australia is now launching itself forth into grocery sales, which is set to put further pressure on to the margins of Coles and Woolies.

And with Amazon fresh food to follow in due course, there will also be the value chain model in the form of Aldi to contend with.

To date, the product range offered by Amazon isn't large, but their broader expansion into Australia to date has been both aggressive and impressive.

This also appears likely to maintain downward pressure on the rate of consumer price inflation. 

As an aside, Buffett did invest in a supermarket chain some years ago - Tesco - and lost a motza as he 'thumb-sucked' while the company was exposed for its accounting scandals.

The all-too-comfortably profitable British supermarket businesses were taken apart by Lidl, Aldi, and other disruptions.

Discl: indirect holder. 

Canberra/Hobart turning into rental disaster zones

Rentals evaporating in some cities

Despite a record investor boom since 2013 vacancy rates are now falling as investment loans are squeezed harder, with the national rental vacancy rate down from 2.3 per cent to 2.1 per cent over the year to September 2018 according to SQM's latest release. 

In absolute terms, that represents a decrease from 72,955 to 70,172 rentals. 

Every month I'm bombarded with theoretical constructs about how Canberra's land tax experiment won't impact the rental market...and every month the rental vacancy rate falls further, now down from about 2½ per cent to just 0.6 per cent since taxes were initially all but doubled. 

I guess the idea was that people in the ACT earn high incomes so homeowners can afford to pay exorbitant taxes, but unfortunately ludicrously high taxes don't discriminate and it's turning out to be a disaster (especially for asset-rich but income-poor homeowners, and now for renters too). 

The ABS rental CPI index has more lag than my nanna's boiler, but more timely industry asking rents indices are now pointing to double-digit rental price increases for the nation's capital. 

Indeed, SQM Research's asking rents index shows the median asking rent for houses increasing by 31½ per cent over the past three years.

Plotted below are the capital city vacancy rates reported by SQM Research on a 6mMA basis so that you can see the trends (click to expand):


Ouch.

Hobart rentals evaporate

Hobart has increased in popularity over the past few years, but with banks either dithering or knocking back investor loans the rental stock has now totally evaporated.

With median asking rents in in the Tasmania capital city already up by 29 per cent over the past 3 years new rental supply should be abounding.

But instead it has completely crashed to sit close to the lowest level on record for any Australian capital city at just 0.4 per cent. 

Asking rents for houses in Hobart were up by more than 6½ per cent over the past quarter alone. 

With only 108 (!) rental vacancies now remaining - please see the definition of a rental vacancy before emailing me - Hobart rents are now destined to increase by more than 50 per cent through this cycle.


Meanwhile kamikaze commentators continue to call for tighter lending criteria for investors and scrapping negative gearing.

Before you pile in to Hobart real estate too late in the cycle remember that small markets can be more volatile and building approvals in Hobart are just coming off 99-month highs

I suppose a supply shock is one way to get consumer price inflation somewhere closer to the target range, with some forecasters already anticipating another dismal 1¾ per cent CPI print next time around. 

Adelaide is heading in a similar direction, with the vacancy rate now down to just 1.1 per cent. 

Brisbane has considerably more breathing space following its preceding record apartment construction boom, with the vacancy rate down far more comfortably from 3½ per cent to 2.9 per cent over the past year. 

As an interesting aside, check out how seasonal Melbourne's rental market these days as population flows become more fluid, partly due to more international students.


Christmas could be interesting this year.

Sydney elevated

The only major city that's seen a meaningful increase in rental vacancies over the past year is Sydney at 19,469 or 2.8 per cent (largely due to investors that bought off the plan a couple of years ago). 

Unfortunately for these investors that bought new at inflated prices they'll probably be in negative equity as they settle. 

While most of the city doesn't have especially high vacancy rates - for example, the Canterbury-Bankstown region sits only at 2.2 per cent - some parts are experiencing a surge of completions, and thus very high rates of vacancy, including most notably the Hills District.


