Slowest credit growth since Q2 2011

Credit growth doldrums

And now to the last of the data dumps from today!

Housing credit growth continued to slow to just 3.1 per cent - a record low - well down from 5.2 per cent a year earlier, reflective of lower stock turnover and prices in the first half of this year. 

ANZ's FY2019 figures this morning confirmed that the stock of interest-only loans continues to decline significantly, and provided evidence that more households are amortising their debt more quickly. 

Investor credit growth was actually negative over the year.

Remember, though, that these figures lag (note how housing credit hit a nadir in 2013, long after Sydney and Melbourne were on the road to recovery). 

Business credit growth slowed from a year earlier to just 3.3 per cent, while personal credit growth was a hugely negative -4.4 per cent year-on-year. 

Overall, this took annual credit growth down to just 2.72 per cent, the slowest level since June 2011, and essentially a borderline recessionary level. 

The wrap

Overall, it was moribund set of numbers, which again raises the question of why markets are threatening to price out further easing of monetary policy. 

One conclusion is that markets think the inflation target has effectively been abandoned - short of linking central banker remuneration to hitting the target it's hard to see how we'll get back to an average of 2 to 3 per cent any time soon. 

Another possible answer is that the housing market is now picking up strongly, as CoreLogic will confirm in its monthly data report tomorrow. 

As I discussed here all the way back in March - when all the doom and gloom was raging - credit growth is the wrong place to look for a turnaround in the housing market.

Bankruptcies at quarter-century lows

Huge drop in insolvency

For about 12 or 13 years now there have been seemingly endless reports that a record number of households are on the brink of ruin.

It's rarely backed up by the hard data, though.

AFSA reported that bankruptices fell to the lowest level since March 1995 in the September quarter, with Victoria faring especially well. 

That's despite the population increasing from 18 million to 25½ million over that time. 

25 per cent of bankruptcies are business related, according to AFSA. 

Personal insolvencies also continued to improve, with a significant 19 per cent decline from a year earlier.

There were notable improvements in Queensland, Western Australia, and Victoria. 

Indeed, if you look at the personal insolvency rate per 1,000 of the incumbent population, all jurisdictions have shown a significant improvement of late. 

Good to see, though not everyone is happy about it.

Some suggest that an unintended consequence of lower interest rates is an undermining of the capital allocation mechanism. 

That is, a short-circuiting of the bankruptcy process through sustaining zombie companies, resulting in weak productivity and wages growth. 

I don't buy that myself - I think a decline in bankruptcies is a good thing - but it's a counter-point. 

Building approvals continue to trend down

Units slump

Unit approvals continued to slump across each of the major capital cities in September.

In particular, the high-rise sector continues to get smashed lower as confidence has been shredded.

On the plus side, in real time detached house approvals may be forming a base in most cities, although Sydney continues to slide. 

Despite booming population growth, only one city has approvals running at record high levels: Hobart.  

There was one other modestly brighter point in the data, being a recent surge in non-residential building work approved in New South Wales.

This was related to the NSW Health 'hospitals building bonanza', which is expected to see $8 billion invested over a 4-year rollout period to develop new and upgrade existing facilities.  

There was also some slightly better data for regional Australia, which saw total seasonally adjusted dwelling approvals bounce to 14,000, up from a cycle low of just 13,000 in August. 

Overall, though, the trend for approvals remains down - driven by attached dwellings - and annual approvals continued to fall to 177,000, down from 227,000 a year earlier. 

Genworth soars

Mortgage insurance

It was a big third quarter for Genworth Mortgage Insurance in Australia. 

It's very disappointing to see that unemployment rates are now drifting higher in all mainland states ex-WA from a year earlier.

Full employment seems to be getting further away rather than closer as capacity in the labour force continues to expand. 

Despite this, delinquency rates were reasonably well contained at 0.60 per cent (up 5 basis points from a year earlier).

The delinquency rate in Western Australia was highest at 1.06 per cent, and there has also been some deterioration in New South Wales and Queensland. 

New delinquencies are cures improved in the third quarter, partly reflective of seasonality as well as generally improving housing market conditions. 

New insurance written soared 26.4 per cent year-on-year to $6.4 billion on the housing market recovery, while Gross Written Premium was up 24.4 per cent to the strongest level in four years as sentiment has rebounded.

Genworth (ASX: GMA) declared a special (unfranked) dividend of 24.2 cents per share.

