Pete Wargent blogspot


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Friday, 18 January 2019

Housing crunch 2018

Housing finance drops

Housing finance was again crunched too hard in November 2018, with investment loans down another 5 per cent to $9.3 billion, and with owner-occupier lending also declining as more and more loans were refused. 

Some commentary speaks of investors voluntarily pulling back, but this hasn't been my experience at all - most industry practitioners appear to have people queuing up to borrow and invest, but credit won't be extended on tighter regulation and criteria. 

The trend for monthly housing finance was down nearly $4 billion or 12 per cent from a year earlier at $29 billion, as too many different constraints on lending bit in unison. 

Labor's negative gearing policy was proposed all the way back in 2016 to level the playing field and reduce investors in the market - this has already happened with investment loans down by a third, but I doubt the ALP will back down because election promises will be made on the back of the supposed 'savings'.

Average loan sizes declined for both homebuyers and investors in November.

Commentators have called at least a dozen of the last zero recoveries for Western Australia, but tentatively this is now happening with the trend number of home loans on the rise out west. Soft almost everywhere else.

New home sales are also trending down.

The share of first homebuyers was at the highest level in six years, at 18.3 per cent. 

Crunch time

On the positive side monthly lending flows are tracking at a level commensurate with further declines in the household debt to disposable income ratio - all the more so with the stock of interest-only loans pushed down to multi decade lows - and this will continue to improve as household incomes rise this year.

The share of outstanding ADI loans pertaining to investors is also now comfortably below the average level of the past 15 years at 33 per cent.

So that's all good, and well executed. 

What needs to happen next is simple: banks need to process loans on a more sensible and timely basis before the economy is sent into a self-induced tailspin. 

Thursday, 17 January 2019

Earth to Martin Place

Inflation expectations collapse

Dear, oh dear...

The market may now be beginning to price in further interest rate cuts; alternatively mortgage serviceability buffers may be relaxed, presently being at a minimum of 7 per cent. 

The breakeven inflation rate, a bond market based measure of inflation expectations, momentarily touched a low of under 1.50 in June 2016, and we're now not far from that point again in January 2019. 

Not to be alarmist, but markets are nervously beginning to eye up the very cold snap the housing slowdown was designed to protect from. 

Wednesday, 16 January 2019


Cut ze rates

Financial markets will soon be pricing in another rate cut within 12 months.

Source: ASX

Generally rate cuts come in pairs, though (aka. the 'double tap').

Completions ahoy!

End of the boom

New attached dwelling commencements fell 8.4 per cent in the September 2018 quarter, and house commencements were down 4.2 per cent.

The smoother trend figures showed that commencements were still fairly high in the third quarter, but it's also likely that these figures have deteriorated a good deal in the months that have followed. 

Developers had made significant inroads into the pipeline by the end of September 2018.

The number of completions hitting the housing market was very high at the end of September, as evidenced in rising rental vacancies by the end of the calendar year. 

The data lags significantly, but at the end of September there were still some 225,000 dwellings under construction, including 157,000 attached dwellings, meaning that access to mortgage finance in 2019 will be critical (although even then conservative valuations could lead to a crash of settlement defaults). 

At the state level, New South Wales (66,000) and Victoria (50,000) still had a particularly high number of attached dwellings under construction. 

Mortgage lending has been tightened considerably in recent years to prepare Australia for such a time when "an unseasonal cold snap" one day arrives. 

Unfortunately, the unseasonal cold snap has now arrived - in no small part because of the weakened housing market - with Westpac reporting consumer confidence "evaporating" in December, the reading crunched 4.7 per cent lower to 99.6, representing negative territory for that survey.

Trying to be optimistic, there is still enough activity live and in the pipeline for the economy to come through this soggy patch relatively unscathed, but in my opinion that won't happen if established dwelling prices continue falling in Sydney and Melbourne. 

Tuesday, 15 January 2019

Sydney a tenant's market

New rentals ahoy

Sydney's apartment pipeline is now shrinking after its multi-year boom, but in the meantime there is plenty of new stock for tenants to choose from.

