Actions not words

Actions speak louder

Some Sunday thoughts for you here (or click the image below).

Take a read of the back catalogue of blog posts here.

Household debt ratios revised lower (again)

Debt ratios down again

Household debt to disposable income ratios were revised a little lower again this quarter, according to the latest RBA statistical tables. 

Ergo, household debt still remained below 1.9x disposable income as at March 2019. 

In fact, the revised ratio was steady at a nick below 1.9x for the fourth consecutive quarter. 

1½ years ago now there were heaps of excitable articles doing the rounds about the (presumably psychological) significance of household debt hitting 200 per cent of disposable income - some even wrote about the ratio hitting 300 per cent, for reasons that weren't entirely well thought through.

But in any event those figures were subsequently revised down and today sit well below 200 per cent. 

Net of offset accounts the ratio is materially lower than 1.9x, and net of deposits the ratio is broadly unchanged in 15 years. 

Of course debt serviceability has improved markedly as interest rates have declined. 

Looking forward the debt ratio will likely decline as overpriced interest-only loans are switched across to cheaper P&I loans, and as tax and interest rate cuts free up household cashflows while allowing nominal wages growth to recover. 

Rates down

Bond yields continued their multi-year declines in June; even the 15-year is tracking at around 1.5 per cent, which shows just how much low interest rate expectations have become embedded. 

Mortgage rates are now available from 2.99 per cent, so it shouldn't be too surprising that housing debt is higher than when mortgage rates were running close to double-digit levels (as they were as recently as July 2008). 

Further rate cuts may not be passed on in full by lenders.

But one thing that shouldn't be overlooked is that - despite recent attempts to besmirch the role of mortgage brokers - borrowers are becoming ever-better informed. 

The marketplace does not not lie: in the first quarter of 2019 a record 59.7 per cent of loans were settled by brokers, a figure which might be expected to rise to ¾ of loans over the next half-decade. 

I wrote about 10 of the ways in which debt ratios can come down here. 

Double tap

Double tap

RBA to cut again in July, and then again by November.

Via Sir Bill Evans of Westpacshire:

Source: Westpac

Weekend reads

Must reads

Please find the must see articles of the week here, where you'll find out more about what lenders are targeting in their loan assessments. 

You can subscribe for Michael's popular podcast here.

We'll be recording a few podcasts together in the coming weeks, which I'm especially excited about.

Have a great weekend!

This is why you need to understand the 3 Cs

Cost, choice, & control

I've just had a brief break enjoying the European summer.

In this short video I make a few pithy observations from my time in Dublin.

And then I go on to discuss the 3 Cs of managing your own money: cost, choice, and control.

You can watch it here (or by clicking on the image below).

Pre-election economy: sand in the gears

Credit stymied

Credit growth had slowed to just 3.6 per cent over the year to May 2019, which was the month of the Federal election.

Broad money growth was off the mat at 4.1 per cent.

Business credit grew by just 0.1 per cent in May, after a flat result in April.

It's tricky to know exactly what personal credit growth is measuring these days - not very much by the looks of it! - but new car sales have slumped, and personal credit growth was in recessionary territory at negative 3.2 per cent. 

Meanwhile credit growth for investment housing was the slowest ever at just above zero, with Labor's pre-election pledges weighing here in conjunction with caps on total investor lending, the interest-only reset, and other tighter lending practices. 

ANZ, Westpac, and National Australia Bank each recorded shrinking mortgage books for investment loans over the year to May 2019, with only Commonwealth Bank of the majors scraping into positive territory. 

Impulse to improve

Overall housing credit growth was the lowest since records began in 1976 at just 3.67 per cent, although the rate of decline had already bottomed out at the end of the first quarter of 2019. 

Accordingly the credit impulse chart - which does have some limitations, it should be said - was already turning north by the election date, with capital city housing prices set to follow suit. 

Since the election there has been an interest rate cut and the ALP's proposed suite of taxation changes have been rejected by the electorate, so housing sentiment has lifted noticeably throughout the month of June. 

One of the interesting things which came out of Labor's negative gearing calculation blunders was the striking and vital importance of investors in driving construction cycles, especially for new apartments.

Notably the investor share of outstanding credit has now fallen to the lowest level since 2012, and at 32 per cent of housing credit sits well below the 15-year average. 

It would be a brave investor to buy into some of the new high-rise apartment developments on offer in the prevailing environment - ironically the design of Labor's now-redundant policy was all set to funnel more investors into exactly this style of property - with high-profile building defects now grabbing almost daily headlines. 

A stylised calculation suggests that apartment construction may roughly halve leading the housing cycle towards its next undersupply by the end of H2 2020. 

Infrastructure dunked

Public works slow

The mining construction boom came to an end in 2012 and was replaced by a surge of dwelling investment and then infrastructure spend, but this now seems to have run out of puff too. 

