Missing bovine backside with a banjo

Cow's backside missed again

Another benign result for inflation for the third quarter of 2018, with the significant contributions mostly coming from the price of tobacco, fuel, and holiday travel, offset by the childcare subsidy.

The third quarter weakness was domestically driven.

More significantly the underlying trimmed and weighted measures showed that price inflation was even weaker than previously thought at 1.77 per cent over the year to June, and eased further still to 1.75 per cent over the year to September. 

With the past two quarters seeing such weak prints reported, it's hard to see how the core measures of inflation can get back to the implied target of 2½ per cent before 2021. 

This may be either a good or bad thing - or a bit of both! - depending on your perspective.

The bad news is that it hardly indicates a vibrant domestic economy and firing demand. 

On the plus side cost of living pressures are not high, and there is no urgency for interest rates to be hiked any time soon. 

By rights they should be cut with inflation dithering below the target 2 to 3 per cent range for going on three years, plenty of slack in the labour force, and broad money growth sagging to just 2.1 per cent.

But I think we all assume that the Reserve Bank will just sit pat.

Rents soft

Rental price growth was only 0.6 per cent for the year to September.

The main drivers of rental prices are Sydney (1.9 per cent) and Melbourne (1.8 per cent) due to the relative size of those two capital cities. 

Although the pace of Perth's slowdown has eased for five consecutive quarters, it's still been a rough few years with rental price growth in negative territory since 2015. 

Darwin also appears to be through the most acute of its declines, with rental prices 4.6 per cent lower over the year to September. 

The wrap

Overall, very few inflationary pressures and few signs of pricing power in evidence.

Normally such weak inflation would see interest rates lowered to fire up demand in the economy, but Lowe has implied that this won't be on the agenda unless there is deterioration in the jobs market.

In the meantime, sit back and hope for wages to go up.

Whether you agree with this approach or otherwise, that's what it is!  

IO cliff whooshes past

IO cliff update

I ran through ANZ's results preso for FY2018 on my Twitter feed, so there's no need to rehash that all here.

A couple of interesting points worth mentioning, though.

Firstly, arrears were quite benign, but there was a significant increase in Western Australia, and to a lesser extent the Northern Territory (click to expand the slides).

Source: ANZ

The increase relates to investors not homeowners, and given the improvement in the economy must relate to changed lending policies. 

If you believe in looking at leading indicators - money growth and building approvals, for example -  rather than lagging indicators such as the unemployment rate, then the pressing squeeze on credit is arguably now doing as much harm as good for financial stability. 

Possibly the most interesting slides revealed the large volume of early conversions from interest-only (IO) to principal-and-interest mortgages through 2017 and 2018.

With ANZ's flow of new IO loans at just 13 per cent for the September half to date this has smashed the stock of outstanding IO loans down to just 22 per cent of the home loan portfolio. 

Source: ANZ

The volume of contracted IO loan rollovers remains elevated for the next 24 months according to ANZ's note disclosures.

Hopefully they'll take the foot on investor throats a bit before then.

But if not then they'll barely have any IO loan assets left at the present rate of decline! 

Crayzee times indeed.

Dearth of public sector approvals

Public eye

It's interesting to look back in time to note how the public sector once built a good deal of the housing Australia.

That dynamic essentially dried up a couple of decades ago as construction was flick-passed to the private sector, although there was a temporary spate of public sector building during the financial crisis in order to stimulate the economy.

The wash-up from the Rudd stimulus aside, public sector approvals are now tracking at the lowest levels on record, essentially at a level to only replace stock obsolescence, but add nothing to the dwelling stock (click to expand the chart).

Australia's rental stock is now supplied by private landlords, while the Labor party is proposing to increase capital gains tax for investors (sorry, reduce the tax 'discount', lol), and snap off negative gearing benefits for prospective investors in established properties. 

Well, OK...good luck with that.

