Tug of war

Jobs or growth?

There are, broadly speaking, two prevailing schools of thought on the state of the Aussie economy.

Firstly, the Reserve Bank has been noting optimistically for quite some time that the jobs market has been improving, and unemployment falling towards 4¾ per cent by next year will eventually see stronger wages growth return.

Basically: well, look at all the jobs! 

Tremendous strength in resources export values and solid nominal GDP growth might support this upbeat view, but if the employment figures start to wobble then presumably interest rates will be cut. 

The other viewpoint is that the sharp slowdown in lending, the housing market, and now consumption is throttling the economy, and that since GDP growth might be expected to lead labour force figures by about six months, then the improving employment data might be getting all set to roll over.

In short: well, look at the slower growth! 

ANZ's job advertisements figures are tailing off, and seem to support the latter view. 

It does rather feel that way, especially since activity in dwelling construction is now shrinking quickly and construction employs well over 1 million Australians, while AiG's services gauge has also sunk into deeply negative territory. 

Financial markets have also firmly adopted the 'deterioration' view in eyeing up two interest rate cuts, while breakeven inflation measures have been bouncing around record lows since January, and bond yields have been crunched across maturities since November.

Some welcome news is that funding cost pressures have ebbed away (although these can have a tendency to spike around financial year end, so keep an eye out for that). 

Housing market needs pep

Activity in 'the housing market' - which for the purposes of this commentary largely relates to Sydney and Melbourne - has been slowed to stall speed. 

Borrowing capacity has been reduced across the board by about 20 per cent, and investor loans in particular have been devilishly hard to come by. 

There's been some media chatter about serviceability assessments being reduced, but my understanding or guess is that the stipulated 7 per cent floor was designed to be structural, and to remain in place through cycles, so it's very hard to envisage that being changed. 

So what else except for an interest rate cut actually can help the housing market to pick up, if not borrowing capacity or imminent wages growth?

More timely processing of mortgages and less exhaustive auditing of household expenses would certainly help (whatever the official Reserve Bank line might be, access to mortgage credit has been painfully tight, although this has probably now flowed through to demand too).  

But given the slowing economy there's nothing else apparent on the horizon that might lead to more urgency to buy, at least until Labor announces a cut-off date for locking in negative gearing and capital gains tax benefits under the prevailing rules. 

Short of that, it then becomes a timing question of how long it is until rental markets become tight again and upwards pressure on rents returns. 

There has been a record supply response through this cycle, especially for high-rise apartments, and growth in the dwelling stock has exceeded population growth for some time, even in the face of rampant growth in the headcount of Melbourne and Sydney. 

Tax changes loom

Labor claims its new negative gearing policy could help to stimulate construction, but it's doubtful - there's no precedent for net demand being reduced and rates of construction holding up across more than four decades of available figures.

If anything, the opposite seems more likely, since the two-tier tax policy must lead valuers of new builds to consider the resale value of what has become a second-hand property at settlement.

It's not hard to envisage settlement defaults if units don't value up. 

In fact, it's been apparent to developers for some time that Labor will cruise to victory in the election, but apartment construction in particular is nosediving, which might prove to be an early indication of things will play out.

Meanwhile Chinese investors have been shot out of the market, leading to question marks around which buyers are going to supply the new stock now.

House approvals have slowed nationally year-on-year by about 7 per cent, while attached dwelling approvals are down by more than 50 per cent from a year earlier.

There is a seasonal aspect to building approvals, but the most recent few months of figures reported have been much weaker.

The results aren't down to recession levels just yet, but apartment pre-sales do suggest that the pipeline is now shrinking fast. 

Approvals are one thing, but the outlook for actual construction activity is quite another - AiG's apartment construction index has fallen for 16 of the past 19 months (and all of the last eleven), and in recent months the readings have imploded to sit well below 30. 

Sydney's population growth was tracking at close to 100,000 per annum, although this should figure should ease as the harbour city leaks residents interstate to south-east Queensland, while Melbourne's population growth has been even higher at unprecedented levels of about 125,000 per annum. 

Clearly it's silly to be even talking about a structural oversupply given these mammoth absolute levels of population growth, but still there's a glut of new apartment stock to be cleared, and this will take time to be worked through. 

Christmas seasonal spikes aside, Sydney has currently about 22,500 or so rental vacancies, while a more balanced rental market might be represented by only about 15,000 vacancies.

The main apartment gluts are in locations such as the Hills District, Epping, Blacktown, and certain parts of Western and South Western Sydney, Parramatta, and North Sydney, while there's also still is a bit going on in Mascot, Green Square, and Zetland.