The share price has accordingly rocketed higher, recording double digit gains at the intraday highs to nestle in above $4.

2020 may be a brighter year for Genworth revenues as more higher-LVR loans are written.

This is why connectivity matters

Connection rules

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Inflation decelerates yet further

No-flation

Rental prices increased by just 0.4 per cent over the year to September 2019, with nominal rental CPI effectively as low as we've ever seen over three consecutive quarters. 

There was once again very little inflation in the third quarter, albeit the cost of having fun went up a bit. 

There was a modest contribution from international holidays, and the 12.5 per cent federal excise on tobacco was the only other meaningful contributor. 

Let's take a slightly zoomed in look at the underlying measures of inflation.

Overall, it was another deceleration to just 1.40 per cent.

Here are the analytical measures for the wonks:

Sign of the times

Core inflation has now been under the target band for fifteen consecutive quarters, and it's still getting further away rather than closer. 

The weighted median reading for inflation this quarter was remarkably weak at just 0.33 per cent, and the trimmed mean wasn't much healthier at 0.38 per cent.  

If the idea is, as reiterated by Governor Lowe in this week's Canberra speech, to average 2 to 3 per cent over the medium term then there is some serious catching up to do (we'd need a series of Bradman-like figures to get back to an average of 2½ per cent). 

Arguably the overall result was roughly in line with the Reserve Bank's forecasts, which expect to see inflation meandering back to target some time in 2021, though few markets types around the traps actually seem to believe this. 

Research by ANZ this week confirmed that the construction industry is now spitting out jobs quite quickly, and tomorrow's building approvals figures may well show the trend for approvals running at the lowest level in about 7 years. 

It's a remarkable sign of the times that markets took the benign result to be forming a base of some sort, and have all but priced out a November rate cut. 

Does anyone really think we're likely to see inflation back in the target band any time soon on these figures?

Or any meaningful progress towards full employment for that matter, as construction activity tumbles?

As Sophia Rodrigues of Central Bank Intel has pointed out, if the sin tax excise on tobacco isn't extended in 2020, there's even further downside risk for CPI ahead. 

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Saving tax isn't the reason to invest

Understanding tax

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Moody's rebound forecast...for housing

Forecasting

Moody's sees house prices rising by about 12 per cent over the next two years in Australia at the 8 capital city aggregate level, with apartment prices to rise by just over 10 per cent. 

Source: Moody's

The gains are set to be driven by Sydney and Melbourne.

Truly, I've no idea how you'd run a sub-regional forecast by property type - let alone incorporating price growth to one decimal place - but here they are anyway!

For Sydney:

...and for Melbourne:

Fiscal consolidation (AAA)

In other ratings agencies news, Fitch affirmed Australia's AAA rating with a stable outlook, thanks to the government's commitment to the fiscal position and consolidation, and with a surplus forecast for FY19 and beyond. 

The Coalition government has copped plenty of media flak for continuing to pursue its long-promised surplus.

On the other hand, monetary purists have been frustrated that the RBA's Lowe isn't vowing to do 'whatever it takes' to get inflation back to target, through downplaying the role of fiscal stimulus in favour of a commitment to hit the target. 

Ms. Quick has a smarter way with words than me, and would doubtless say that monetary policy is like sex - being 99 per cent in the head (or is it like seduction, being 99 per cent talk, 1 per cent action? I never can remember), while the impact of fiscal stimulus won't amount to the proverbial hill of beans.

That is to say: commitment to the target matters, and if markets perceive a lack of commitment then EMH takes over blunting any token efforts.

As economist Stephen Kirchner has highlighted, issuing government bonds to mete out the widely discussed fiscal stimulus could result in a crowding out effect, appreciating the currency, impacting net exports, and hampering the role of monetary policy.  

The Reserve Bank must not shirk its 'singular responsibility for demand management', posits Kirchner.

In today's Canberra speech the Governor mirrored the Board Minutes in reiterating that the Board is prepared to ease further to reach full employment and for inflation to hit the target:

We aren't presently close to full employment or to the inflation target (hence I mused here upon the looming November meeting).

However, for the final word, back to BQ:

There's a little bit riding on Wednesday's inflation figures for Q3. 

Deeper and down (2-handle)

Rates down

Home loans with a 2-handle, via the fire-breathing dragon:

Source: Broker channels

This is part of the reason I think the First Home Loan Deposit Scheme will be fully subscribed.

