Happy NY first homebuyers

Deposit scheme commences

Happy NY and all that.

The first home loan deposit scheme (FHLDS) kicks off effective today, 1 January 2020.

The details of how to qualify can be found here.

The scheme is initially capped at 10,000 slots per financial year, so there may yet be another 10,000 places available from 1 July.

The FHLDS is available through 27 lenders, including Commonwealth Bank and the NAB of the majors.

First homebuyers have already been increasingly active since Labor lost the election.

And if the success of previous schemes is anything to by, first homebuyer commitments will soon hit the highest level since the Rudd stimulus.  

Given the terms of the scheme it may be worth considering participating, even if you have a 10-20% deposit.

Please note this is not advice, and of course you should never borrow more than you can comfortably afford to repay!

The magic of rebalancing

Managing exposure

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Buy low, and sell high

Buy low, and sell high

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Why you should manage your own money

The 3 Cs

See the latest blog post here (or click the image below):

Construction downturn yet to bite

Construction crunch race against time

Another week, and another mid-tier developer goes bust.

This time it was Verve Construction in Melbourne, as reported by the AFR. 

The best leading indicators and surveys all seem to point a significant downturn in construction and related trades and materials employment. 

Interestingly, though, the detailed quarterly employment figures from the ABS showed total construction employment holding up at 1.2 million, or some 9 per cent of the employed labour force.

Here's Commsec with the summary statistics:

Source: Commsec

I wrote in a 2018 report why construction employment must inevitably fall from record highs, but it apparently hasn't happened a widespread basis just yet!

Sentiment is picking up gradually for new property, so it's a bit of a race against time: how quickly can new projects be funded, and will this happen fast enough to head off the worst of the slump?

Credibility issues

When I appeared on the Devils & Details podcast in the first half of 2018, David Scutt made the point that amongst the smart brains around town there was no belief in the Reserve Bank's commitment or forecasts for stronger wages growth and inflation (listen here at the 23:30 mark with Scutty pitching in at around 25:15). 

The problem, suggested Scutty, is that in promoting the importance 'financial stability' instead of committing to the inflation target there was a chance of the economy losing momentum, in turn creating a greater risk. 

19 months on and the slower economy is now upon us, unemployment is rising, wages growth has ticked lower, and inflation still isn't expected to hit the target throughout the entire forecast period.

Meanwhile the government remains doggedly committed to delivering a surplus. 

Unemployment drifting higher

Onto the detailed ABS figures, and the annual average unemployment figures are now drifting steadily higher in Sydney and Melbourne.

Everywhere else they're way too high, with the other state capitals all above 6 per cent. 

Sydney has had an unemployment rate as low as 4 per cent, yet there was still no indication of robust wages growth, and unemployment is now rising again as construction slows. 

Not-so-Merry Xmas

There was a bit of excitement about a jump in jobs growth in November, but looking through the monthly noise the 3-month average employment growth was soft, and the annual pace of growth is fading. 

The way things are, it seems a fair bet that even an unemployment rate of 4 per cent wouldn't lead to wages growth overheating (ha), which implies that perhaps 165,000 of those 708,000 unemployed need not be.

And that's before anyone mentions the trend underemployment rate at 8.4 per cent.

Looking around the states, the number of unemployed persons has been drifting higher in New South Wales and Queensland, while the economy of the Northern Territory is shrinking painfully. 

Job searchers

The median duration of job search has improved year-on-year in New South Wales to 13 weeks, but this was offset by a deterioration almost everywhere else except in Tasmania.

In South Australia and Western Australia the duration of job search in November 2019 was 30 and 31 weeks respectively.

There also hasn't been a great deal of joy lately in resources regions in terms of wages growth or falling unemployment. 

The race is on...

Overall, the jump in employment in November mainly just reversed a negative result in October, and the trend for unemployment looks likely to be heading higher in 2020 as construction slows.

Job advertisements have fallen to the lowest level in 4 years, but since policy works with a lag the hope is that rising housing prices will eventually lead Australia across to the other side of the slump. 

Australian Investors Podcast

Australian Investors

Watch my extended 80-minute video podcast with Owen Rask from earlier in the year, where we discuss all matters investing:

The show notes are here. 

We recorded this interview early n 2019 when the ASX 200 was meandering along at about the 6,100 level.

What a year it's been!

US stocks have soared 40 per cent since December 2018 to close are record highs this week, and accumulated returns in Australia haven't been too far behind.

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If you're interested in investing in property in 2020 download our free property guide here.

New in 2020

New book

Some details on what our new book will cover here:

UK 10 years of price change (hometrack)

The decade that was

Does the decade end in 2019 or 2020?

Not sure, but here are the 10-year UK housing price figures.