December is a seasonally weak month for the rentals market for obvious reasons, but Sydney had around 25,000 rental vacancies around Christmas according to the latest SQM Research figures, for a vacancy rate of 3.6 per cent (well up from 2.6 per cent for the prior corresponding period). 

Sydney's population is growing fast, but it's always going to take time to digest such a high level of rental supply coming all in a rush. 

At the sub-regional level, rental vacancies are especially high in the supply-responsive zones, such as within the Hills District of Sydney.

Source: SQM Research

Some of the suburbs where landlords are really likely to struggle have been flagged here often enough before, including as Wentworth Point (8.3 per cent vacancy rate in December). 

Despite the high level of supply unit asking rents increased in Sydney over the month. 

At the other end of the spectrum Hobart (0.4 per cent) had but a hundred or so vacancies, while Adelaide, Brisbane, and Perth have consistently seen vacancy rates lower than a year earlier, so these markets are tightening.

Melbourne will be interesting to watch in 2019, particularly as the first quarter of the year is likely to see a seasonal summer surge in Australia's estimated resident population of about 125,000, with most of the new arrivals heading to Sydney and Melbourne (in that order), before accounting for interstate movements.  

Flash uncrash

Dollar surges

Well the supposed 'recession indicator' that was the Aussie dollar flash crash didn't last long then!


Monday, 14 January 2019

Credit cards out of vogue

Peak credit card?

I stopped Tweeting credit card statistics a long time ago - too many inane and energy-sapping comments and people unable to see beyond their own narrative.

That is Twitter, what the hell am I saying?

Whatever, an unexpected reprieve today, as it's been a quiet start to the week and there were a few interesting points of note!

Unusually for Australia, the number of credit card accounts has actually declined to under 16 million, as more Aussies opt to cut up their cards.

The big drop at May 2018 was due to a change in data collection coverage, so that's nothing to get too aroused over, but since then there has been a steady decline of about 86,000 accounts (click to expand graphics):

Although credit card debt overall has moderated, the 'average' balance per card has increased simply because there are fewer credit card accounts than there were 18 months ago. 

There was no sign of a slowdown in total card transaction levels, indicating healthy levels of consumer spending, but credit card balances accruing interest have certainly eased in recent years. Indeed, in per capita terms, balances accruing interest are well down.

During periods of more elevated household financial stress (2007-8, 2012) than we have seen lately ~38 per cent of credit card limits were used, but we are now down to ~34 per cent.

Cards in the blender

The annual decline in credit card lending was the greatest in more than a dozen years - though this was more than offset by more consumers opting for debit cards and spending that way instead - while the number of credit card accounts has been in outright decline.

Overall, less credit card usage may be about what you'd expect to see with the trend unemployment rate of 5.1 per cent now at the lowest level since July 2011.

More consumers are also undoubtedly finding that tight mortgage lending criteria make holding spare credit card accounts more trouble than they're worth, while new regulations will additionally require that consumers prove they can repay the credit limit within a 36-month timeframe. 

Perhaps there's a bit of the Barefoot Investor effect kicking in as well, with a bit of that evil plastic ending up in the kitchen blender.

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

Good to see!

How to join the 5%

How to join the 5%

Here's how (click image to watch).

Sunday, 13 January 2019

Black Friday boost

Spending moves to online

It's been suggested that the Christmas period was potentially a horror show for retailers - and we always enjoy a bit of a headline - but we'll have to wait for the official statistics to get confirmation of that.

Certainly there's been very little in the way of pricing power for retailers.

It also seems to me that there's a possibility of retailing trends changing faster than surveys can comfortably react (we've already seen recently how the internet has changed the relevance of some job vacancies surveys).  

Indeed, the ABS report for November 2018 showed one remarkable statistic, that online retail accounted for a record 6.6 per cent of total turnover, up from only 5.9 per cent in October, (and 5.5 per cent a year earlier) which, if sustained, is a remarkable rate of change. 

