Pete Wargent blogspot


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'I've been investing 40 years & still learn new concepts from Pete; one of the best commentators...and not just a theorist!' - Michael Yardney, Amazon #1 bestseller.

Tuesday, 14 July 2020

Rental vacancies are falling sharply

Rental vacancies plunge

Kudos to Louis Christopher of SQM Research for correctly anticipating that rental vacancies would fall to be lower than a year earlier following a strong trend reversal in online listings. 

There's another narrative to overlay here, and that being the resources capitals could fair surprisingly well from a rental market perspective now. 

Following Vale's Brazilian operations closures the iron ore price has ballooned to US$111/tonne following strong gains in the futures markets, and this tends to be positive news for Western Australia. 

Sure enough Perth and Darwin saw huge year-on-year declines in rental vacancy rates in June.

Perth's vacancy rate has dropped from 3.2 per cent a year ago to just 1.5 per cent.

In Darwin the equivalent decline has been from 3.1 per cent to 1.8 per cent.

Brisbane saw a modest decline from 2.5 per cent to 2.4 per cent, with suburbia faring very well, though the Brisbane CBD itself has a high vacancy rate of 14 per cent.

Hobart (0.9 per cent), Adelaide (1 per cent), and Canberra (1.1 per cent now all have tight rental vacancy rates following recent declines. 

The bulk of vacancies remain in the CBDs of Sydney (13.8 per cent), Melbourne (8.8 per cent), and Brisbane, as well as in Melbourne's Docklands (16.2 per cent)...and Palm Beach, which has a very high vacancy rate. 

But despite this, vacancies did decline in the largest two CBDs, as well as across Sydney and Melbourne more broadly.

The wrap

Clear signs here that rental vacancies are tightening, with national vacancies falling from 2.5 per cent to 2.2 per cent in June.

That means a decline from 86,398 vacancies May to just 77,132 in June.

One of the mechanisms through which empty rentals are filled is a lower median price of property rented, and asking rents are a few per cent lower than a year earlier, especially in Sydney. 

Although international travel is severely impeded, people are naturally likely to gravitate towards Australia and New Zealand over time, while the supply of new rental housing has dropped very sharply. 

Vacancy rates still remain high for now in the CBD areas of Sydney, Melbourne, and Brisbane, and at Melbourne's Docklands. 

Many of these units and studio apartments were previously short stay lets, Airbnb, and student rentals. 

Rethinking the recession

Savings glut

Freelance economist and journalist raised and articulated some very interesting points in a Twitter thread yesterday, especially with regards to luxury goods and items expenditure.

Firstly, he noted, Treasurer Frydenberg has unleashed an enormous and unprecedented fiscal stimulus, to complement the Reserve Bank's five interest rate cuts and A$50 billion in government bond purchases. 

In aggregate, this will more than offset the drop in wages paid this year, and we do know that there's been a savings glut among many of those better off Aussie who haven't lost their jobs. 

Secondly, noted Murphy, luxury car sales jumped to multi-year highs over the past month, with Mercedes sales soaring to an all-time high. 

And thirdly, the international border closure is set to keep an additional $18 billion of spending at home.

This is a tricky thing to measure, but we do know that since 2008 there have been more short-term departures from Australia than visitors to these shores, as Aussies increasingly enjoyed the stronger dollar and their new-found wealth from the resources boom. 

Indeed, the monthly tourism trade surplus has ripped higher by about $1.5 billion since March, so extrapolating that out over a year does get you to about $18 billion. 

Not all of this money will be spent on travel and tourism services, but most of it will ultimately be spent somewhere. 

Some, for example, will find its way into premium housing...

And other funds will be directed to coastal property...

And plenty already appears to be worming its way into luxury items, such as a new Mercedes. 

The wrap

The global savings glut means that the world's wealthy will still have ample capital to spend over the year ahead, and for some time they've been denied the opportunity to spend much of it on skiing trips and frippery.