No surprise to see London and Cambridge topping the compound annual price growth charts in Britain over the past 10 years, with Bristol being another University city nestling alongside Cambridge.

At the other end of the spectrum Aberdeen (oil) and Belfast in Ireland experienced negative growth.

More recently, Manchester in the north-west has performed strongly.

Source: hometrack

Over the year to November 2019, city house prices (+3.4 per cent) continued to outperform the national figures following patterns of urbanisation.  

Merry Xmas (new book 2020)

New book for 2020

Merry Xmas and have a great New Year!

Thanks for reading in 2019. 

Here's what I've been working on lately: a new book that tackles the challenges which will arise in 2020 as it gradually dawns on markets that buying stocks at such expensive prices has never historically delivered decent real returns. 

The book is due out in February via Wilkinson Publishing and will address how to generate solid returns when developed markets are at historically high levels. 

Private sector credit growth at decade lows

Credit growth slows again

Monthly housing finance flows are up by more than 15 per cent since the election as homebuyers return to the market, driving a solid rise in prices. 

Meanwhile, more households are also taking the opportunity to pay down debt.

As such the growth in the stock of housing credit was just 0.18 per cent in November, and 2.93 per cent over the year. 

That's the lowest annual percentage growth across the 43 years of available data, and helps to explain why debt to income ratios are now falling (with tax cuts also now beginning to help). 

Investor credit growth was again negative in November, and fell year-on-year, as more and more loans roll off interest-only terms.

This is arguably good news for financial stability, though it's also helping to suck the living daylights out of household consumption. 

Personal credit fell by a massive -4.9 per cent over the year, but this data series may well be becoming less relevant if it doesn't capture buy now pay later transactions. 

Business credit growth was also lacklustre, at just 0.2 per cent in November, and 2½ per cent over the year. 

Overall, total credit growth fell to just 2.3 per cent, which is the slowest result since April 2010, when credit growth was only 2.2 per cent as Australia emerged from the global recession. 

This weakness is partly due to a lack of demand, but also reflects that it's often just darned hard to get credit out of institutions. 

There's no direct link between credit growth and housing prices, of course.

For one thing, neither cross-border nor non-intermediated lending are captured in these numbers, and the relationship can also be distorted by the switcheroo away from interest-only loans.

In any case, housing prices are now higher year-on-year at the capital city level. 

In some ways the housing credit figures are now in a bit of a Goldilocks zone for the Reserve Bank.

Housing prices are rising as first homebuyers and upgraders enter the market, and finance for new housing and construction also appears to be responding according to the latest available ABS figures 

At the same time many households and property investors are also deleveraging.

Even so, total credit growth of 2.3 per cent is still pretty dismal for an economy with nominal GDP growth running at 5½ per cent for now on commodity price strength.   

Million dollar baby

Wealth records

The ABS released its finance and wealth statistics for the September 2019, quarter which saw Aussie dollar household net worth jump by 3 per cent or $318 billion to $10.9 trillion.

The increase was driven by holding gains on land and dwellings of $174 billion, following six quarters of losses, while there were further gains on financial assets. 

Both property and stocks is on track to record even further gains in Q4, and the average net worth per capita jumped by more than $10,000 in Q3 to a fresh record high of $428,600.

It was the strongest quarterly jump since 2016. 

Liabilities were almost unchanged, recording the softest quarterly growth since 1993.

The preliminary estimates for the number of residential dwellings came in at 10.4 million, which gives rise to a remarkable statistic.

And that is that the average wealth per household in Australia is now $1.05 million.

Of course, the mean number of legs per person is also less than two, and averages can mask significantly varying fortunes beneath the headlines.

Households now have some $1.2 trillion in cash and deposits, and the household saving ratio has increased again lately, although as a ratio of financial assets this is roughly in line with long-term averages. 

Aussies also have $1.1 trillion in shares, although this remains lower than the long-run average as a share of financial assets. 

Due to higher asset prices most of the debt ratios improved. 

This is why Aussies are staying put for longer

Not moving

I discussed why this is the case here at Property Buyer:

Debt ratios are coming down

Debt deflation

We keep hearing that Aussies have twice as much debt as income, but the narrative is due for a change.

Not only has the household debt to annualised disposable income ratio been revised down, it is also now set to decline quite sharply as more mortgages are paid down.

The household debt to disposable income ratio declined to 1.865x, which is back to where it was at in June 2018, and also well below the fabled 2x so often reported.

Long overdue tax cuts have clearly helped here, and net of a surge in the use of offset accounts it’s still unclear whether household debt to income ratios have increased much at all over the past 15 years. 

The household interest burden has also fallen very sharply in Q3 2019.

The housing payments to income ratio is now down to the equal lowest level since 2003 at 6.5 per cent.

And although there’s more principal being paid down, mortgage arrears have been easing.