Black Friday boost

A 30-second look at the November 2018 figures, then: seasonally adjusted retail turnover increased by a better-than-expected 0.4 per cent in the month to $27.12 billion. 

As you can see in the chart above the prior year figures were spiked bigly by Black Friday and especially iPhone X sales - rather depressing the year-on-year change in retail turnover - but the smoothed trend series shows a moderate year-on-year growth of 3.6 per cent. 

Black Friday and other promotional activities were especially flattering in November 2018 to household goods retailing (+1.2 per cent), and clothing, footwear, and personal accessories (+1.5 per cent), while department stores (+0.4 per cent) saw a modest boost. 

The main monthly increases were seen in New South Wales (+0.8 per cent) and the ACT (+1.6 per cent), with Canberra now experiencing the fastest year-on-year growth.

Overall, not bad numbers, so we can all breathe a sigh of relief and save the Apocalypse Now references (for another month at any rate). 

The horror. The horror...

Jackhammers going very quiet

Apartment construction collapses

You may have noticed that my 'daily' blog somewhat failed to live up to its billing over the past 48 hours or so, the reason being a shocking bout of the 'flu. 


Anyway, thankfully I'm almost back on an even keel...but it seems as though some parts of the economy are starting to look a bit crook.

The (historic) retail trade figures for November were a little better than expected but AiG's triumvirate of performance gauges for December didn't look too inspiring. 

The manufacturing gauge was mildly contractionary (49.5), while services was still in positive territory but slowed (52.1).  

The construction reading came in at just 42.6, the weakest result in half a decade, while the components of the index made for some eye-popping reading. 

House building slowed sharply again to just 35.4, while apartment activity has essentially collapsed at just 26.3.


There are still many apartment projects under construction, but through both hard evidence and anecdotally (and simply through visual evidence) many have slowed, been delayed, mothballed, or increasingly are at outright risk of failing. 

Source: AiG


Now, to be sure, there is still a significant pipeline of non-residential building work approved.

However, Aussies constructing, buying, and then furnishing properties is known to have a strong multiplier effect in the economy, and the reverse also holds true. 

The Housing Industry Association once again commented that...well, you already know what they said!  

The wrap

All three performance gauges weakened in December, and within the construction reading for house building further contracted sharply and apartment construction was basically annihilated. 

In theory this should see the extension of more credit to housing investors in 2019, following four years of tightening. 

Who knows, however, what gems the Royal Commission will come up with? 

We'll find out more at the end of January.

Friday, 11 January 2019

As bad as it gets


Straight-talking is to be expected from a Yorkshireman - article by Marcus Padley on house prices at LiveWire.

Depends on the property type and location, of course. 

But, worth a read!

Thursday, 10 January 2019

Spurious precision

Fake precision

Plenty of this around.

And here's why it can be a problem (click the image to read).

A lot of things that aren't supposed to happen somehow do.

Remember when Hillary Clinton was 99 per cent sure to beat Trump, according to Bayesian modelling? 

How's the ACT land tax going?

Canberra rents surge

I've been consistent on this point (often wrong, but never in doubt!): taxes in the Australian Capital Territory (ACT) are far too high for landlords to invest there en masse, which will lead to a rental shortage as the population steadily grows. 

There are a lot of 'well, in theory...' type comments made about this point, however, including by me, so let's stick to the hard data for today.

Rental vacancy rates fell from 2½ per cent in 2014 when rate rises were first introduced to 0.6 per cent in October 2018. 

Rental markets are seasonal in the ACT and often tighten through the early months of the calendar year, and in turn Canberra could take out Hobart in Tasmania for title of most undersupplied capital city rental market in 2019, which is is some feat (click to expand): 

Asking rents for houses in Canberra are now up by more than 26 per cent over the past three years alone. 

A major issue is that rates are often far too high on units as well, despite the relatively low land value content of this property type. 

The asking rent for 2-bedroom units in Canberra is also up by more than 23 per cent over the same time period!

In Canberra! 