Engineering construction activity for the public sector plunged 16 per cent lower year-on-year, and with renewed mining investment not showing up total activity suffered double digit falls over the 12 months to March 2019. 

With the honourable exception of Tasmania, there were hefty falls across the board.

Quarterly activity of $3.3 billion in Western Australia was the lowest since 2005, and way down from a peak of more than $13 billion in 2012. 

Activity in the Northern Territory has almost totally ground to a halt post-Ichthys. 

The results for each of the three main states were solid, yet even here the smoothed trend now points to a slide.  

Overall, not good.

RBA to hit pause?

Analysts are divided on what comes next for interest rates: another cut in July or 'wait and see', Mr. Micawber style, in the hope that something will turn up?

It's not entirely clear what might turn up with housing starts declining and job advertisements now in decline; futures markets are implying about a 70 per cent chance of a July cut at the time of writing. 

Policy makers have gotten into something of a bind. 

Inflation remained well below the target band through 2016 and 2018, but the Reserve Bank didn't take the cue and instead opted for a mantra of stability and confidence. 

It seemed to be working initially, but the housing downturn has since begun to bite. 

Nobody can say for sure where NAIRU is, but given the abject lack of inflation it could feasibly be at 4 per cent or lower.

This in turn implies that between 100,000 and 200,000 Aussies might be unnecessarily idle, sacrificed on the altar of financial stability. 

So that's clearly my argument for a cut, but what about...

Something that might turn up?

Behind the scenes 3-month rates have been tracking at close to record low levels (both 3-month and term are where Aussie banks hedge, fund, and borrow, while deposit flows have been strong). 

This is some welcome news as it allows banks breathing space to reduce mortgage rates on new loans. 

The Bank of Queensland will unleash a 3 year fixed rate mortgage product for owner-occupiers at 2.99 per cent through broker channels, presumably effective next week. 

Source: BOQ

BOQ subsidiary Virgin also just announced a 3 year fixed rate product for owner-occupiers at 2.99 per cent, for loans up to 90 per cent LVR, effective today (June 28). 

And UBank will also introduce a 1 year fixed rate mortgage of 2.99 per cent.

Tax cuts and very low inflation should assist household cashflows as nominal wages growth recovers.

So there's your case for 'wait and see'.

It will be interesting to monitor the broad money growth figures at the end of the month for any further signs of a lift. 

Silicon rocks

7 year itch

I was in glorious Dublin this week, which looked at its very best as it basked in the Irish summer sun.

Having spent quite a bit of time in Dublin over the years much of the city is familiar, but in saying that this was my first visit in the best part of two decades. 

The city is absolutely pumping with summertime tourists and cement mixers and cranes, and the word locally seems to be that the housing market in Dublin is getting close to another top after a 7 year bull run. 

The inflationary Help to Buy Scheme expires at the end of this year, and presumably the impending arrival of Dublin's first skyscraper - partly comprising residential flats - is a reasonably reliable indicator of a market approaching its cyclical peak. 

Docklands boom

Most of the staff at the Central Bank of Ireland moved to new premises on the regenerating Docklands strip in 2017, and it was wryly amusing to see a central bank so comprehensively encompassed by a plethora of cranes. 

But by far the most striking part of my riverside travels was the impressive impact of the Silicon Docks in the area around Grand Canal Dock (formerly known by a somewhat less bullishly pioneering moniker: Misery Hill). 

Incidentally, a hat tip to me old mucker and former Dubliner Jamie Smyth at the Financial Times who reportedly coined the term Silicon Docks back in 2011, before securing his Aussie citizenship and jumping ship to the FT Down Under. 

The local economy has evidently been buoyed by its low corporate tax rate of just 12.5 per cent and seed funding enterprises, resulting in a tech explosion.

Pick a big tech name and most likely you'll find them here at Silicon Docks: Facebook, Amazon, Google, Twitter, LinkedIn, Pinterest, Airbnb, Accenture, Dropbox, TripAdvisor, Groupon, Indeed, and a veritable stack of other big names besides. 

Half of the local renters are employed by big tech, and it's caused something of a boom, with well over 100,000 tech professionals employed in the locality. 

Australia's tech hub

Closer to home, last year one of my left-field calls was that the Australian Federal election could throw up a few surprises such as funding or a proposal for an Aussie tech hub, perhaps at Gold Coast, or in the ACT, or in another regional location.

Well, it was a nice idea Peter, but obviously it didn't transpire.

Instead it's become abundantly clear that Sydney Harbour will become Australia's tech hub. 

This seems like a potential missed opportunity, with the population growth of Greater Sydney accelerating in 2018 and roaring past 5.3 million in the process, which can only cause demand for housing to shift towards inner-suburban transport hubs or areas that are walkable to the city.