Meanwhile in Canberra the unhinged land tax grab moves seamlessly from the sublime to the socialist, with rent controls apparently now the latest proposed wheeze!

You'd think that chasing even more investors away from the ACT wouldn't be front of mind with the vacancy rate crashing to the lowest level on record at an excruciating ½ per cent.

Meanwhile Canberra has achieved the dubiously impressive mantle of ousting Sydney as the most expensive place in the nation to rent a house. 

Way to go.

Building work set to take a bath

Residential construction to fade

The lumpy unit approvals figures for Melbourne jumped back up from 1,333 to 2,841 in September, holding up the total building approvals result.

Sydney unit approvals for the month, on the other hand, were 45 per cent lower than a year earlier.

As I've written elsewhere previously, Melbourne is the one capital city with the potential to sustain high rates of apartment building over the next few years, though even this is now looking questionable in the current lending environment. 

Approvals around the traps

Approvals for both units and houses in Sydney are now tailing off sharply. 

For context, Sydney's population grew by more than 100,000 for the first time ever last year, so any pockets of 'oversupply' will only be a temporary dynamic as supply slows. 

Brisbane's rapid rate of apartment construction has long since decelerated, and the market has rebalanced in the Queensland capital as interstate migration and population growth picks up.  

Interestingly tighter finance conditions are now also impacting areas where there are clear rental shortages, with Hobart representing that trend as well as anywhere (though you might choose to cite any number of regional locations). 

Total approvals bounce a bit

Piecing it together there was a modest 3 per cent monthly bounce - from last month's plunge - to around 17,100 approvals in September, on a seasonally adjusted basis.

However, this wasn't enough to arrest the entrenched downtrend, with the trend in approvals now in a fairly sharp decline for both houses and units. 

The annual number of building permits remains robust at ~225,000, but with some big monthly numbers set to drop off this figure is heading towards ~200,000 soon enough. 

Moreover, many of these approvals will never see the light of day as projects are mothballed or cancelled, as evidenced by the forward-looking PCI sub-indices for apartments. 

Finally, tighter financial conditions are also now slowing non-residential approvals in Victoria, Queensland, and Western Australia, although commercial development remains as strong as an ox in Sydney. 

Asymmetrically committed

In summary, building work looks set to fall pretty much across the board. 

There's been some hopeful talk about the Reserve Bank 'normalising' policy, but with building approvals in decline and money growth at quarter-century lows, there's little realistic chance of that any time soon. 

If anything, expect inflation for the September quarter to miss target to the downside yet again in tomorrow's release, with the lack of faith in commitment to hitting the target...well, disturbing!

Stephen Kirchner argued in a much-discussed paper this week that low inflationary expectations have conditioned low wage growth, while citing research to suggest that lower interest rates have made little material difference to debt to disposable income ratios (quite logical when you think it through, especially after accounting for the increase in mortgage buffers and offset balances). 

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Last of all, a bit of love for the ABS, an institution that puts out hundreds of releases each year with seemingly little appreciation (indeed, everyone appears so quick to be critical!).

Well, we reap what we sow. 

Let's provide more funding to this vital function - rocket surgery it's not! 

Blowing away Schumpeter's gale

Worried about being overtaken by change?

Here's what to do!

Social butterfly

Aussie data dump

Fair warning, it's a huge week of news ahead for the Aussie economy.

The inflation print will rightly take centre stage, with a comfortably benign core result expected.

There appears to be a reasonable chance that the two-quarter annualised figure for core CPI will be just 1½ per cent, implying a further period ahead below the target 2 to 3 per cent range. 

So that's the main news to watch, because it has implications for monetary policy. 

But there's also building approvals, international trade, retail trade for Q3, private sector credit, manufacturing PMI, home values, export & import prices, and more.

Basically a whole lot more than can or should be discussed on a blog page.

You can get much more real-time reaction via my Twitter feed, as well as some thoughts on the stock markets, and, erm, football. 

And some good old-fashioned bantz too, of course.