The official unemployment rate in Australia is expected come in at around 7 to 8 per cent this month, but the effective unemployment rate is probably nearer to double that level.

So there's no question that the recovery from this induced economic coma will be a prolonged and at times arduous one. 

But also don't be shocked if there's a range of surprisingly bullish trends in some sectors and asset classes. 

MOAR housing stimulus

Stamp duty reform?

Will there be further measures announced by the Treasurer on July 23 to boost the housing market?

I discussed with Scutty and Nadine Blayney on a socially distanced ausbiz TV here (or click on the image below):

Tesla to the moon

Tech boom partying like 1999

It's like Y2K bug all over again, as the Fed provides the liquidity and Tesla balloons an intraday high of $1,795.

The market cap just soared past US$330 billion.



Monday, 13 July 2020

Podcast Episode #14: Groupthink, social physics, and leverage

Podcast Episode #14

Tune in to listen here (or click on the image below):

You can check out our full series at Apple podcasts, or you can tune in at SoundcloudStitcher, or Spotify.

Don't forget to leave us a friendly review, as it helps us to get the word out. 

Thanks! :-)

CAPE: what's too hot, and what's not?

CAPE crusaders

A brief look at some of the world's stock markets - see here (or click on the image below):

Sunday, 12 July 2020

Podcast Episode #14 preview

Podcast preview

Here's a sneak preview of Episode #14, which is out tomorrow morning:

Into the deep freeze

Second wave

In brighter news, there's been no COVID-19 community transmission to speak of in Australia this week...ex-Victoria.

Unfortunately the Victorian government's shocking mismanagement of hotel quarantine means that there's now a potentially nasty second wave of the virus spreading exclusively in that state. 

With another couple of hundred cases over the past 24 hours Victoria now has 1,124 active cases. 

Elsewhere local cases have essentially been running at zero all week, which is a great result. 

Victoria will now go into another lockdown, this time for at least six weeks, which is a disastrous hammer blow for the local economy.

Auctions slump

Sydney recorded rock solid auction results on Saturday, with the median price of property sold under the hammer rising to $1,260,000.

In Melbourne. however, auction success volumes and results have unsurprisingly begun to plummet as consumer confidence has been demolished by the lockdown announcement.

Alas it's now only a matter of time before someone rolls out another 'tale of two cities headline'...sigh.

To date Melbourne's housing prices have fallen by about 3 per cent since April.

Look out below

I'm not usually in the business of making serious predictions, which are usually broad brush and often prove to be pointless.

But these sorts of auction results in Melbourne have normally been commensurate with something close to double digit pace declines in housing prices, and in all likelihood may point to a 10 to 20 per cent decline in Melbourne's market.

Given that Greater Melbourne is Australia's second largest economic hub - and that it's long been accounting for such a significant share of growth - the decision to lock down for six weeks has all but cruelled the chance of a meaningful recovery any time soon.

Research across half a century of historical data from the Bank of England has shown that falling house prices lead to fear of negative equity, falling confidence, and consumers declining to spend, borrow, or invest.

If the Federal government wants to stand any chance of getting the Australian economy back on its feet this year the Treasurer should announce on July 23 a temporary stamp duty holiday for the remainder of 2020 (and fund the difference for the states by making use of bond yields at record lows).

Alternatively, and more sustainably, broaden the GST and raise the rate to 12.5 per cent.

Get onto it! 

Saturday, 11 July 2020

The BIP Show: Are stonks expensive? Does macro matter any more?

The BIP Show

This week on The BIP Show, a discussion of what rocketing PE ratios mean for stocks, and whether indeed they actually matter any more, particularly with reference to the following chart:

Of course, one bad year of earnings (quite likely we're facing more than one) isn't the sole driver of market valuations.

Tune in here to listen (or click on the image below):

By the way, you can listen to the property market Episode that I recorded with the guys here.


