Fresh lows for Sydney unemployment

Sydney creates the jobs

Today's CapEx release I'll look at later, but it was a fairly comfortable beat on expectations.

Interestingly investment was driven higher by a big lift in New South Wales, with CapEx plans for the year ahead also lifting rather nicely for investment in serviced industries.

Today's largely unreported detailed labour force figures showed Greater Sydney created a rip-snorting 117,000 new jobs on a net basis over the year to January 2019. 

Sydney's annual average unemployment rate declined to just 4.2 per cent.

This is now close to the lowest level on record, and the latest figures point to further tightening still. 

For many inner or eastern areas of Sydney such as Bondi, Waverley, Woollahra, Coogee-Clovelly, Erskineville-Alexandria, Pyrmont-Ultimo, and so on, the unemployment rates range from only 1 to 3 per cent. 

So far, so good, although monthly unemployment rates of 7½ per cent for Perth and above 7 per cent for Hobart suggest that credit rationing is beginning to hurt.

In fact that holds true for most of the country away from Sydney and Melbourne, with oodles of slack in the jobs market away from the big capitals. 

Credit rationing: touch too much

The credit figures for January 2019 I'd expected to be pretty weak given that they related to the period before the Royal Commission final report, and there was a further weak reading for monthly housing credit growth of only 0.2 per cent. 

Housing credit growth figures should also be expected to be lower given that three-quarter of loans by value are now paying down principal.

But this was the weakest month in about 35 years as the screws have clearly been tightened too far. 

There was zero growth in lending to property investors, which itself is quite an extraordinary result given the increase in dwelling supply, with growth to homeowners also now tailing off into the dirt.  

Business credit growth was marginally better at 0.3 per cent in January 2019 (though that figure will probably slow further for small business given that small business owners tend to use housing as security). 

But with personal credit growth contracting by -2.8 per cent over the year to January 2019 the figures were more than clear in their message: credit rationing now risks pushing Australia's economy into recession, and credit needs to be allowed to flow unless we want to unleash 'Armageddon lite'. 

The monthly figure for personal credit growth was even more diabolical than expected at -0.63 per cent, the sort of monthly result which is basically unheard of outside of recessions or the global financial crisis itself. 

Hopefully whoever's pulling the levers will also exercise some common sense with regards to interest-only resets through allowing borrowers to move onto 30-year P&I loans, otherwise the 30 to 50 per cent leap in repayments will send thousands of marginal borrowers into arrears. 

Hmm!

Construction misses in Q4

Construction shrinks

Construction work done missed expectations in the fourth quarter shrinking by another 3 per cent to $51.1 billion. 

That follows on from a significant contraction in Q3, so in the second half of 2018 construction work done slowed by about 7 per cent overall.

Quite nasty on the face of it, although we were coming off a high base. 

The engineering construction work done figures took a 5 per cent hit in Q4, which sounds quite dire at first blush.

To be fair, the ABS has never gone big on accruals accounting for one-offs like the Prelude LNG platform, and as the Gorgon and Ichthys projects drop off the headline figures will inevitably appear weak - yet the underlying figures aren't quite so bad.

In fact mineral exploration spend has been on the rise, so investment and mine restarts will likely pick up, especially in Western Australia. 

Here are the trend figures for engineering, in chain volume measures terms (you can click to expand the charts).

Residential construction work dropped by about 3½ per cent in the fourth quarter, although overall activity was actually still relatively high, at least on these estimates. 

A significant driver of the squeeze was slowing Sydney and Brisbane apartment construction, and there'll be plenty more to come here in 2019. 

For completeness, quarterly 'other residential' work done slowed by about 4½ per cent in H2 2018 from $8.2 billion to $7.8 billion.

In my humble opinion there could well be another couple of billion of quarterly declines to come here through 2019 and beyond, even if Australia is moving more towards attached dwellings and medium-density living. 

The wrap

Overall, a fairly ordinary miss on expectations. 

There are still too many partials to be reported for Q4 2018 to have any level of certainty, but while a technical recession perhaps remains unlikely, in per capita terms it looks very possible.

Summary: banks on strike; no chance of a hike.

Why you won't recognise Brisbane in 5 years

Brisbane transformation

First came the apartments boom

But with construction in that sector now having slowed right down, the next 5 years it will be all about commercial development.

And how!