Consider the following:

-5 per cent deposit with no LMI

-mortgage rates from about 3 per cent (and futures markets pointing to lower rates) 

-unemployment rates in Sydney and Melbourne well below 5 per cent 

-low and steady inflation

-stamp duty grants available in some jurisdictions

Buying a first home isn't for everyone, but it's hard to imagine the stars aligning any more so than this.

The scheme is ostensibly designed to be 'first-in-best-dressed', though the government has previously indicated that the available places could be extended if required.

The prudential regulator today confirmed that it will apply a lower capital requirement for FHLDS loans given that the Government guarantee is a valuable form of credit.

This is why stocks will take a hit

Downturn due

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Population clock passes 25.5 million

25.5 million

The timing was pushed back a few weeks in the end, but the Aussie population clock has now passed 25½ million. 

Source: ABS

There have been many predictions about changing living patterns.

But only three areas continue to dominate population growth.

These are: Greater Sydney, Greater Melbourne, and south-east Queensland (Brisbane, Gold Coast, and Sunshine Coast).  

There will be a lot of talk about the overbuilding of apartments for the next 12 months until the cranes finally come down. 

But there's no structural oversupply.

In fact, I put an apartment up for rent in Sydney this week and had four applications on the first day.

Being close to a train link is probably important.

Check out this post at the Demog Blog which looked at the number of vacant dwellings on Census night and how this lines up with historic trends. 

Here come the first homebuyers

FHBs return

It's quite likely that the number of first homebuyers in the market will soon scale the highest level since the Rudd stimulus. 

First homebuyer numbers had already increased significantly across the first 3 months of available data since the election as you can see in the chart below. 

The government today released further details for consultation relating to its First Home Loan Deposit Scheme today.

From 1 January 2020 the scheme will allow qualifying first homebuyers with a 5 per cent deposit to get into the market sooner. 

Looking at the price caps - including $700,000 for Sydney, $600,000 for Melbourne, and $475,000 for Brisbane - the scheme may partly be designed to encourage first homebuyers to buy units rather than houses. 

Source: Minister for Housing

According to the release, the capital city price caps will also apply to large regional centres with a population in excess of 250,000, meaning the Gold Coast, Newcastle and Lake Macquarie, the Sunshine Coast, Wollongong. and Geelong. 

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Escaping the 9 to 5

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Tesla shorts get dacked

Tesla surprise

No dog in this race, but I can't get enough of this story, which like all great thrillers has suspense, good guys, bad guys, and a tantalisingly unpredictable conclusion. 

Tesla released its much-awaited Q3 results this week, with a surprise return to profitability. 

Over the most recent two trades the share price stormed around 30 per cent higher from $254.68 to $329 at the time of writing. 

This has left the vocal mass of short-sellers reeling in agony, with some openly disclosing material losses that will end their quest to profit from the company's failure. 

There's still such a great deal of uncertainty surrounding so many of the underlying figures reported, yet this price action sends the Tesla market cap rocketing to north of $57 billion.

Tesla is the second most shorted US company after Apple, but this surge makes Tesla the most highly valued car company, eclipsing even GM.

Game on. 

Resi land values down 8 per cent in FY2019

Land values down

There's an old rule of real estate that says find out where the people are moving to and buy the land before they get there. 

Over the long run in Australia this has been very wise advice with the value of all land increasing more than fivefold over the past two decades from $1 trillion to well over $5½ trillion.

But the adage might also note that prices can still fall from time to time. 

Over the 2019 financial year, there was a decrease in the total value of Aussie land from $5.9 trillion to $5.7 trillion.

This was driven by a significant -7.7 per cent decline in residential land values from $4.8 trillion to $4.5 trillion.

As the most populous state New South Wales was the main contributor with a decline of $174 billion or -9 per cent. 

Although Victorian resi land values fell by some -10 per cent or $140 billion.

Declines were generally considerably smaller elsewhere, both in absolute and percentage terms. 

The declines of the past two years are now over since the election result, with a sharp return to growth noted since June. 

Investors should also be able to deduce from the above figures that the bulk of the increase in residential real estate prices over the years has been driven by land rather than building costs. 

For this reason, they should aim to own properties with a high land to asset ratio of ideally well over 50 per cent, in areas where demand is both high and growing.