You can also connect with me at Facebook, LinkedIn, and Instagram, and probably some other places as well.

Whassup. 

Weekend reads

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Click here to read the must-see articles of the week, including one from yours truly.

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Aussie rules

Lucky country

The Economist ran with a major lead story and a special report on Aussie rules this week, though probably not the kind that you're thinking of:

'Rising incomes, low public debt, an affordable welfare state, popular support for mass immigration and a broad consensus on the policies underpinning these things—that is a distant dream in most rich countries. 

Many Western politicians could scarcely imagine a place that combined them all. 

Happily, they do not have to, because such a country already exists: Australia.'

Naturally this led to many a snide online comment about the jinx of The Economist, and so on.

I might have even partaken a little myself, admittedly. 

However, it's not the first time Australia has been featured in the publication for its prolonged outperformance, now being a record 27 years and counting since the last Aussie recession. 

Source: The Economist

Lest I felt the need to make any further comment, Lord Pascoe has already done so at The New Daily.

Pascoe notes Australia's low public debt which accounts for its AAA-rating, the astonishing sustained growth in Australia's GDP, and the fast growth in the real Australian median wage through the resources boom years (as well, of course, as our ever-expanding propensity to whinge about it all).

Not a bad combination, when you look at it (except for the whining part, that is). 

No wonder Australia has the wealthiest adults in the world and is 'arguably the most successful rich economy.'

Notes The Economist:

'Luck has had a hand in these feats, to be sure. Australia is blessed with lots of iron ore and natural gas, and is relatively close to China, which hoovers up such things. But sound policymaking has helped, too.'

This is a tad harsh and a little bit over an oversimplification, one feels. 

Fair shake of the sauce bottle...we have coking coal too!

AFG sees holding pattern (record mortgage size)

Tighter for investors

Australian Finance Group (AFG) reported that mortgage lending through its network of brokers is in a 'holding pattern', in its latest market release.

I've often found that if you want to understand what's happening - and is going to happen - in housing, the best starting point is mortgage brokers, or those with an in-depth understanding of lending standards and trends in lending flows. 

I recently checked in with the undisputed king of LinkedIn content, Chris Bates of Wealthful.

One of his observations was that with investors finding it increasingly difficult to get finance across the line, a consequence of this might be prospective buyers tipping all their borrowing capacity into a place of residence or family home.

There might be some decent evidence to support the Mr. Bates thesis here.

The total dollar value of AFG lodgement volumes was a bit under 5 per cent lower than a year earlier, reflecting tighter lending standards.

Record mortgage size

Yet the average mortgage size lodged through the county's largest aggregator zipped to a record high $509,736 in the first quarter of the new financial year. 

AFG believes that this is likely due to the reduction in lending to investors, with investor market share down from 40 per cent at the peak in 2015 to 27 per cent over the most recent quarter. 

The market is now being driven by aspirational upgraders, while there may also be fewer apartments now settling, so a change in composition might have played a part in mortgage sizes too. 

The average mortgage size was driven by record highs in New South Wales, which recorded a huge lift to $626,738, with Victoria and South Australia also hitting fresh highs. 

Note that the average mortgage size written through third party AFG brokers has always been higher than the average for all mortgages written as reported by the ABS. 

The first homebuyer market share of 14 per cent was the highest for AFG since the equivalent quarter five years earlier, while the market share of interest-only loans was steady at a fairly benign 19 per cent. 

The interest-only loans that are still being written are increasingly processed through non-major lenders, as borrowers perhaps seek an escape valve. 

The major banks clawed back a little market share to 59.8 per cent, but this remains well below the peaks when a share in the 70s range was common, according to AFG's latest release.

Investors were for some time driving the housing markets.

Now it's all about homebuyers again - and they've got more firepower now they aren't investing. 

Resi land values fell in FY2018

Land values ease

It's not been too often that you get to say this, but the estimated value of Australia's residential land fell over the 2018 financial year.

