Pete Wargent blogspot


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Tuesday, 19 February 2019

Record arrivals in 2018

Rush of new arrivals

It's only a matter of time now before the stories begin emerging about a lack of suitable rentals around the country, with investor credit never having been more difficult to obtain.

It's already happening for houses in parts of Melbourne, Canberra, and Hobart, but I expect this will become a more widespread issue in 2019. 

In 2018 permanent and long-term arrivals ripped to 832,560, just as the supply pipeline is shrinking.

That's an increase of 17 per cent from three years earlier. 

Investors in established housing have also dried up significantly on tighter mortgage regulation. 

There was also a comfortable record high for short term arrivals in 2018, at 9¼ million, despite a bit of a slowdown in the pace of growth.

Visitors are becoming less keen on identifying themselves as tourists, and more keen on advising that they're 'visiting friends or relatives'. 

One big happy Aussie family!


All-important wages figures are due out tomorrow morning. 

Analysis to follow then. 

Chinese investment crippled

Foreign investor collapse

Can we summarise the FIRB Annual Report in 60 seconds? Sure, why not?

The number of residential approvals to foreign buyers has been crippled over the past two years, from about 40,000 to 10,000. 

Now, there has been a methodology change for the approvals process for the purchase of new properties, and the prior year figure was revised so significantly as to make the current year figures somewhat questionable.

But, anyway, the reported value of proposed residential housing investment is off by well over 80 per cent in two years, as Chinese investors are discouraged by punitive surcharges and taxes, as well as considerably tighter Chinese capital controls. 

New dwelling exemptions were revised up significantly for FY2017, and there could therefore a revision could follow in FY2018.

But anyway you look at it foreign investors in new property in Australia have by and large gone away, and this was one of the factors which helped to fuel the resi construction cycle. 

At the state level New South Wales (35 per cent), Victoria (41 per cent) and Queensland (10 per cent) continued to account for the bulk of residential approvals by value. 

For all real estate, including commercial, there remains a fair level of interest from China, the US, and Singapore.

The wrap

The collateral damage from turning away Chinese investors through punitive taxes in new residential housing has already been notable, with the construction cycle set to shrivel. 

The FIRB underscored the point that most foreign investment has been in new dwellings, thereby materially adding to the supply of dwellings.

A handful of breaches were identified by community grassing, but more were picked up through data matching and self-identification, and a small number of infringement notices were served. A very small number of fines and enforced sales ensued. 

As well as the drop in real estate there's also been a marked fall in Chinese investment in manufacturing, services, mineral exploration and development, and electricity and gas, but there's been a different driver for this, being tightened Chinese capital controls. 

Overall, expect new residential construction to slow to a crawl over the next few years. 

Monday, 18 February 2019

Commodities come the tax cuts

Shock and ore

A few choppy trades for iron ore after Lunar New Year, but what a bonus for company profits, tax receipts, and the Federal Budget!

This gives a marginally resurgent Coalition ample headroom for income tax cuts to be announced ahead of the looming Federal election (which will largely boil down to tax policies and the ubiquitous 'boats' question) when the Budget is handed down six weeks from now. 

The RBA's index of commodity prices is up by a thumping 16 per cent in Aussie dollar terms over the past year, and it's not all been driven by iron ore.

In fact in SDR terms LNG has been the main driver of the year-on-year gains, followed by iron ore, and then alumina.

Ore producer Fortescue (ASX: FMG) is boisterously powering towards fresh highs, closing out today's trade all the way up at $6.37.  

Analysts are busily upgrading profit forecasts for BHP Billiton, Fortescue Metals Group, Rio Tinto, and the rest, with Rio trading at a post-crisis high of $92.60 today, and the newly-structured BHP (with South 32 demerged) flying high at $37. 

While iron ore prices shouldn't be expected to stay at these levels over the medium term - a supply disruption due to Vale's tailings dam disaster has been a factor - the overall strength in commodity prices could drive a boost to resources investment, following on from some years of under-investment.

Exploration spend has already surged, especially in Western Australia, while further drilling will be required as existing bulk commodity projects see their reserves run down. 

Financial markets are now fully pricing in a rate cut over the coming 18 months, but a surge in national income and nominal GDP - which normally results in stronger wages growth - is a factor that stands against this outcome.