At the suburb level the most obvious beneficiary of Sydney's tech boom will be Pyrmont, with Google hoovering up masses of commercial space and a spate of A-grade apartments achieving multi-million dollar price tags across recent weeks.

Tech giants Amazon, Facebook, Apple, Tesla, Twitter, and LinkedIn have all mopped up commercial space in Sydney, while Microsoft is at North Ryde. 

Sydney's apartment market is patchy to say the least right now, and new apartments have been in the headlines for all the wrong reasons lately.

But with mortgage rates continuing to fall - and set to fall further - expect to see A-grade units achieving record prices in suburbs to the north such as Mosman and Manly, Neutral Bay and Cremorne, Waverton and Wollstonecraft. 

The market has already picked up in some areas, most notably in northern suburbs where stock levels are scraping along at decade lows.

George Street saw its first tram action in more than 60 years this week, albeit in test run mode, and if and when the CBD & South East light rail ever gets finished there'll be a commensurate boost for the east: Surry Hills, Randwick, Bondi Junction, Queens Park, and Coogee, as well as Kingsford, Kensington, and Maroubra. 

Transactions continue to fall

Low turnover

The annual take from stamp duty and land transfer duty in New South Wales remained reasonably strong at around $8 billion over the year to May 2019, as bracket creep has pushed property taxes far too high. 

Those numbers are flattered by settlements from the tail end of the construction boom, however. 

And even still transaction levels have continued to plunge towards decade lows over the year to May 2019. 

Once the off-the-plan boom washes through the transaction levels will be at decade lows for sure.

While I agree that stamp duty is an inefficient tax at its current too-high levels I won't ever get behind the well-meaning but ultimately flawed push for a broad-based land tax (whereby the unimproved land valuations mysteriously yet inevitably rise vigorously every year, regardless of prevailing market conditions). 

Many investors already know about this all too well. 

For all its foibles at least stamp duty is a known dollar amount. 

If you trust governments to maintain annual property levies at a reasonable level, well...ha. 

No risks allowed

Reducing risk?

There's a lot of teeth-gnashing going on about the stalled economy right now, leading to ever-louder calls for record low interest rates, government fiscal stimulus, quantitative easing, helicopter money, and goodness knows what else. 

Goldman Sachs are now calling for the cash rate to fall 100 basis points this year to just 0.50 per cent, for example, while others expect QE to kick in sooner. 

OK, but let's take a step back and consider for a moment how all this came about? 

It's not too big a leap to conclude that at least part of the economy's slowdown was caused by the combination of a banking royal commission and a fairly savage crackdown on mortgage lending. 

The ADI exposures for the March 2019 quarter suggested that the five-year squeeze on higher-LVR lending may finally have run its course - at least as a share of the loans actually still getting written. 

However, the volume of loans written was some 19 per cent lower than two years earlier (despite a population increase of about 800,000 over that time). 

As for the 'mysterious' retail recession and abject lack of household consumption? 

Well, here's one way that more and more dollars have been sucked out of the economy: the lowest ever volume of interest-only lending on record getting through the net in the March 2019 quarter, now down by more than ¾ from the peak. 

The stock of outstanding IO loans fell to a fresh record low share of mortgages at 23 per cent, a colossal fall from 39 per cent only a couple of years earlier.

No wonder the economy has felt the pain, that's a tremendous reconfiguration of household finances in such a short space of time. 

Loans to investors were down by a third from two years earlier, rendering investor credit growth non-existent.

Mind you, owner-occupier lending was down 15 per cent year-on-year as well. 

Meanwhile, low-doc loans have essentially ceased to exist, and in fact other non-standard loans have by and large gone the way of the dodo too. 

Let it flow!

Many of us, including me, doubted there'd be such a resolve to crack down so effectively on the excesses in mortgage lending.

Fair play, and credit here where it's due.

But while many still seem to be cheering on ever-tighter lending criteria, it's also worth recounting the RBA's point that the appropriate level of risk in the mortgage market is not nil, and that there should always be an element of speculative demand in the market.  

After all, it's all a bit circular if the solution to the slowdown is interest rates being cut over and over and over again.

Better to get some credit flowing and let banks lend to willing borrowers while we still have some!

Tourism switcheroo, to the big cities too

Tourists flock to cities

Not content with dominating the other parts of Australia's services economy, Sydney and Melbourne are now cleaning up from a tourism perspective too.

The extraordinary boom in Chinese visitors to Australia has finally slowed to an annual growth of 3 per cent at 1.3 million.

But they're still spending more, with total spend by Chinese tourists ripping 10 per cent to a record $12 billion. 

Overall tourism spend hit a fresh high of $44.3 billion over the year to March 2019. 