Unsurprisingly, an upbeat view...because low interest rates.

To me the salient risk is that if and when the US market drops it will bring Aussie shares down with it, regardless of prevailing valuations in Australia. 

There are, of course, any number of macro valuations you can look at help determine broadly how 'cheap' or 'expensive' a market is.

Our preferred measure is the CAPE ratio - with a special focus on the US, which is by far the largest and most influential market for global equities - due to its strong correlation with expected 10-year returns and its accord with with the business cycle.

Here the Shiller PE, still running at about 30 into the eye of the recessionary storm:

CAPE isn't a market timing tool.

All it simply tells you is that from this point 10-year nominal returns are likely be poor at just a few per cent per annum, while history suggests that there's potentially (very) significant downside risk. 

If you don't like CAPE - and, to be fair, some people don't - then here's a look at price to sales, which is steaming along the highest level since the dotcom, erm, bubble exuberance:

Ditto price to book:

Ditto Tobin's Q...

...and ditto the Crestmont PE, which is now threatening even its 2000 peak:

And then there's the luring in of the army of Robinhood traders, and all the other behavioural red flags, with everyone from barristers to baristas asking about hot stock tips.

Back in Australia, as discussed on The BIP Show, Afterpay has more than 9-bagged since its lows of, *checks notes*, three months ago.

As discussed on the show Tesla is through US$285 billion having gone from $1,000 to blazing through $1,540 in a month, while analysts are openly discussing whether Tesla will hit a US$1 trillion dollar market cap before it's consistently turned a profit.

Meanwhile the US has sunk into its deepest recession since the Wall Street Crash and Great Depression, with an election looming large in November. 


Friday, 10 July 2020

Weekend reads

Must see articles

This week at Property Update a look at the bounce in job vacancies and what's going to happen with interest rates.

Click here to read (or on the image below):

By the way, as always you can subscribe for the free Yardney podcast here.

Thursday, 9 July 2020

Refinancing explodes to record high

Refinancing surge

There was an explosion in refinancing in May 2020, taking total lending to owner-occupiers up to record monthly highs.

This will effectively act as a rate cut (or perhaps two) for many of these borrowers.

But once you strip out the massive surge of 21,227 refinancing approvals there was the expected decline in housing lending, as the economy was largely shut back in May. 

Activity was down pretty much everywhere, as you might reasonably expect.

First homebuyer transactions were...down.

And the average mortgage size also declined, although borrowing capacity for many borrowers has increased compared to 18 months ago thanks to the salvo of five interest rate cuts, and the average mortgage size was up by some +18 per cent from a year earlier. 

In particular borrowers in Sydney and Melbourne have been flexing their extra borrowing capacity over the past year or so. 

The wrap

Overall, once you strip out the huge rip in refinancing there was much less housing lending and transactional activity in May. 

Housing prices have drifted a little lower since rolling over around the end of Q1 2020, but on much thinner volumes, and stock levels have fallen very sharply which has somewhat underpinned prices.

Naturally the Victorian government now opting for a fresh six-week lockdown is going to lead another wave of local business closures over July and August, which will bring its own downside risks for Melbourne.

Sydney, on the other hand, is now steadily reopening for business, and most other housing markets have been fairly flat through the COVID shutdown.

Of course the lending figures are, as always, old news, reflective of historic activity from the end of April to the end of May.

More timely indicators from the REA Group appear to be relatively upbeat.

Australia opens its borders to Hong Kong


Australia's universities aren't quite getting the fast-tracked return of international students they so desperately want just yet.

But things have moved in a different direction, with Prime Minister Morrison offering visa extensions followed by residency visas to those over from Hong Kong on a temporary basis, while moving to bring Hong Kong businesses and skilled workers to Australia.

Hong Kong is widely expected to see thousands of fleeing citizens. 

What this means for Australia's relations with China going forward is less clear. 

Via the New York Times: