2-handle

Down we go

Here come the record low mortgage rates as interest rates fall.

And yields are not just falling in Australia by the way.

Despite the Fed's optimism, financial markets are now pricing for three rate cuts in the US by the end of next year too. 

Greater Bank will be the first Aussie lender to offer a 1-year fixed rate product at 2.99 per cent. 

(Source: Gemma Acton, Rate City)

Earlier today National Australia Bank cut its 2-year fixed mortgage rates by 20 basis points to 3.59 per cent, including a first homebuyer special at 3.49 per cent.

And Bank of Queensland is now offering 3-year fixed rates from 3.39 per cent.

But they could be heading lower, so do you even need to fix just yet?

Supply to tighten

Approvals drop further

There's been a marked positive shift in property sentiment since the election.

Still the Victorian government seems to be doing its darnedest to quell new dwelling supply, hiking surcharges to non-resident buyers yet further - on top of land taxes - and the State Budget introducing huge changes to the stamp duty to be paid be developers on land. 

In the end, this will be passed on to dwelling prices, and will naturally drive non-resident investors to other states. 

Sentiment for development was already very low pre-election, and this was reflected in another 5 per cent monthly decline in approvals. 

Attached dwelling approvals were 29 per cent lower year-on-year, driven by substantial declines for apartments in Sydney, Melbourne, and Brisbane.

Detached housing approvals were down 21 per cent over the year too, again driven by the big capitals, though Perth is finding a base at last. 

Piecing it together monthly approvals are now running below 15,000 per month, having previously tracked at around 20,000 per month for quite some time. 

Supply is tightening, and despite the protests to the contrary, buyer urgency has turned around sharply, all but on a dime. 

10-year below cash

MOAR cut calls

JP Morgan was out to update its forecasts and call for no fewer than four interest rate cuts over the next 12 months to a record low of 0.50 per cent.

In the past few minutes Australia's 10-year government bond yield ticked down to 1.499 per cent.

Which is below today's official cash rate of 1.50 per cent.

Remarkable times.

Will the government take this opportunity to borrow and invest in some infrastructure?

Rebound is on

Prices rising

With the blindingly obvious caveat that an index doesn't denote anything meaningful for individual properties, metropolitan housing prices are now rising again. 

Sydney and Melbourne home values both rose over the week for the first time since all the way back in 2017, with a 0.3 per cent gain for Sydney, and a marginal increase in Melbourne. 

Commonwealth Bank CEO Matt Comyn reported the largest volume of loan applications in six months this week, now that the looming threat of wholesale changes to taxation has been extinguished. 

Whether or not those loans are approved on a timely basis...let's see. 

The bottom's been 'n' gone in the established housing market, but new dwelling markets still have a long way to clear. 

It was interesting to note during the downturn phase that all those old real estate clichés about there 'always' being a level of competition for A-grade stock did to a large extent hold true.

In saying that, some investors still got battered by paying wildly inflated prices during the frenzied peak, or through overcapitalising. 

Better lucky than smart

The Lucky Country

MYEFO sensitivity analysis showed that +/- $10 per tonne to the assumed FOB iron ore price, if sustained through the year, could add $12 billion to nominal GDP in 2019/20.

Better still it could add a humongous $3.6 billion in tax receipts.

The Budget had assumed a FOB price of $55/tonne.

Well, hold the front page, as it's currently about double that.

Indeed the iron ore price is now up by 184 per cent from the December 2015 lows at more than US $108/tonne, and it's ballooning higher by the day. 

For completeness here is the same data series charted back to the peak of the iron ore price bubble of 2008.

It's worth noting that the Aussie dollar today is trading at 69 US cents, a far cry from 110 US cents back at the peak of the heady mining boom days, which boosts the Aussie dollar value of exports enormously.

What. A. Windfall.

The Budget will apparently be back to surplus about a year earlier than previously forecast.

Can ScoMo push through some tax cuts now, please?

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Commonwealth Bank CEO Matt Comyn said the bank had its busiest week for loan applications in some six months as sentiment has turned positive after the election.

Big surge in student visas

2,322,000 temporary visas

The Department of Home Affairs released the latest temporary entrants visa holders which are always worth a squint. 

The number of bridging visas continued its apparently endless increase to record highs, representing the surge in temporary migrants looking to extend their stays on another visa type. 

But the most striking move year-on-year was the +77,000 increase in international student visas to a stock total of 613,000.

Student visas have increased by +48 per cent or +200,000 over the past five years, adding substantially to the capital city populations.

You can click on the chart to expand it:

An interesting sub-plot is the steady but determined increase in the number of students obtaining graduate visas, granting them permission to join the labour force for 2-3 years (many of these will then surely become permanent residents in due course). 

Over the past year the number of temporary entrant visa holders increased by +92,000 to a record high of 2,322,000.

And over the past five years the increase has been a thumping +430,000 or +23 per cent. 

Australia's estimated resident population has ballooned to 25,386,400.

