Bit of a chartfest today: a look at the tale of woe that is building approvals in six quick charts.
Attached dwelling approvals nosedived another 18 per cent in July 2019 to be 44 per cent lower than a year earlier, driven by huge ongoing declines in unit approvals in Sydney, Melbourne, and Brisbane.
The sector faces the twin ongoing challenges of financing and confidence, especially given all the media coverage of building defects and cladding issues.
House approvals also saw declines across each of the four main capitals to be 17 per cent lower than a year earlier.
And even sprightly Hobart hasn't been immune to the credit squeeze, with approvals now trending lower.
Perhaps an alternative to QE might be building some housing, with public sector approvals stuck at near-record lows (and actual record lows as a share of the existing housing stock).
Piecing it all together, seasonally adjusted building approvals fell to just 12,944 in July, having peaked at nearly 23,000 in November 2017.
Attached dwelling approvals fell to only 4,573 in July, having peaked at 12,688.
Non-residential building work approved has held up better, but overall the annual value of building work approved has slumped from $130 billion to $112 billion, and it's quickly becoming quite some hole to plug for the economy.
Annual dwelling approvals have already slumped from 233,000 to 183,000 and continue to trend lower, sowing the seeds of the next housing shortage.
Although there are still many units under construction in Sydney and Melbourne, these are mostly pre-sold and the new supply issue isn't stopping s healthy rebound in sentiment.
In fact, CoreLogic's index shows a massive +1.6 per cent gain for Sydney this month with Melbourne at +1.4 per cent, and while I don't/wouldn't pay much heed to short-term price or index movements the ensuing headlines themselves probably help to flip sentiment.
ANZ downgraded its GDP forecast to just 0.2 per cent for the June 2019 quarter, and 1.1 per cent for the financial year.
This would equal the worst growth rate since the early 1990s recession.
The Fed's Mary Daly yesterday stated her bias for running the US economy hot, noting that the benefits to employment and growth outweigh the potential costs, and that persistently running inflation below the 2 per cent target was 'worrisome'.
Perhaps with luck her next gig will be Down Under, because here we're rapidly approaching half a decade of CPI below the target in Australia!
Today there was plenty of upbeat reporting of what was, in the end, another negative result for CapEx.
Total private new capital investment fell by 0.5 per cent in the June quarter to be down 1 per cent year-on-year at $29.2 billion.
On the upside mining investment has at least bottomed, and this sets the scene for a recovery in 2019-2020.
Around the states New South Wales saw a solid 5 per cent increase in capital investment over the financial year, and there were double-digit gains for Victoria and South Australia.
But the mining jurisdictions continued to drag, for one final financial year.
In the post-Ichthys Northern Territory, which only accounts for a small share of the total, investment fell by more than 60 per cent in FY 2019.
Overall the result for actual investment was undeniably weak.
On the plus side the third estimate for 2019-20 was notably better than the prior year equivalent figure at $113.4 billion.
As such the outlook is arguably a little brighter with mining investment no longer falling and services businesses tentatively ramping up investment plans.
However, the partials will be a further drag on GDP for the second quarter, with the end result looking set to be a damp squib.
In this recent post I explored how the average commute time in Sydney hit a record high in 2017, as it did in Brisbane, Adelaide, and Perth.
And these data relate to the period immediately before the great bulk of apartment completions in this record construction cycle, which as any Sydneysider will tell you have had a meaningful impact on typical travel times.
Informed or influenced by earlier experience in London, I must have made this point a hundred times on this blog over the years: this is only going to increase the popularity of inner-ring suburbs, and those locations with both 'walkability' and direct train link access for the City.
The average or mean commute times only tell part of the story due to the compositional shift of more apartments being built close to transport nodes, and the natural tendency for workers to gravitate closer to their place of employment.
But as Sydney's population pumps seemingly at warp speed towards 5½ million the congestion challenges are becoming very real.
Australia's population clock, which estimates the resident population, will blast past 25½ million within a month.
CoreLogic looks set to report housing price gains of 1½ per cent for Sydney for the month of August 2019, with Melbourne not too far behind, and modest gains for Brisbane.
SQM Research will forecasts 'double digit gains' for Sydney and Melbourne housing over the year ahead.
A quick look at the construction figures for the June 2019 quarter revealed another significant 5 per cent drop in residential building, taking the total value of residential work done 10 per cent lower year-on-year.
Apartment building is slowing everywhere, especially in Sydney, with Queensland also showing ongoing declines.
Overall, medium density construction fell throughout the 2019 financial year, with AiG's more timely surveys suggest plenty of further contraction to come.
It wasn't just housing construction that fell over FY 2019.
Non-residential construction work done plunged 6 per cent in the June 2019 quarter alone, while engineering construction was very disappointing in falling 16 per cent over the year.
The decline in engineering construction had for years been driven by Western Australia, but that is no longer the case with WA recording a decent rise.
The fundamentals for the WA economy are now looking much healthier; what's missing here is some more confidence.
Although a great swathe of infrastructure projects held New South Wales engineering work firm, elsewhere there were declines, while in the recessionary Northern Territory engineering work done has collapsed alarmingly by 87 per cent from its 2015 resources-driven peak as the Ichthys project construction phase fades.
GDP weakness continues
Overall these numbers were weak with construction work done falling 11 per cent over the 2019 financial year.
This is noteworthy because construction, especially the construction of dwellings, is known to have such a strong multiplier effect on other parts of the economy.
We don't have enough information yet to know for sure, but it looks quite possible that the economy grew only modestly in the June quarter following on from several consecutive quarters of soft growth.
This has already led commentary to speak of a 'per capita recession', whereby domestic product has been growing no faster than the rate of population growth.
It's a silly term, in some ways, but it looks like we might be stuck with it for a few more months yet!
JP Morgan downgraded its GDP growth forecast for the June quarter from 0.5 per cent to 0.3 per cent.
Thankfully a bit more news to get stuck into this week.
In the absence of anything else to talk about from the weekend, preliminary auction clearances rates continued to rise to 80 per cent across the capital cities, which was the highest result since 2017.
The strong result was driven mainly by Sydney (85 per cent) and Melbourne (80 per cent).
Economics guru Bill Evans of Westpac reported over the weekend that a further 50 basis points of interest rates cuts seem assured, with further stimulus beyond this perhaps to follow.
Iron ore staged a temporary reprieve in closing up 4 per cent on Friday at $87.81/tonne (62% Fe Fines) following a somewhat brutal four weeks.
The correction should be seeing in some context, though.
The Federal Budget had assumed that the spot price would fall to finish March 2020 at just US$55/tonne, so prices and receipts at these levels are still filling up the government coffers rather nicely.
Housing prices recovering since the election date: some excellent chartage via the Property Chat:
Source: Wombat777, Property Chat
The source data is via CoreLogic's Daily Home Value Index.
The past month of figures extrapolated point to about 5 per cent further price gains for Sydney and Melbourne by the end of 2019.
ANZ's economists calculated that auction clearance rates point to 15 to 20 per cent annualised price growth for Sydney, but that seems unlikely on a city-wise basis (for genuinely scarce stock...maybe).
There's been some evidence of positions being filled more quickly in Victoria and South Australia, but this is now being more than offset by elongated job searches elsewhere, including in Queensland. Western Australia, Tasmania, and the Northern Territory.
At the capital city level there's some evidence that roles are being filled quicker in Melbourne and Sydney, but not so elsewhere (and certainly not regionally).
In Greater Sydney the participation rate has continued to trend higher for both genders since 2011, to the extent that even robust jobs growth hasn't been able to stop the annual average unemployment rate rising for a 4th consecutive month to 4.23 per cent.
While Melbourne is still recording steady improvements there's no compelling evidence that NAIRU and the desired wage acceleration is getting any closer.