The total value was down just by a whisker from $4.84 trillion to $4.83 trillion, according to the ABS estimates released earlier today.

Firesale alert, indeed!

Although there were material increases in Tasmania and the ACT, these were offset by a 3 per cent decline in the value of residential land in New South Wales.

The value of NSW residential land, not adjusted for population growth, remains 104 per cent higher than a decade earlier, before you get too excited. 

Despite the slight decline the total estimated value of all Australian land - including commercial, rural, and other land - was marginally higher at $5.92 trillion (for context it first went past $1 trillion in 1999). 

The increase was mainly thanks to strong performance in the value of commercial land in New South Wales and Victoria. 

Rural land values also performed strongly in FY2018, increasing by 13 per cent in total - despite adverse weather conditions - with the largest increase recorded in New South Wales. 

Melbourne accounts for fall in unemployment

Melbourne employment boom

There was a big drop in the number of unemployed persons in September, with the total dropping from 695,500 to 645,500 in the month, in original terms. 

On a smoother annual average basis, you can see that this continues a steady improvement observed over several years. 

Of course, the population of Australia is growing quickly, so the metric most commonly quoted is the unemployment rate, which dropped from 5.3 per cent to only 5 per cent in September on a seasonally adjusted basis. 

This was the lowest level in nearly 7 years.

Melbourne booming

The recent improvement has largely been due to booming construction and other sectors in Victoria. 

The monthly unemployment rate in Greater Melbourne is now posting huge monthly declines, down to just 4.39 per cent in September (way down from 6.22 per cent only a year earlier). 

In terms of the number of unemployed persons, there has been a huge drop from 171,900 to 118,800 over the year. 

In Sydney, the monthly unemployment rate is now cyclically very low at just 4.17 per cent. 

The smoother annual average figures show that Brisbane and Perth still have unemployment rates of about 6 per cent - indicating much slack - while the southern state capitals of Adelaide and Hobart have posted better results in recent months. 

The annual average chart shows the continuing improvement for Sydney, and especially Melbourne of late.

Finally, S&P reported that prime SPIN mortgage arrears ticked down from 1.38 per cent to 1.36 per cent in August, largely in line with expectations. 

Arrears are nevertheless higher than a year earlier, presumably due to interest-only loan resets. 

Recently reported figures have reported a fall in median dwelling prices in Melbourne, but I doubt there will be too much concern there yet from policymakers looking at these numbers for Victoria. 

Zoltar!

QBE's latest forecasts predict that Sydney dwelling prices will decline by 3½ per cent in 2019, before rising again from 2020 due to pent-up demand.

QBE expects Brisbane prices to rise by 11.3 per cent by mid-2021, and Perth prices to rise by 5 per cent over the next few years. 

Capital city land price boom continues

Land prices up another 16 per cent

Property transaction volumes have been crippled in recent months.

But one key dynamic has not changed.

The capital cities continue to create hundreds of thousands of the most favourable employment opportunities...and there still ain't any more well-located land.

Capital city vacant land prices increased by a massive 16 per cent to a record high of $336,124 over the year to June 2018, as supply fails dismally to keep pace with demand. 

This was much faster than the 5 per cent increase for regional lot values. 

Sydney may still have the highest land price at $477,250 at the end of the June quarter.

But Melbourne recorded faster growth, with the median land price per square metre exploding another 27 per cent higher higher over FY2018. 

Sydney's median vacant land price per square metre is now $1,100, ahead of Melbourne at $885. 

From the HIA:

Upwards pressure on capital city land values will continue:

Construction costs are also rising faster than inflation.

And accordingly, the future price of new detached housing will be "inevitably higher" according to CoreLogic analysis.

Auction strangler

Stamped out

Reduced lending flows continue to stymie property purchases, auction volumes, new car sales, and stamp duty and transfer receipts. 

Total annual duty transfer receipts have been holding up due to some large non-residential transactions and off-the-plan settlements from the death throes of the apartment construction cycle.