Which way things go will likely depend to some extent on the housing market, with the volume of new lending in 2018 falling by a crunching 20 per cent thanks to layer upon layer of mortgage regulation. 

Bushy Martin - Get Invested podcast

Get Invested podcast

It was a real privilege to be invited on Bushy Martin's extended podcast.

It's not often you get to speak more in-depth these days.

Tune in here, or click the image below.

Sunday, 17 February 2019

When bad news is good news (and vice-versa)

Good or bad?

Have you ever seen financial markets weaken on good news?

Or improve on bad news?

Confusing, huh.

Here are 3 considerations.

Hammer time

Sentiment picks up

The highest preliminary auction clearance rate for 9 months in Sydney, according to CoreLogic, being the provider the most comprehensive results.

I saw higher results elsewhere, but I'd trust CoreLogic more, tbh:

Source: CoreLogic

A change in interest rate expectations is one possible factor.

It can't be stressed enough that these numbers should be taken with caution, as while some parts of the Sydney market have picked up - such as in some parts of the eastern suburbs - others really have not.

I haven't looked at the sub-regional figures, but just from browsing the results it's quite clear what's selling and what's not.  

Another thing: there were only 521 auctions in Sydney this week, and there'll be more next week.

The AFR lead article ran with 'Huge sentiment shift', which itself probably adds to the feedback loop.

A missing piece of the housing market puzzle is banks that will actually write timely loans, but that might fall into place as 2019 rolls on.


The most interesting release this week will be wage price indices.

I expect that annual wages growth will continue drifting higher towards 2½ per cent, driven by improving private sector wages growth in Victoria.

Chunky minimum wage increases will also help a little.

I'll post the key charts here during the week. 

Saturday, 16 February 2019

Weekend must reads!

Must read articles of the week

Here you go, comin' atcha from Property Update:

Some great reads there on the Royal Commission and what's coming next for housing markets.

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If eternity should fail

Never taking a backwards step

Australia has famously gone 27 years without a recession.

But what if that doesn't continue?

Here are 7 reasons we'll be OK over the medium term.

Brisbane back in balance

Brisbane fills up

An interesting series of charts was posted by Simon Pressley of Propertyology, showing how a number of Brisbane construction hotspots have seen the rental supply tightening back into balance.

Pressley showed tightening vacancy rates in Nundah (1.6 per cent), Bulimba (2.8 per cent), and Chermside (2.2 per cent) as a few prime examples, while West End and Fortitude Valley were still chewing through the their glut in January 2019. 

A bit closer in here's New Farm and Teneriffe, with the rental supply at the tightest level since 2013, and the chart courtesy of SQM Research:

Source: SQM Research

Hamilton also recorded its lowest vacancy rate since 2013.

Commencements and units under construction have levelled off, and new approvals continue to slide back towards historic averages.

And while not all internal migrants head to the capital cities, as I write this interstate migration to Queensland is at its highest level in about 13 years, those heady pre-crisis days when when the mining boom was in full swing. 

While developers aim to manage risk as well as they can, there's always an element of forecasting of demand when strategies are put together.

For a while it looked as though the demand for units and rentals wouldn't keep up with the record rates of construction.

But it increasingly looks as though things have swung back into balance in the nick of time, as Queensland draws more and more internal migrants away from the major capitals. 

Friday, 15 February 2019

What's in a median?

Brisbane now has 27 million dollar suburbs, apparently!

But what does that actually mean?

Here are just a few considerations.

Free buying guide

Well, it's Friday - have a freebie on us.

Download your free buying guide here.

Thursday, 14 February 2019

The east stirs...

Old news?

There was some interesting and welcome debate today as to whether housing finance figures from last year can predict what happens to housing prices this year. 

Housing finance figures and the trends buried within them from months ago are both interesting and relevant, even if they are not timely.

But in my experience there are more pressing indicators of sentiment.

After all, if there are only crickets turning up at open homes then sellers can be quite quickly inclined to drop the asking price.

On the other hand, if opens are busy then vendor expectations are lifted accordingly, even if a sale isn't immediate.

That's just the way it works, and agents for good quality homes are reporting busier open homes now, although some of that may be a seasonal impact.

