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Saturday, 21 September 2019

Weekend reads

Must see articles

This week: a look at population growth, and the biggest auction weekend of the year so far.

See here or click the image below:

By the way - you can subscribe for the free podcast here!

Friday, 20 September 2019

Is this a V-shaped recovery?

V-shaped bounce

For parts of the housing market, maybe so.

See here for more (or click the image below):

Mapping the death of the construction boom

Apartment gluts

Quarterly dwelling starts fell to just 43,000 in the first quarter of 2019, down from more than 58,000 a year earlier. 

We don't yet know the figure for the June quarter of 2019, but given it was election time, I expect the figure will have cratered even further.

Now we have some more up-to-date population estimates, let's take a quick look around the traps at dwelling supply versus underlying demand.

Of course there is much more to housing demand than simply population growth, but it's a decent proxy over time. 

In New South Wales there was a long period of under-building from 2006 to 2012, followed by a veritable starburst of new apartment buildings.

Population growth has accelerated over the years, and unit starts are only now crashing lower - overall, of all the cities Sydney has the biggest apartment overhang to work off. 

In Melbourne, recent population growth is a little under-counted, and the pace of construction has remained by and large in line with the monstrous rate of headcount growth.

I expect to see a rental shortage to transpire here in time:

Queensland has a higher ratio of population growth to dwelling starts than either of the two most populous states, and the Brisbane rental market has been steadily tightening for a couple of years, after a wild period of over-building which peaked in 2016. 

Interesting trends.

With both finance and apartment pre-sales now so much harder to come by, new dwelling starts may well fall by about 60,000 per annum from the peak. 

Glitch in the matrix

Population growth still ~400,000

Australia's estimated population growth ostensibly 'slowed' to +119,000 in the first quarter of 2019, apparently bringing the annual pace down to +389,000. 

However, upon closer inspection this was partly due to further processing delays for births in Victoria, which accordingly reduced estimates of the natural population increase. 

For all the noises about slowing permanent migration to Australia, including 'temporary' migrants net overseas migration actually accelerated again to +250,000 over the year to March 2019. 

Some clever sleight of hand there, though I doubt the congested capital city electorate is too much fooled! 

Net overseas migration shifted a little more towards Queensland and Western Australia over the year to March, despite being still heavily dominated by immigration to Greater Sydney and Greater Melbourne. 

Tasmania attracted +1,000 newly immigrated Aussies in the first quarter, too, which is an unusually high number for the Apple Isle, and indeed the highest figure on record!

Interstate migration away from New South Wales, South Australia, and Western Australia has slowed, but Queensland continues to attract +13,000 a year away from the southern climes in particular.

This makes south-east Queensland relatively speaking a population growth powerhouse, with the state growing at about +89,000 per annum.

Overall, New South Wales (+114,000) and Victoria (+133,000) attracted the strongest annual population growth, while several other states are steadily increasing, including Tasmania, Western Australia, and the very liveable South Australia.

The Northern Territory population is in a troubling decline, and since for some reason my chart doesn't have a negative y-axis, you can't see that the Top End recorded -1,100 for the year to March. 2019. Ouch!

Overall, the lag in processing births will see the rush to an Aussie population of 25½ million pushed back by a few weeks, at least according to the official estimates. 

But the big picture is unchanged, which is to say accelerating net immigration and population growth running at around +400,000 per annum.

Big numbers, indeed, and with dwelling starts in an ongoing decline, more than enough to clear the new apartment glut in time. 

Thursday, 19 September 2019

Will we see rising inequality?

Getting ahead

See here for the answer (or click on the image below):

Unemployment ticks higher

Defying gravity (for now)

Employment continued to defy gravity in increasing by +34,700 in August, although the composition was was all part-time this month, and full-time employment fell. 

Over the year to August employment increased by +310,700 to keep the annual pace of growth at a sprightly +2.46 per cent (a rate of increase still well ahead of population growth). 

The jobs over the past few months have mostly been seen in New South Wales and Victoria (still), although hearteningly Western Australia has now recorded several solid months on the bounce.