In fact, you won't even recognise Brisbane 5 years from now. 

And here's why. 

3 types of risk tolerance: which are you?

Risk tolerance type

Here's how to determine the answer.

Nights at the round table

Canberra round table

I've been too busy (well, OK, that and at the beach) to discuss with any of the attendees, but the recent housing round table in Canberra was certainly an interesting one.

Among other notables, it was attended by Doron Peleg of RiskWise, with whom I co-wrote a detailed paper on the potential impacts and consequences arising from Labor's proposed negative gearing and CGT policies. 

This summary is well worth a read from Queenslander Gene Tunny, including the noteworthy extract below:

Source: Queensland Economy Watch

Indeed.

I've raised some similar points before.

The timing issue could be overcome.

After all, the Coalition showed with its 2017 depreciation amendments to Section 40 that a mid-year change to tax policy could feasibly be pushed through. 

The bigger challenge for Labor, assuming they still genuinely have the desire to see the reforms through, is that the current composition of senators will potentially make life tricky. 

Some will back the reforms, some will oppose them, but based upon the preferences of the those senators in the middle ground the outcome might yet prove to be a cap on negative gearing claims or another watered-down alternative. 

Should you be optimistic about the future?

Should you be cautious but optimistic?

Or sceptical and pessimistic?

Find out here.

How to shape your online persona

Here's how to shape your online persona:

Auctions: turning up as credit flows a little faster

Rate cuts talk

Another bounce in preliminary auction clearance rates for Sydney according to Domain at 61 per cent, but with Melbourne languishing a bit at 55 per cent.

Melbourne came to down its downturn phase later, and thus may take longer to turn around, with total stock listings sitting considerably higher year-on-year. 

There were considerably higher clearance rates reported by Auction Insider and REA Group for Sydney and New South Wales, but since I've always followed Domain I'll continue with that for consistency and reliability.

Across the week CoreLogic reported 59 per cent and 53 per cent for Sydney and Melbourne respectively. 

The median price of property sold at auction in Sydney has drifted back up to $1,230,000, though there are some notable variances within that figure. 

Compared to a year earlier the median price of units sold at auction has moved a little higher, but the median figure is materially lower for houses on tighter serviceability.

This drop has been driven largely (though far from entirely) by illiquid markets at the premium end, with only a small smattering of homes now selling under the hammer at above $3 million. 

Another thing you can see for yourself just by browsing through the results is that while A-grade properties are generating plenty of buyer footfall, bidders, and solid sales results, the Bs and Cs have taken quite a hit from the auction market peak of exactly two years earlier. 

At the sub-regional level, the strongest preliminary clearance rates this weekend according to Auction Insider were seen on the lower north shore (~90 per cent), with east and inner west also back above 80 per cent, and the weakest out west (~50 per cent). 

Source: Auction Insider

Merry Xmas...crunch is over?

So, there's been a notable positive sentiment shift in early 2019, perhaps partly driven by talk of further interest rate cuts. 

It's still taking forever and a day to process many mortgage applications, though this is said by some brokers to be improving, while auction volumes and sales are way down on a year earlier.

Source: Domain

But all of this could or should speed up now the Royal Commission has finally passed.

Despite the fears, the final report didn't introduce any further short-term hit to mortgage lending practices, instead focusing on disruption of the mortgage broking industry. 

And the the now largely redundant arbitrary caps on investor credit growth and interest-only lending caps have also been removed. 

Construction dries up

I think on average I get about a thousand messages a year comparing Australia's housing market to Ireland. 

Why the obsession with Ireland, I don't know, but as even some of the more prominent housing bears have pointed out the housing market dynamics really are quite different.

And that's not just in terms of Australia having control of its monetary policy and a free-floating dollar - Sydney and Melbourne are also very different in terms of prevailing construction trends.

While Ireland saw ghost housing estates built speculatively far out into remote areas, the latest readings show apartment construction activity as having collapsed across Australia's eastern capital cities, and supply is set to tighten. 

On its own that doesn't mean much, but meanwhile population growth continues apace, jobs growth is still firing in Sydney, and the unemployment rate in New South Wales continues to decline to the lowest level ever, now to under 4 per cent. 

While there have been some tweaks to visa processing practices at the headline level, the annual number of permanent and long-term arrivals in Australia hit the highest ever level in December at 832,560, with most headed for Sydney, and then Melbourne. 