Source: TRA

Visitor numbers have been mixed from the US, despite a favourable shift in the currency, and soft from Britain. 

The booming sector is now in Indian visitors, tearing another 15 per cent higher to 343,000, with total nights another 21 per cent higher year-on-year. 

More than half of Indian tourists (53 per cent) state that they are VFR - visiting friends and relatives - much higher than the norm for all international tourists (30 per cent). 

Source: TRA

The other growth sector is for education arrivals, up 7 per cent over the year to 586,000, with trip spend growing 9 per cent here too.  

Tassie has drifted back out of favour a bit, and so too have Perth and South Australia.

Sydney and New South Wales (4.3 million visitors) and Melbourne and Victoria (3.1 million visitors), on the other hand, are becoming effective Meccas for tourists looking to deploy their cash, with soaring spend of $11.2 billion and $8.5 billion respectively!

Source: TRA

Queensland saw a boost from the Commonwealth Games in Q2 2018, but this will drop off the annual figures next quarter and normalise the results for the Sunshine State somewhat. 

Here we go again

Easy money...

Bitcoin is now trading back up above $10,000, having begun the calendar year at under $4,000.

That makes for a year-to-date gain of 169 per cent.

A Libracoin bump? Who knows?

Still not dead, anyway.

Meanwhile in the US...

Overhang?

Construction boom

Sydney went through a record period for dwelling starts between 2014 and 2016, especially for new apartments. 

Measuring dwelling supply against demand is far from an exact science, as it depends upon population estimates and constantly shifting trends in household formation.

For example, it transpires that population growth in New South Wales was higher than previously estimated in recent years, as you might have guessed if you live in heaving Sydney. 

With commencements remaining high through much of 2018 there's going to be an apartment overhang for Sydney to work off, with many similar projects hitting the market contemporaneously. 

So you have suburbs like Carlingford, Epping, Ryde, Homebush, and Miranda with a lot of very similar apartments looking for tenants. 

Though with the state's estimated annual population growth accelerating to around +124,000 in 2018, there's no evidence of a structural oversupply of dwellings; rather it's a temporary glut to be worked off. 

By the beginning of this year the ratio of population growth to dwelling starts for New South Wales was roughly back in line with the 30-year average at just under 2 (new apartment projects tend to house fewer people per dwelling than we saw in historical cycles too). 

In Victoria it's an altogether different story. 

As the mining boom faded FIFO workers relocated interstate and many chose to head to Melbourne, so not only was the Victorian capital attracting immigrants from overseas it was pulling in economic migrants from interstate too. 

Lob in the natural population increase and the Victorian population went through its most striking boom since the Gold Rush, which has overwhelmed the lift in construction. 

With a credit squeeze and duty surcharges for foreign buyers quelling dwelling supply in 2019 and population growth across the state running at close to +140,000, Melbourne looks set to get very tight.

I looked at the trends for vacancy rates by city across recent years here.

Melbourne has a clear seasonal pulse, but has been steadily tightening for the past five years despite a period of record construction. 

Need some time in the Sunshiiiine

Time to shine

Queensland's population growth surged towards 90,000 for a growth rate of +1.8 per cent in 2018.

That's up from about 80,000 in 2018, for the strongest growth since the mining boom of 2012, and takes the population of the Sunshine State to beyond 5 million. 

As at December 2018 New South Wales had a population of more than 8 million, and in Victoria the estimated resident population moved above 6½ million. 

The increase for Queensland is being driven by net overseas migration as immigrants head for the south-east Queensland lifestyle and Aussie expats return from pastures elsewhere. 

The inner city of Brisbane saw an apartment building boom between 2013 and 2016, but things have visibly calmed down in this regard over the past couple of years. 

Measured on a statewide basis the ratio of estimated population growth to dwelling commencements has rebounded to the highest level in half a decade. 

Accordingly Brisbane's rental market is now steadily tightening, following a difficult period for landlords. 

Newsletter subscription

Weekend reads

The must read articles of the week, summarised for you here at Property Update.

Make sure you read the piece about Sydney listings at decade lows!

You can subscribe for the ace free newsletter content here.

Aussie stocks rally

Stocks fully priced

It's been a big period for Aussie stocks, recording a third straight week of gains in adding another +1.48 per cent this week. 

Aussie stocks are now just a couple of per cent from their historic highs of yesteryear. 

The accumulated returns - including dividends - are plotted below (courtesy of @Scutty via Twitter):

Almost by definition buy and hold isn't going to do as much from today's levels, as market valuation are no longer cheap. 

The US S&P 500 opened and closed at record highs yesterday as markets price for rate cuts in the US too. 

It's time to look further afield if you want better than average returns. 

---

In other news major Aussie bank economists are now falling over each other to predict rate cuts in July and August.

And finally, if you've been short iron ore, look away now...

Have a great weekend!