If anything full employment is now elusively pulling further away with about 715,000 unemployed persons in July equating to a trend unemployment rate of 5.3 per cent and drifting higher.
Race to the bottom
It seems that banks have seen enough to take a view on the trajectory of interest rates, to the extent that we'll now see more and more mortgages with a 2-handle.
Some 'lit' fixed rates are now available all the way out to five years..
Via the St George dragon:
Source: St George
This is significant, not only because the headline rates are low, but also because when combined with a serviceability buffer of 250 basis points there is now some more capacity for owner-occupier borrowers.
My simple if stylised analysis shows that mortgages written at a rate of lower than 4¾ per cent can be treated a bit more favourably under the revised 250 basis points buffer.
The most timely available ATO statistics showed that owning a rental property remains a popular choice with Aussies.
Given the increasingly fluid nature of the workforce - and that the public sector is now providing close to zero net additions to the rental supply - it's hard to imagine this changing much any time soon.
Most investors owned a solitary rental property, with relatively few landlords owning significant portfolios (contrary to Labor's election spiel which contorted the data like Uri Geller bends spoons).
Since the interest rate easing cycle began in earnest in late 2011 the number of individuals claiming paper net rental losses after capital works and depreciation deductions - which is not necessarily the same thing as those with a negative carry - has declined, in spite of a huge surge in the Aussie population over that time.
In fact, according to the ATO data there has been little change in the number of negatively geared claimants since the 2007-8 income year.
Up until the 2012 income year negative gearing claims were punching quite a hole in the Federal Budget, with net rental losses totalling close to $8 billion, although of course any objective analysis would additionally take into account all taxes paid by and levied from private landlords.
As mortgage rates have declined so too have total net rental losses, down towards about $3½ billion by the 2017 income year, despite half a decade of only limp growth in rents.
Tax changes pushed through
Although not always taken into account in commentary, the Coalition made significant inroads into future negative gearing claims by making sweeping changes to the ability of investors to claim second-hand plant and equipment depreciation under Division 40, and by disallowing travel expenses for landlords.
This effectively removed the potential for double-counting of depreciation by successive landlords, as well as the spurious practice of property investors claiming deductions for flights to coastal south-east Queensland, ostensibly to inspect rentals.
I discussed what all this might mean for the housing market and the Federal Budget going forward with quantity surveying supremo Mike Mortlock of MCG Depreciation.
Mortlock noted that not all investors have been impacted by the Coalition's changes, since some about 40 per cent of depreciation schedules prepared in their business sample were for new-build properties (compare this figure with Labor's bungled modelling during the election campaign, which was 'so far from the truth it's not even funny').
Moreover due to grandfathering the full impact of the the changes won't flow through for some time, although a significant chunk has already taken effect according to Mortlock.
The average depreciation lost by investors for the first year of claim has been a punchy $6,870 under the diminishing value method (or $16,866 lost under the diminishing value method over the first five years) for MCG's clients.
As a side note, a subsequent legislative change TR2019/5 became effective 1 July and is further reducing benefits for investors in established properties, but since investors in new properties have often been able to increase claims the net impact on the Budget here is likely to be minimal.
Interest deductions plunging
Following the credit squeeze, and after accounting for these changes to depreciation and travel expenses, it's still likely that there will only be modest ongoing declines in net rental losses in the 2018 and 2019 income years.
However, my stylised projections show that with the interest rate differential for interest-only loans now snapping shut - and with record low mortgage rates now on offer from '2 point something' - assuming market pricing we could see net rental losses dropping sharply in the current financial year 2020 (and possibly even all but eliminated in the years thereafter).
Labor had dubiously claimed that its negative gearing and capital gains tax reforms would save the Budget an outlandish $32 billion over the course of the coming decade.
Yet with mortgage rates now so low - even casting to one side any shortcomings in the ALP's modelling - by the end of the current financial year the Budget impact of negative gearing reform will likely be fairly immaterial.