19,469 sounds like a lot for Sydney vacancies, and it sort of is - arguably about 16,000 would be a rental market in balance - but let's face it, at the present rate of population growth this could turn around into a rental shortage on a dime if investors pull up stumps.

The summer months tend to be much busier in Sydney and Melbourne these days, so let's see what happens over the festive period.

Finally, the coal price bust and subsequent super-boom has seen the vacancy rate in the Hunter Valley tumble from sky-high levels in 2015 to just 1.3 per cent.

There could be an interesting twist in the tail for the coal-mining towns that took such a hit in the aftermath of the resources construction boom.

The coking coal price has burned up into the stratosphere at $215/tonne (or about A$300/tonne) which is huge for Queensland. 

6 rules for wealth creation (podcast)

And here they are.


Enjoy!

Monday, 15 October 2018

Times are changing

Wages growth returning

Employment growth has continued at a rapid 2½ per cent pace over the year to August 2018.

So fast, in fact, the Federal Budget seems set to be back in surplus imminently. 

Quite a shock.

The jobs data will likely be the most interesting news of the week ahead.

The market median forecast sees +15,000 new jobs created on a net basis, and a seasonally adjusted unemployment rate steady at 5.3 per cent.

TD has gone in with a 5.1 per cent forecast, while the high range forecast is for +30,000 jobs created.


Source: Bloomie

Punchy indeed.

Such a result would really set the cat among the pigeons. 

The unemployment rate in New South Wales already plunged to just 4.7 per cent in August, while in Victoria the rate dived to only 4.8 per cent.

The participation rate in New South Wales has been pushing out the highest ever levels, driven by pulsating trends in female employment. 

The labour force figures are due for release on Thursday morning.

---

After a 'lost decade', UK wages growth is finally accelerating again, with the growth in regular pay excluding bonuses up to 2.9 per cent for the three months to July. 

The jobless rate in the UK is down to just 4 per cent - it hasn't been lower since 1974-5.

Saturday, 13 October 2018

Gone to the dogs

How to beat the average market return.


HIA not happy...again

Ease the squeeze

From a somewhat spooked Housing Industry Association:


Source: HIA

Housing finance was weaker in August

Housing finance squeezed

Total housing finance was lower as expected back in August at $30.67 billion in seasonally adjusted terms, well down from the peak of above $34 billion a year earlier. 


The Reserve Bank of Australia posted some useful insights on household finances, financial stress (or rather the lack of it), and the impact of tighter lending standards on loan sizes

The RBA doesn't always help itself when citing very old data, but made some handy insights on borrowing capacity, specifically noting how most loans are made significantly below borrowing capacity.

In the surveyed figures only about 13 per cent borrowed 90 per cent or more of the maximum amount potentially available, while some two-thirds borrowed only 70 per cent or less of their capacity (thereby implying that tighter lending standards only impact some borrowers). 

This was to some extent borne out by the housing finance data, with average loan sizes having continued to rise for owner-occupiers to be significantly higher than a year earlier, including in all three of the most populous states. 


The borrowers most likely to be materially impacted by tighter lending standards include portfolio investors, and this is also reflected in the totals for investment loans. 

The monthly trend result for investment loans has fallen from $14 billion at the 2015 peak to $10 billion, suggesting that the best performing properties are likely to be those actively sought by homebuyers (and the worst, investment units designed primarily for leasing). 

More interest-only loans were reset in the third quarter.

Non-banks have been picking up more business, as expected.


With construction loans and the number of new dwellings financed now in decline new supply will be dropping off in time.

First homebuyers continued to account for about 18 per cent of new home loans, partly driven by incentives.

Finally, as for the state level figures...another time, perhaps.

Must see articles of the week

Weekend reads

Week auction clearance rates in Sydney this week.

Check it out here at the weekend reads.


Subscribe for the free market commentary here.