Employment in the Northern Territory, by way of contrast, has fallen by nearly 7 per cent from its peak. 

Participation in the labour force continues to skyrocket, now up to a fresh high of 66.2 per cent - once again driven by New South Wales and Victoria - and as such spare capacity is as high as it ever was.

With another modest increase to 5.254 per cent, the monthly unemployment rate was rounded up to 5.3 per cent.

The unemployment rate is now at the highest level since July/August 2018 and seemingly destined to drift ever further away from NAIRU. 

On the plus side, in New South Wales the unemployment rate ticked down to 4.3 per cent, and Western Australia's seasonally adjusted unemployment rate has been under 6 per cent for three months in a row now.

On the other hand, unemployment rates are far too high in Queensland (6.4 per cent), Tasmania (6.6 per cent), and South Australia (6.8 per cent), all running at well above 6 per cent.

The smoothed trend state unemployment rates are plotted below, showing the dichotomy:

The quality of jobs in Australia remains a critical issue, with the growth in hours worked only +1.7 per cent over the year to August.

Note that this means employees are working fewer hours, on average. 

The wrap

Summarily, still lots of part-time jobs are being created, but the leading indicators include job advertisements falling at dire double-digit rates, and a construction-related crunch heading squarely for Sydney and Melbourne. 

Measures of underemployment increased again, and under-utilisation (13.8 per cent) remains very much elevated (and almost off the charts for younger workers at around 30 per cent), and so wages growth remains slow. 

It's good that more people are in work, and the Federal budget is now back in balance.

But there remains a ton of spare capacity, inflation expectations continue to sink, and economists are lining up to call for an interest rate cut in October (markets are pricing 25 basis points in October as close to a lock, at about 80 per cent). 

Of course, jobs reports are always 'mixed', but recent releases really have been mixed!

The two most populous states have recorded strong employment growth and conditions, but with participation so high objectively we're now a long way from full employment, and - with construction job advertisements cratering - likely heading further adrift.

Jobs leading indicator sinks for 16th month

Leading indicator slumps

The Department of Employment's leading indicator of employment fell for a 16th (sixteenth) consecutive month in September. 

Cyclical employment has now fallen for a second month too, as the cycle rolls over:

Source: Department of Employment

Employment figures have continued to confound on the upside, but it's hard to see how that continues given the outlook for economic activity. 

Anyway, here's what the market expects from today's Labour Force figures, which is to say employment growth of +15,000 and the unemployment rate flat at 5.2 per cent (a long way from NAIRU, which is thought to be around 4½ per cent or perhaps lower): 

Expect we'll see more sluggish growth in hours worked, whatever the headline result.

Charts later!

Tuesday, 17 September 2019

S&P sees arrears in decline

Loans in arrears

From S&P's latest mortgage stats.

Owner occupier arrears fell 3 basis points in July 2019 from 1.74 per cent to 1.71 per cent.

And investor arrears declined 1 basis point to 1.46 per cent.

The difference reflects tighter lending criteria for investors, suggested S&P (agreed).

As noted previously, the recent improvement has been seen in Western Australia, albeit mainly in the 30-60 day arrears category. 

S&P itself reported that: 

'We expect to see arrears to continue to decline as the recent rate cuts filter through. 

The improvements are expected to be seen in the earlier arrears categories, which are more sensitive to interest rate movements'.

Significant, if they are right.

Housing cycle bottoms out

Cycle turns

The ABS released its official residential price indexes for the second quarter of calendar year 2019.

These are dated figures, and CoreLogic's indexes have shown price gains of about 3 per cent for Sydney and Melbourne since the election, but it's still worth looking back at what went before.

From peak to trough Sydney's detached house price index fell 13.7 per cent, and attached dwellings were also down 11.7 per cent over the two years to June 2019. 

In terms of implications for monetary policy, the talk naturally turns to Sydney as the most expensive market in the country, in dollar terms. 

Two points on this, though.