Meanwhile total household interest payments to income are way down, and far below previous peaks seen in 1989 and during the resources boom.

With asset values rising, the ABS also reported an improvement in most debt ratios in the September quarter.

2019 in review...and what's in store for 2020?

2019 in review

2019 has been an interesting year, to say the least.

In real estate, it was the quintessential year of two halves, with desperately low transaction volumes before the May election, and then inner-Sydney property recapturing record highs in the second half of the year. 

Other parts of the country experienced mixed fortunes, but were a bit more buoyant in the second half.

As for stocks, well, that's all gone very well...but, to be fair, almost any long-only strategy would have ripped in 2019. Bazinga!

It's a big world out there

A review of my 2019 - not advice...

The best performing investment from the 'dogs of the world' part of our strategy (which may include investing in the most out-of-favour stock markets, asset classes, sectors, or styles) this year was obviously Greece, with 1-year returns likely to finish the year at about 50 per cent. 

The financial media occasionally attempts to grapple with long-winded explanations for this massive outperformance, but they're mostly flaky or unconvincing (the Greek economy is not exactly firing, after all, with an unemployment rate at close to 17 per cent!).

The main reason for the huge rebound in fortunes was simply a change of sentiment after the stock market was crippled in 2018, when it experienced a crash of -37 per cent.

Everyone out together, everyone back in together...same as it ever was. 

Don't over-complicate it: there's more than one stock market in the world, so buy when low, and sell when high (Greece is clearly now a sell). 

Pakistan has also delivered accumulated returns of well over 40 per cent since August, and we weren't too far off ticking the bottom with that one (we bought when the market's dividend yield was close to 10 per cent, and this one we'll be holding into 2020). 

On the other hand, after an initial 30 per cent bounce, Turkey's ETF, which was one of our H2 2018 investments, has delivered only modest returns over this calendar year.

That's the way it goes - stock market returns don't conform to calendar years, and the index is still plenty cheap enough to hold for now (in any case, part of the point of buying low at this stage in the cycle is to look for asymmetric bets and to avoid drawdowns - rule #1, don't lose money). 

Now this all sounds great, and it's certainly nice to see some big positive returns.

But as I say, almost anyone with a pulse and a sensible long-only portfolio could’ve gone great guns in 2019.

The acid test for any investment strategy is how it fares through the cycle.

Looking ahead to 2020 (not advice...)

The Aussie stock market has had a blistering run in 2019, and looks set to deliver total returns in excess of +25 per cent.

Thanks to the increasingly outsized role of passive indexing and superannuation, this sees total Aussie household wealth per capita blazing to the highest level on record, which is a remarkable stat given what doomsdayers were confidently predicting as recently as May. 

Some of the stock valuations now look ludicrous to me, so I've been dialling back exposure for quite a while (‘too early’, in fact - though I don't believe I'm missing out on any real returns by taking risk off at these levels).

Resources and some financials are priced quite conservatively, especially given record low bond yields.

But as for high PE and growth stocks, this looks increasingly like a...well, you-know-what.

Source: GS, via Livewire Markets

And it's the same for high quality stock market multiples - these are now higher than they were at the time of the tech bubble.

Source: Goldmans, via Livewire Markets

In short, resources and financials may be priced reasonably in Australia, but some industrials and other sectors are approaching bubble-like valuations.

Passive smokin’

It's interesting to reflect on the global role of indexing and institutions with their index-like portfolios, and how even the dross that comes into an index immediately catches a bid, to the benefit of stock promoters and to the detriment of future index fund returns. 

Generally speaking I’m a big fan of index funds, but it's a curiously troubling phenomenon to see global businesses one might at best judge to be ultimately worth zero (and at worst borderline frauds) spike in price simply because they've entered a benchmark index, leading forced buyers hoover up stock.

This isn't necessarily a major issue, especially for the relatively narrow Aussie index, merely a disapproving observation. Perhaps it's an inevitable side-effect of ‘light touch’ regulation, but we must take the world as it is, not as we'd like it to be.

Year-end rebalance

I'll look to rebalance my portfolio on 1 January, so let's see what the rest of 2019 brings.

There likely seems to be more value in Europe than in the US or Australia next year.

After a bonanza in 2017, the Poland ETF has had a couple of down years, and its CAPE ratio is edging back closer towards reasonable value, so that might yet be worth a look, but let's see where things are at in the new year. 

None of the asset classes look cheap after this year's strong performance, but some sectors (e.g. oil) have recently piqued interest.

We explain how a regular portfolio rebalancing exercise forces you to buy low and sell high in our new book, which is due out in February 2020.

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Note: This is what I've been up to in 2019 - just in case you have a time machine, this is obviously not advice, etc. 

Smile, and move up the happiness curve

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