Short-term arrivals also hit a record high in 2018. 

It's important to look at leading indicators, as official credit figures and housing price indices will continue to lag the reality.

Here's finance strategist Redom Syed, himself a leading indicator, over at Property Chat:

Source: Property Chat

One caveat is that as we've passed through the peak of the construction cycle - and with the endlessly ongoing construction of the light rail - increasing congestion has made getting around parts of Sydney unbearable.

And therefore demand for housing is likely to continue intensifying around key train and transport hubs, so that could either have a positive or negative impact dependent upon location. 

Your route to financial independence

There's any number of potential paths to financial independence.

Should you build businesses, own real estate, or invest in the stock market?

I reckon the best answer is all three.

But there's no such thing as a ‘right’ answer - only the right answer for you.

In this short video I take a look at some of the relevant considerations.

Weekend reads

Weekend reads

The must-see articles of the week?

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Subscribe for the free newsletter here, along with 1.1 million other keen readers.

Desperately seeking NAIRU

NAIRU lower

RBA Governor Lowe now believes NAIRU may be lower than 5 per cent.

Perhaps closer to an unemployment rate of 4½ per cent. 

The relationships between unemployment and wages might not be so strong at the state level.

Nevertheless, it's interesting to note that New South Wales has had an unemployment rate under 4½ per cent since September 2018. 

In fact, yesterday's reading was the lowest ever for the state, at just 3.9 per cent. 

And yet still not much doing in terms of wages growth, or inflation. 

Debelle noted that the economy would have to weaken 'a hell of a lot' - a phrase he seems rather fond of! - before the Reserve Bank would contemplate deploying quantitative easing (QE). 

Presumably they'd want to use more conventional policy first. 

Interesting and unusual times, to say the very least!

Westpac predicts two rate cuts

Breakeven plumbs depths

The Reserve Bank's challenge: markets don't believe they are serious about returning inflation to target, with the 10-year breakeven inflation rate approaching the lowest level on record at 1.55 per cent. 

The breakeven rate is a market-based measure of inflation expectations, and it tends to be more reliable than surveys since bond investors are keenly interested in correct pricing. 

Source: Bloomie

And that was yesterday, before China reportedly opted to cap imports of Australian coal at certain ports.

It's not all on the Reserve Bank's head - the RBA is responsible for monetary policy and setting the interest rate on overnight loans. 

But the crash in expectations has been driven largely by extraordinarily tight access to credit rather than the level of the cash rate.

Financial markets have moved on, and are pricing further cuts.

Source: ASX

Westpac expects interest rates to be cut in August, and then cut again in November.

Finding your freedom formula

Here's how to do it.

Brokers bounce back

ALP chucks a uey

Closing out the easiest trade of 2019 today, with Australian Finance Group (ASX: AFG) up 23 per cent, and Mortgage Choice (ASX: MOC) up 10 per cent during trade.

Predictably Labor is already getting set to backflip on its foolish claim that it would accept all Royal Commission findings sight unseen, which was always a crazy idea. 

Not even three weeks later the mortgage broking industry recommendations are being viewed unfavourably, and ALP sources are reportedly canvassing options to water them down.

As I opined in a couple of videos (such as here and here) at the time the final report was released, these were never great recommendations, and shouldn't be followed through under any circumstances.

Females have the upper hand

In other news, the average weekly earnings figures showed continued slowish growth of +2.4 per cent annual gains for full time ordinary time earnings, and +2.8 per cent for total earnings.

Once again, there were considerably better results for females, at +3.2 per cent for full time ordinary time earnings, +3.4 per cent for full time total earnings, and +3.8 per cent for total earnings. 

Not quite so much joy for the male half of the labour force.

NSW jobs boom rolls on

Jobs boom for NSW

It was another awkward day for the ABS, with further data upload timeliness issues.

When the detailed figures did finally materialise employment surprised with a massive +39,100 gain in January 2019, including a walloping +65,400 full time jobs. 

This takes the annual trend gains all the way up to +296,000 or +2.4 per cent. 

There are now 12¾ million employed Aussies for the first time. 

And we need a whole new y-axis for New South Wales, which has added an astonishing +162,000 to net employment since a year earlier, to a total of 4.1 million employed. 

It really is a tale of two states when it comes to employment growth, as the headlines will no doubt remind us forthwith.