But both the residential receipts and the leading indicators are now heading to Hades at warp speed, with the most timely available figures suggesting that transaction levels for established property will be at cyclical lows soon enough, if they're not there already. 

The New South Wales economy has been tracking very well in recent times. 

But the key leading indicators are weakening by the month.

Building permits and dwelling starts are dropping away, and money growth is at quarter-century lows.

Australian jobs attracting Kiwis again

Kiwis heading to Oz again...gradually

At the peak of Australia's mining boom Australia was attracting more than 50,000 permanent and long-term migrants per annum from New Zealand (and 40,000 on a net basis). 

Australia's economy was really booming back then, and the lure of a labour shortage and higher pay was too strong to be resisted. 

But then came the resources construction downturn and steadily rising unemployment for Australia, while New Zealand managed to turn its economy around following its post-financial crisis malaise. 

There was also the Christchurch factor. 

Only a visit last year to the city helped me to appreciate the sheer potential scale of the rebuild operation for what is a relatively small country and population, and this may have played a role in attracting some construction workers home to New Zealand. 

Only now is Australian beginning to close the unemployment rate gap, with our seasonally adjusted unemployment falling rate falling to a near 7-year low of 5 per cent, while at the last count New Zealand's unemployment rate (measured quarterly rather than monthly) ticked up a notch to 4½ per cent. 

Wages growth has been similarly sedate in both jurisdictions.

Employment beckons Kiwis across the Tasman

Perhaps more significant than the unemployment rate, the latest job ads figures in New Zealand point only to a moderate period ahead for hiring, whereas the official ABS figures in Australia have seen job vacancies soar to record highs, especially in Sydney and Melbourne.

Resources investment is also picking up a bit in Australia again. 

It's still early days, of course, but you can see the impact these trends are having on migration patterns, with the net flow between the two countries now swinging back in favour of Australia since early 2018.

I have belatedly noted that Bloomberg ran a similar article at the end of last week, wherein they note a considerably higher recent exodus from New Zealand to Australia. 

It's hard to work out which numbers they're quoting from Statistics NZ.

But either way the trend is similar: Kiwis are heading to Australia again. 

Auctions fizzle

Auctions fizzle out for 2018

Very cagey auction activity in Sydney, with a preliminary clearance rate of only 44.5 per cent (more like somewhere in the thirties come final). 

The median auction price of a sold house was well down from a year earlier at $1,285,000, reflecting reduced borrowing capacity (mainly for investors rather than homebuyers). 

For units the median price of property sold at auction was up from $900,000 a year earlier to $940,250.  

But still very muted activity levels overall.

Melbourne's clearance rate is also now well under 50 per cent. 

ALP in the ascendancy

With the Coalition roundly punished by the electorate in the Wentworth by-election for their machinations and tanking to a minority government in the process, property market participants will need to weigh up the potential impacts of changes to negative gearing legislation.

I'll post an online workshop on this very subject this week, so keep an eye out for that. 

Underutilisation falling...

Tightening

Thanks for the thousand or so Tweets, messages, and pingbacks about record underutilisation and the like - a pleasure as always! 

Yes, it's a problem.

No, it's not been getting worse.

Volume measures - reported quarterly on an original basis - have consistently improved year-on-year since 2014...through 2015, 2016, 2017, and 2018 year-to-date.

All publicly available information from the ABS:

Yes, there is more work to be done (literally so in this case!).

The Reserve Bank has noted the same patterns, but still believes that the unemployment rate is the key measure, and that's at the lowest level since 2012.

No, this won't be reported in left-leaning media, nor for that matter whichever 'recession' blogs you may care to mention.

C'est tout. 

Cheers!

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Very low preliminary auction clearance rates this weekend, under 50 per cent for Melbourne, and just 44 per cent for Sydney.

It'll be a long, slow run into Christmas from here this year. 

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.  

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.