Firstly, globally there are many cities with (often dramatically) higher price-to-income ratios than Sydney: from London to New York, Mumbai to Paris, from Tianjin to Tokyo, to Shanghai, Shenzhen, Seoul, and Singapore.

And secondly, since the inception of the ABS data series in 2003, Sydney has been the worst performing capital city market with nominal price gains over 16 years of +80 per cent (as compared to +140 per cent in Hobart).

To be fair, 2003 was a cyclical peak for Sydney, but still 16 years is a pretty long period of relative underperformance. 

Australia's mean dwelling price fell from a peak of $689,700 in 2017 to $638,900 at the bottom of the cycle in June 2019. 

The preliminary estimate for the number of dwellings was 10,347,200, with the rate of increase in the dwelling stock accelerating up until 2016, but soon being set to fade again. 

With the Aussie population clock set to blaze past 25½ million over the coming few days even the record construction boom has failed to significantly outrun population growth.

Overall, this left the value of the dwelling stock at $6,610,590,100,000, well down from close to $7 trillion at the 2017 peak.

All interesting stuff, no question, but the market immediately bounced upon the election result, and now Sydney and Melbourne prices are in a strong uptrend as dwelling starts are tightening dramatically. 

The Reserve Bank noted in its Minutes today that weakness in dwelling construction will sow the seeds of the next upturn.


All eyes will now turn to the August 2019 labour force figures, due for release on Thursday.

Westpac expects employment growth of just +7,000 for the month - slowing the annual pace of employment growth - and for the participation rate to hold flat.

Such an outcome would see the unemployment rate levitate further away from full employment at 5.3 per cent.

If they're right, then in all probability so too will be their forecast for an interest rate cut in October. 

Vacancies lower in August

Vacancies tighten

Sydney's vacancy rate ticked down a notch to 3.4 per cent in August, having been as high as 3.6 per cent in December. 

Approvals have dropped in half, so the glut will be cleared in time.

The rental vacancies rate fell again in Adelaide to just 1 per cent in August, and there was a further decline for Perth, which is now down to 2.9 per cent. 

Some other cities ticked up a bit, but overall the national vacancy rate dropped from 2.3 per cent to 2.2 per cent in the month. 

Sydney's rental vacancies declined from 24,869 to 24,465 in August, with most areas seeing a modest decline.

But where are the problem areas?

Here's one, out at Box Hill and Marsden Park, where there has been a lot of generic new housing built, some 40 to 50 kilometres north-west of the City:

Source: SQM Research

There you go, 60 Minutes, you can have that one ;o)

The pipeline and the rate of construction are now falling away fast, leading Bill Evans to forecast an interest rate cut as soon as next month.

The Reserve Bank released its Minutes today which explicitly mentioned that a lower unemployment rate could be sustained, and that policy would be eased if required. 

What is financial independence for you?


What actually is financial independence?

See here or click the image below:

Monday, 16 September 2019

Arrears up 11bps over the year

Arrears a bit elevated

Mortgage arrears declined by a further 2 basis points to 1.49 per cent in July 2019.

Arrears remained 11 basis points higher than they were a year earlier.

The year-on-year increase was quite broadly reflected around the states.

Arrears rates remain well below 1½ per cent in New South Wales and Victoria, as well as in the ACT. 

On cycles, booms, and busts

Market cycles

Cycles: what are they, and why are they important?

See here, or click the image below:

Auctions soften, ex-Sydney

Auctions: steady as she goes

Auction clearances were a bit softer this week, although the preliminary clearance rate was solid at 75.7 per cent according to CoreLogic. 

That's well above the 51.8 per cent from a year earlier. 

And in Sydney the preliminary clearance rate was still above 80 per cent, despite somewhat softer results elsewhere. 

Anyway, here's the chart from the core of logic:

Source: CoreLogic

Auction listings are down dramatically by about quarter from a year earlier. 

So the story goes, a rush of sellers is going to hit the market, but there's no real sign of it to date.

In fact as my buddy and industry supremo Cate Bakos points out, strip out the school hols and long weekends and there are only seven auction Saturdays remaining this year before the December drought kicks in. 

Sunday, 15 September 2019