Record low NSW unemployment

Moving on to unemployment, the seasonally adjusted unemployment rate was steady in January 2019 at 5.02 per cent. 

And zooming in the chart, the unemployment rate just ticked up a notch off 6-year lows...

An increase in Western Australia's unemployment rate to 6.8 per cent was offset with more amazing results in New South Wales, which reported its lowest ever unemployment rate of only 3.9 per cent.  

Some ¾ of the full time jobs have been created in NSW and Victoria over the past year, reflected in their respectively very low trend unemployment rates. 

Finally, there was a very slight improvement in the trend for hours worked, up to +1.6 per cent over the year (which is only flat in per capita terms). 

Late cycle lags

Certainly a beautiful set of numbers versus what was expected, and the Reserve Bank certainly will no doubt enjoy seeing this result.

Unemployment rates can fall low late in a housing market and construction cycle, however, and the leading indicators have been far less inspiring to say the least.

Indeed, Bill Evans at Westpac has a front-row seat to lending and construction trends, and he burst into the headlines today to forecast not one but two interest rate cuts in 2019. 

I met the genial Bill for the first time in November when we presented on a great panel at the Business Insider event in Sydney...and he was already 'healthily sceptical' about central bank forecasts, even back then.

If proven correct this would take the cash rate to a fresh low of just 1 per cent. 

It's 2019, and it's game on. 

VIC closes in on full employment

Wages tick along

More wages weakness reported in the December 2018 quarter, though I doubt it'll be enough to move the needle for the Reserve Bank's view too much. 

Wages growth was +0.6 per cent for the private sector, and +0.6 per cent for the public sector, seasonally adjusted, decimal point quibbles aside. 

Annual growth in private sector wages of +2.29 per cent was still plenty slower than in the public sector at +2.53 per cent.

However, this was the 'fastest' annual pace of growth in private sector - if you can justifiably use the word fast in this context - in the four years since December 2014.

And it's also well ahead of headline inflation, which could feasibly sink to just 1½ per cent next quarter on lower fuel prices. 

As noted here previously (h/t Justin Smirk, Westpac) Victoria has been creating a thunderous volume of job openings and is nipping along nicely towards full employment, so wages will almost certainly pick up here. 

Indeed, at the state level for all sectors Victoria (+2.7 per cent) and New South Wales (+2.4 per cent) have accounted for most of the improvement since the nadir, while sprightly Tasmania (+2.6 per cent) is resurgent from a low base. 

Not much joy here in Western Australia, though we should acknowledge that WA has seen by some margin the greatest increase in wages over the past two decades, so a bit of post-boom payback was perhaps due. 

At the industry level the strongest wages growth was seen in healthcare and social assistance (+2.8 per cent), and electricity, gas, water, and waste (+2.8 per cent), while the weakest growth was in IT & Telcos (+1.6 per cent). 

The wrap

Still pretty sluggish overall, but skilled job vacancies came in at a near 7-year high today, so there's still probably just enough evidence that the jobs market might pull through, provided credit flows a bit more freely in 2019. 

Arrears: everybody breathe...

Arrears flat in 2018

OK, aaaand chill.

Let's take a considered look at S&P's mortgage arrears.

Basically unchanged throughout 2018 at 1.38 per cent for 30+ day arrears.

90+ day arrears are now up a notch to 0.75 per cent.

That's mainly related to major banks locking interest-only (IO) borrowers in as they roll over to P&I loans.

While this could be a drag on consumption most IO borrowers have buffers measured in years, and most didn't borrow anywhere near to their maximum capacity either.

I'd argue that most of the little mortgage stress that there is has been inflicted by excruciating mortgage regulation rather than rising unemployment, mortgage rates, or over-stretched borrowers.

Weakness in Western Australia's economy is the other main contributory factor. 

In fact, job vacancies are at record highs according to the ABS surveys, both in absolute terms and as a share of the labour force. 

The unemployment rate is also at the lowest level in 6½ years at just 4.98 per cent, while the respective unemployment rates in New South Wales and Victoria are actually the lowest on record. 

The main deterioration in arrears has clearly been in Western Australia, now at 2.73 per cent for 30+ day arrears.

And non-confirming arrears remain close to their lowest ever level.

Unemployment is low, mortgage rates are low, and there are plenty of job openings.

Banks just need to lend on a more reasonable and timely basis.