Friday, 12 October 2018

Tug o' war

Tightening tantrums

In the US the S&P 500 took another bit of a shellacking yesterday, down by 3.3 per cent, taking the index all the way back to where it was, erm, a few months ago. 

By my calculations that makes it 23 times that we've seen a correction of 5 per cent or more since the market lows of Q1 2009.

That didn't stop the experts coming out in force to explain the move (after the event, naturally!).

Whether this proves to be the big one...well, who knows?

Tech stocks have taken some of the bigger beatings, having previously been bid up very aggressively, including stocks such as Twitter and Netflix.  

The NASDAQ has retreated from above 8,100 at the end of August to 7,422.


All eyes will be on the markets at the open today, then, though a softer than expected inflation result put stock futures back on an even keel.

The bigger picture is that there's now a tug of war underway between equities and bonds as monetary policy is tightened. 

Rising bond yields have captured a lot of attention, including Down Under, although for all the hype mortgage rates are still quite widely available in Australia from around 4 per cent.

---

Update: the US stocks rout continues in late trade.

The NASDAQ was down another 1.12 per cent to 7,338, the S&P 500 down another 1.24 per cent, and the Dow Jones was down another 2 per cent (taking its 2-day losses to 1,300 points).

In Australia, ASX 200 futures are pointing to an open around 5,800...another beasting ahead.

So, a clear-cut winner in today's pull! 

Thursday, 11 October 2018

Sydney cranes deliver a surge of units

Supply arrives

All those Sydney cranes pumped out a surge of apartments in the second quarter of 2018, with 11,200 attached dwelling completions across the state in Q2. 

This has already been reflected a jump in vacancy rates from 2.3 per cent to 2.8 per cent in the second quarter of the calendar year.

At the suburb level you tend to see these spikes when a surge of completions comes online at the same time - with a flood of landlords letting identical units - and it can take a little while for the stock to be absorbed by the rental market. 

We've seen this already several times through this cycle in individual pockets, but not on a city-wide level to this degree. 


These figures lag somewhat and relate back to the period earlier in 2018.

But according to the dwellings under construction figures, apartment completions are likely to remain high for at least the remainder of 2018 before they ease back.

Attached dwelling commencements in Sydney peaked in December 2016, and have pulled back since, so the new supply will slow soon enough.

The population of Australia will likely increase by around 4 million over the next decade, with Greater Sydney likely to swell to well beyond 6 million - just to put these numbers in a bit of perspective. 


Wednesday, 10 October 2018

Melbourne holds up building activity

Dwelling starts ease

New seasonally adjusted detached house starts were solid in Q2 2018, holding at above 30,000, while new attached dwelling starts declined by 7 per cent. 

For some texture, marked at Figure 1 is what happened last time the negative gearing rules were quarantined, with quarterly dwelling starts collapsing from above 39,000 to 27,800 before the legislation was quickly reversed in a panic.

With foreign investors now effectively barred from buying by high surcharges and domestic investors unlikely to buy new given the diminished resale market, one might anticipate a similar outcome this time around (click to expand the images).


That new apartment starts held up at historically high levels over the past year is now almost entirely thanks to Melbourne, with Sydney and Brisbane pulling back from their respective peaks. 


Some 39,000 dwellings were parked as approved but not yet commenced, with more than half of these being in New South Wales (mainly units in Sydney). 


Melbourne carries the torch

We can expect to see more apartments and townhouses under construction these days due to higher absolute rates of immigration and maturing capital cities.

Even still, for the period from April to June this year the number of attached dwellings under construction was still tracking at very high levels. 

New South Wales is slowly grinding through its backlog, while for Queensland the construction downturn is now largely complete. 

In Victoria, on the other hand, the number of units under construction continues to rise, mirroring population flows. 


Overall, then, there were still some 227,000 dwellings under construction as at Q2 2018.


These will be nervous times for those that bought off the plan a couple of years ago.

The Sydney and Melbourne markets then were stronger than under today's tighter lending standards.