That's also why I don't think housing credit or even loan approvals are a great leading indicator

In fact, Domain ran a piece last week showing that the best time to buy Sydney property in the past 15 years was in February 2008 during the financial crisis, when credit growth had tanked and sentiment was at scary lows.

I bought several Sydney properties for myself around that time, which I still own today, and three things I can clearly recall.

Firstly, it was very nerve-wracking - you had to be able to hold your nose and act regardless of the conventional wisdom - but on the plus side you could make low-ball offers and have your offer taken seriously.

Secondly, unless my memory is playing tricks nobody was using a 'credit pulse' or a 'second derivative household debt accelerator index' (or whatever) to try to pick the market turning point.

Actually they were, and to all intents and purposes they were basically useless. 

And thirdly, the buyers at that time had the rare opportunity to buy top-quality assets as there was so little competition. 

The year ahead

Borrowing capacity was cut in 2018, and sharply so for many investors.

Plenty of budding investors simply couldn't get mortgages altogether, mortgage processing times ballooned from weeks to months, and there were far fewer Chinese investors due to capital controls and punitive taxes.  

And all of that naturally made a big difference to the housing market, knocking prices down and bringing a once-rampant construction cycle to an abrupt end. 

Offsetting that, the RBA has shown that most buyers don't use anything remotely close to their borrowing capacity, with only about 1 in 10 borrowers doing so.

Plus there is another unique factor to this cycle which rarely gets any airtime. 

And that is Aussie households are now sitting on more than $1.1 trillion of cash and deposits - well over double what household had access to a decade earlier - something that is unprecedented, and a result of lower mortgage repayments for incumbent homeowners. 

Some of that might be in offset accounts, or lines of credit, but either way it's a lot of cash that might be called upon if required in more buoyant market conditions. 

And my thinking is that housing market sentiment can turn around on a dime, but only if and when banks are allowed to lend without the undue constraints of 2018. 

We've seen that play out often enough before with interest rate cuts.

None of this is to downplay the impact of the downturn, which has evidently been harsh or even severe on some parts of the Sydney housing market, and the credit squeeze has clearly also had a dire knock-on impact to the rest of the economy.

In fact, almost every market release for the month of December was desperate, even prompting financial markets to price a rate cut.

East stirs

In the eastern suburbs of of Sydney, good quality stock is commanding interest. 

Indeed, a tiny 52 square metre apartment on Bronte Road with no parking but with ocean views fetched $1.46 million this week prior to auction at gazillions over the asking price, so there's a little bit happening (an anecdote of some interest to me personally, since I bought a place on Bronte Road in 2007). 

And there were a few sales in the auction rooms tonight, although listing volumes are well down...

Credit crunch reality bites

An interesting sub-plot is that as Aussie banks all but went on strike over the last two months of 2018 in anticipation of the Royal Commission final report, bond yields nosedived as activity in the economy shrivelled.

It wouldn't be at all surprising if growth in the economy was flat or negative for the quarter, but we won't know about that for a few weeks yet. 

The 10-year bond yield dived dramatically from 2.76 per cent in early November 2018 to just 2.06 per cent earlier this week. 

A year ago it was up at around 2.90 per cent. 

Consumers are eyeing up a cut to the cash rate - or at the very least no imminent hikes - while lower 2-year and 3-year fixed rate mortgages are increasingly being made available to housing market investors.

Elevated funding costs were a challenging issue throughout 2018, especially around the last financial year end, although now off their peaks. 

Moreover the threat of sharp monetary tightening around the world seems to have eased, with the window for rate hikes closing as Germany slides towards recession, Britain dithers with its Brexit woes, and the Fed doves up.

Finally for today, in my view house price indices also often lag the reality.

For example, my experience in Sydney was that housing prices peaked way back on 25 February 2017 - with some outlandish auction frenzies taking place in the first quarter of that year, and on that day especially!

But the official figures didn't record any declines for months to come.

That's the lag effect of settlements and data availability, I guess, and it'll likely be the same when the market turns in the other direction.

By the time prices are officially rising again the nadir will probably be 3 to 6 months in the rear view mirror. 

Wednesday, 13 February 2019

Investment strategies in Brisbane property

Brisbane is a less mature housing market than the largest capital cities, and investors need to take a different approach. 