It's always worth considering that some temporary visa holders might be inclined to depart in the event of severe downturn in economic fortunes.

On the other hand Kiwis may be inclined to remain in situ, depending upon what's playing out across the Tasman, students would presumably keep studying, and a lower Aussie dollar might also boost demand for visitor visas, so it's not quite as clear cut as it first appears.

In the end, there is just a helluva lot of demand for Australia Inc. and over the years this has been consistently reflected in surging visa numbers and massive growth in the estimated resident population. 

Recession priced out

Mood brightens

There's been a lot of excited discussion about imminent Armageddon in Australia, but markets have sent a different signal, with the ASX 200 now a surprise top performer over the past year. 

Australia's banks and financials have had a tougher time of it over the past couple of years, with the threatened Royal Commission coming to pass and sending valuations much lower for a time. 

But here too the Aussie financials index has popped 17 per cent higher since the pre-Xmas lows, with a notable bounce upon the release of Hayne's report. 

Markets took a careful look at doomsday, but have since cooled on the idea. 

The election result has also now removed a lot of uncertainty surrounding capital gains taxes and other shifts, reflected in a spate of upbeat news articles on housing today. 

THIS is where the tech demand is going

Centralising demand

Without much fanfare, and while all the election fuss dominated the news headlines, over the past fortnight the ribbon was cut at the new designer digs at the Australian Technology Park.

Some 10,000 Commonwealth Bank technology and operations staff have thus begun their mass exodus from three other disparate locations in Sydney's Parramatta, Olympic Park, and Lidcombe to these new state-of-the-art offices in South Eveleigh in central Sydney, reported IT News. 

Source: Mirvac

This move is symbolic of a broader trend of tech-driven demand for central Sydney office space.

It's thought that bringing technology and operations staff closer together increases productivity, ideas, and bottom line results. 

Tech giant Google has moved into Pyrmont on Sydney's Darling Harbour to hoover up 50,000 square metres of space, transforming the future of the suburb towards that of a tech campus.

Meanwhile, Amazon is set to take over across the water at Market Street. 

Expect to see Google, Apple, Facebook, and Tesla dominating commercial space in Sydney's CBD and its immediate surround over the years to come. 

I discussed some of the key implications of these trends in this short video here. 

ScoMo bounce

How good are auctions

Auction clearances receive a lot of attention in Australia, mainly because they're a very timely indicator of sentiment, even if they're ultimately only a snapshot.

Analysts were looking for a turnaround in sentiment this week following the election result and the signalling of looser monetary policy. 

And, in Sydney, they got it, with preliminary clearance rates leaping to 70 per cent from 505 results. 

That's up from a final result of 56 per cent a year earlier.

Sydney hasn't reported a final result above 60 per cent for more than a year now. 

Melbourne ascended to 63 per cent from 788 results. 

Source: CoreLogic

Volumes are way down from the same time last year, with the fall in stamp duty take hammering state budgets. 

The other cities don't really do much in the way of auctions, but the results are included above for completeness.

Labor U-turn

A week is a long time in politics, and it must feel like a very long time to the supposedly united Labor party, as the hustling continues over the selection of a new Deputy Leader. 

More pressingly, there has been a dramatic about-face on the controversial Adani coal project, which people like me had long assumed to be unviable.

It's amazing what a shock defeat at the hands of the polls can do, though, with media reporting that Labor Party leaders have accelerated the plans to commence "a coalfield bigger than the UK".

Source: The Times

It goes without saying that this would be huge news for Queensland's economy if it does eventuate, and especially for employment in cities and towns such as Mackay, Townsville, Rockhampton, Bowen, and the Isaac region. 

Coal production is flying already, so throw in such a massive construction project and the obvious result is a shift towards full employment and wages growth. 

It has been reported widely in the media that the Carmichael mine could be breaking ground within only a few weeks. 

See you at Gold Coast?

Can't wait!

Register your interest here.

Lowest ever mortgage rates (rate cut spesh)

Deep cuts

Australia's lowest ever mortgage rates.

Coming soon, to a brokerage near you.

Variable rates are now being rolled out from 3.29 per cent (Early Bird spesh, with cash back).

Via RateCity:

Source: Rate City

And there's plenty more to come here between now and Q2 2020, with markets taking on board the Evans call for three rate cuts. 

Capitulation complete

Just cuts

It's been a long time coming, but the capitulation is now complete.

Bloomberg's latest survey of economists showed that all concerned see interest rates falling at least to 1 per cent over the year ahead. 

Notably, Westpac now sees three cuts this year, with further risks to the downside beyond that.

Bill Evans is usually ahead of the pack too.

Funding cost pressures are nowhere to be seen, so this should largely be passed on to borrowers.

Slow news day, you may have gathered, especially after the week we've had.

Bond yields sink to record lows

Yields hit new lows

Plenty of feedback and questions about 'when interest rates go up again' and the mortgage rate buffer.