Source: SQM Research

If you don't like asking rents - and you may not - then Domain's actual rental report figures this week were similar.

Domain reported that Canberra is now a more expensive city in which to rent a home than even Sydney, with rents spiralling as high as the Black Mountain Tower. 

Dr. Nicola Powell:

"With investors slugged with higher rates and land taxes, it is likely landlords are passing on the additional costs to tenants, or opting for high yielding short-term leases in order to recover costs."

On the plus side there have been some significant apartment projects approved for construction, but one questions which landlords are going to buy them and rent them out. 

Politicians seeking tax deductions, perhaps.

Foreign investors won't supply the rentals any longer, having already been taxed out of the market.

Some people are even campaigning for high land taxes, and the ALP negative gearing reforms, and a doubling of capital gains tax (all of this on top of the changes made to foreign investment, interest-only lending, restrictions on Division 40 depreciation, disallowance of travel expenses etc etc.). 

There's nothing much to say but best of luck with that!

If you're not from Australia, by the way, the photo below is Canberra: the most expensive Australian city in which to rent a home.

It's a small city, which grows in population by less than 10,000 per annum. Way to go!

Economy to slow this year?

Economy risks

Quite possibly.

The Reserve Bank doesn't think so, though it noted some downside risks in its latest SOMP (now a little dated). 

Via the Financial Times (or click the image below):

Construction job vacancies keep rising

Construction peak

Just an additional point on yesterday's figures.

Counter-intuitively the reported construction job vacancies rose to a 6½-year high in the November 2018 quarter, for reasons that weren't entirely clear to me (resources investment picking up?). 

Of course, the figures are based from a survey sample, and this could simply be a blip. 

Now, full disclosure: I wrote a report last year (published here at LiveWire) that predicted construction employment would fall off sharply.

To date, construction employment has fallen from those dizzying peaks, by 27,000 - which is a bit, but not that much.

So, maybe I'm wrong. 

I think I may just be early, especially as non-residential approvals are now in decline too.  

One to watch in 2019 anyway.

Au revoir construction cycle (KIBOSH!)

Crunch time!

Back in November 2017 there were some 12,823 attached dwellings approved, but by November 2018 the equivalent figure has collapsed 5,921, an impressive swan dive of 54 per cent. 

On the one hand, as you may recall, the prior year figure was inflated by a record 6,512 unit approvals in Melbourne, when half of Footscray was apparently approved for high-rise apartment living. 

On the other hand, this is no time for complacency as even the apartment projects that are under construction are increasingly stalling or at risk of failing. 

The smoothed monthly trend figures show that house approvals also declined virtually throughout 2018. 

Furthermore, Sydney's unit approvals fell to a multi-year low in November, all the way back down to levels commensurate with under-building for the prevailing level of population growth, sowing the seeds of the next cycle. 

Annual unit approvals in Brisbane have fallen by well over 50 per cent from their peak of three years earlier, and are now tracking at the lowest level since 2013. 

Even in Hobart - which has record job vacancies and has experienced the tightest rental market imaginable - unit approvals have been running at close to zero sine the Royal Commission kicked off. 

For the first time in years Australia built enough dwellings through this cycle, largely off the back of  a huge surge in Chinese investors, but the states have now effectively blocked foreign investment through surcharges and taxes, while the public sector has essentially given up supplying new housing too. 

Meanwhile, homebuyers finance very few new dwellings per annum, so that leaves Aussie investors to finance apartment projects...however, it's been decreed that investor credit growth must be constrained too. 

In short, the construction cycle is stuffed. 

HIA warns again

The Housing Industry Association is spitting chips (again): 

Source: HIA

Agree with the sentiment on timely and sensible processing, but it's doubtful they'll have much luck in the midst of a Royal Commission - especially with the legal geniuses being sticklers for questioning every last full stop and comma, as, of course, they are incentivised to be. 

Futures markets are increasingly looking towards a rate cut later in 2019, despite the RBA's reluctance to entertain the idea.

Au nom de la stabilité!