Tuesday, 12 February 2019

Vacancy rates in January

Vacancy rates seasonally lower

Vacancy rates fell everywhere in January, except for Hobart which is already remarkably tight with a vacancy rate of only 0.5 per cent, or 144 vacancies. 

In Sydney the vacancy rate fell from 3.6 per cent to 3.2 per cent in January, but the trend has been strongly higher over the past year as the construction cycle peaks, especially in regions such as Epping and the Hills District, Parramatta, and south-western Sydney. 

Notably Perth is now tightening apace, with a lower vacancy rate than Sydney, while Adelaide looks set to reach a tight rental market some time later this year. 

Brisbane looks set to balance out this year as apartment construction slows down. 

Melbourne is the most interesting market to watch this year, and we're already hearing of multiple tenant applications on inner-ring houses, but the apartment market is often an altogether different story. 

Picking turning points

I was offline today and didn't get chance to check out the all-new lending finance figures from the ABS.

Industry surveys already told us they'd be weak, and it was obvious anyway from the dire run of data through the month.

Here's what I'm more interested in - what happens after the Royal Commission report.

Wharves come alive

Great to see Howard Smith Wharves near New Farm coming to life.

A development approval has been lodged in New Farm for one of Brisbane's most ambitious ever house developments on Moray Street.

The double block itself sold last year for $11.3 billion. 

Report from The Urban Developer.

Monday, 11 February 2019

Election campaign on housing

Unintended consequences

The Grattan Institute has unsurprisingly been an enthusiastic supporter of Labor's proposals on negative gearing, but their modelling has never made much sense to me. 

In short, housing prices wouldn't fall materially under Grattan's model, perhaps 1 to 2 per cent, and rents wouldn't increase much either.

It's not really a model as such, rather it simply divides the assumed value of the tax benefits by the total value of the housing market, which isn't how marginal buying decisions are made, and also doesn't factor in the unintended consequences of such a policy change.                                              

Evidently negative gearing can't have inflated prices much if its removal doesn't see prices fall. 

Having worked on far more extensive modelling with Riskwise the one thing we can say with certainty is that under Labor's policy rental yields would have to rise.

Here's Danielle Wood from Grattan:

Source: SMH

What isn't mentioned here is that the ALP policy is actively designed to funnel negatively geared investors into new and off-the-plan apartments, which we already know to be bad investments.

Two-tier market

In fact, new apartments will be even worse investments under the ALP policy, because some developers will undoubtedly build low-grade apartments for marketing to investors for the tax benefits.

Meanwhile the second user of the property won't have access to the same tax benefits as the first, so the value of new units will plunge post-purchase. 

As Veronica Morgan pointed out this will sadly also see a rampant return of the white shoe brigade, flogging new apartments for developer commissions to unsuspecting young investors.

There will inevitably be some horrible losses for investors in new apartments to absorb. 


The proposed changes are also arguably elitist given that the benefits for existing investors are grandfathered.

Meanwhile anyone with a family trust or investment income from other sources will be largely unaffected. 

If negative gearing is 'bad' or a 'problem' then surely phase it out or use a cap on benefits, instead of creating this ill-advised two-tier market. 

Capital gains tax is a bad tax which deters investment, plain and simple, and shouldn't be increased period. 

The ALP won't be backing down as the alleged $32 billion of Budget savings are funding the election pledges, so the only hope is that the Senate thinks carefully about the proposed policies before waving them through. 

Mortgage arrears benign

Bendigo reports little stress

Commonwealth Bank already reported benign mortgage arrears, with a slight uptick on interest-only loans.

Today, it was Bendigo Bank's (ASX: BEN) turn as reporting rumbles on, and residential arrears were very moderate. 

Source: ASX

Very little to report in terms of any mortgage stress.

Source: ASX

NIM -3bps, and earnings took a knock.

Weekend auctions

Auctions 2019

Off and running for 2019.

Preliminary results by Sydney region, via Dr. Andrew Wilson:

Source: Auction Insider

Better than last year's dismal finish, with the most sales in the City & East as the Royal Commission passes and the RBA indulges in a spot of light jawboning, with the inner west and lower north shore also back above 70 per cent (preliminary).