An interesting point of note is that as and when interest rates do go up again, a buffer of 2½ percentage points would actually constrain the capacity to borrow (should the proposed rules remain in place, which they may not). 

But that's not something that's going to happen any time soon in any case. 

Of course, we all agree it is important to allow for changes in circumstances. 

Which is, after all, what the buffer is for. 

But you also need to look at the likelihood of 250 basis points of hikes, which - as market pricing shows - over the near term is effectively zero. 

Meanwhile bond yields across the curve have continued to decline to their lowest ever levels. 

Source: Bloomie

The 5 year bond yield is just 1.23 per cent, while the 10 year bond yield is at a record low of just 1.58 per cent.

Heck, even the 15 year bond yield is only at 1.85 per cent, so the squawking about rate hikes should be put into a bit of perspective. 

Or, looked at graphically.

An interest rate buffer of 250 basis points is very prudent, all things considered.

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Addendu,: further declines in yields overnight.

Mortgage rates heading to record lows (in memes)

Labour force in detail

The ABS released its (largely ignored) detailed labour force survey today for the month of April 2019. 

I've jotted down a few points of general interest below, with a couple of memes to brighten up an otherwise predictably wonkish post. 

Unemployment rates are no longer trending lower in Sydney and Melbourne. 

In several other capital cities annual average unemployment rates are floating well above 6 per cent.

Sydney has had such a tremendous run in this respect; yet so many construction projects are winding down now that it's difficult to see much in the way of improvement from here, even for an eternal optimist such as my good self. 

And still there's not been too much in the way of wages growth, though perhaps we are through the trough now. 

Gizza job...

The median duration of job search has improved moderately over the past year in New South Wales (13 weeks), and quite significantly in Victoria (12 weeks).

But it remains relatively higher in Queensland and South Australia (both 18 weeks).

The Northern Territory is highly seasonal but you'd better allow for six months up there in the present climate.

Here's the national picture: 

With inflation decelerating there's realistically nowhere for interest rates to go but down, and down again. 

Funding costs plunge again

Interestingly, as a sundry observation, bank funding costs have also receded to record lows, meaning that we may see out-of cycle cuts to fixed rate mortgages too. 

This represents a remarkable turnaround from last year when all the talk was about spiralling funding costs and how many times the Fed might hike.

Instead, borrowers look set to enjoy the lowest mortgage rates on record. 

Wealth Ways for the Young

For the young

My newest book, and the fifth in the series, is now available in all good book stores...

...and newsagents (it's the one on the right, hey)...

...and online now.

It's a book in two parts, for parents and for teenagers.

Big short

Cash burn

After the fundraising analysts continue to debate whether Tesla is going to zero due to its mountain of debt and appetite for burning cash.

The share price is now down 49 per cent since mid-December.

Funding secured.

Incoming windfall

Also of interest overnight, the benchmark spot price for 62% Fe iron ore was up another 3.4 per cent to fresh 5-year highs at $105.78/t.

The price is up by more than 12 per cent in a week as stockpiles are run down in China.

The low point was just $38.30/t in December 2015. 

Rivers of gold here for the government's receipts, given that even $10 above the Budget assumptions sustained through the year can add $12 billion to nominal GDP and $3.6 billion to tax receipts.

The 2019/20 Budget had assumed that the free-on-board (FOB) spot price would fall through the fiscal year to US$55/tonne by the end of March 2020. 

What a windfall incoming here!

This is what the election result means for you

Election result

I take a look in this short video.

Assessment changes

Changes to assessment

It's interesting to consider how a new assessment rate for mortgages might impact lending.

A simple but stylised graphic below shows that currently mortgages written under 4¾ per cent could be treated a bit more favourably under the proposed 250 basis points buffer.

Following market pricing for the cash rate - and assuming that those rate cuts are broadly passed on by lenders - then the impact would be felt far more meaningfully for loans written under 5¼ per cent. 

It makes good sense, and appears likely to keep a lid on interest-only lending to investors (typically at higher rates), while favouring homebuyers.

It's good to see a dynamic and pragmatic move.

An interesting addendum: were interest rates to increase again in the future then a buffer of 250 basis points would constrain borrowing capacity.

Buyers return: The ScoMo put

No personal grudges, but there sure are a lot of happy people in the mortgage broking, real estate, and development space that Bowen isn't going to be in charge of the coffers.

Investors may still find financing hard work if they're looking at interest-only loans, but there seems to be a good chance that homebuyers might be hoovering up idle housing stock and getting things moving again. 

To wit:

Source: Property Chat

Wow, what a difference a week makes.

Enquiries on the up too.

All eyes will be on auction markets when they fire up again. 

Sydney's gross rental yields have increased from 3.2 per cent to 3½ per cent over the past year.

But even assuming a couple of rate cuts there's a limit to what Sydney prices can do from here until rental price growth returns, and that's some way off. 

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A noticeably brighter mood up in Queensland this week. 

I always kind of knew Labor was unpopular up here, but at the moment they are very, very unpopular.