The Silicon Valley of Australia

Aussie Silicon Valley

Here's where it will be, and why it's important (or click on the image below):

This is not a drill

An extraordinary year

A few thoughts on what has just played out in Australia this year on my personal blog here (or click on the image below): 

Credit growth slumps to new cycle lows

Credit growth sluggish

Reserve Bank assets have continued to increase to $319 billion as at mid-December. 

But as money growth scaled fresh cycle highs of 12.4 per cent in November, credit growth continued to slump to new cycle lows of just 1.7 per cent. 

Business credit growth was negative again in November, as it was in October, and there's been little need for personal credit to grow lately as stimulus (in fact personal credit growth has crashed deeply into negative territory this year). 

Housing credit growth continued to move up to a 17-month high, but overall will be more modest in this cycle with interest-only loans outstanding having been crunched lower from $580 billion to around $260 billion. 

To date the growth has been all about owner-occupiers, with this cohort recording +5.4 per cent credit growth over the year to November 2020. 

The housing credit impulse already points to higher housing prices in the first quarter of 2021. 

With enquiries from investors suddenly jumping in December housing credit growth will likely rise further, in turn igniting double digit gains for property prices (base case). 

Job ads soar over the year to November

Jobs ads rise again

Another really positive data point from the Department of Employment, with job advertisements increasing another 8 per cent in November to 169,900.

In Queensland ads were some 5,200 higher than a year earlier, and indeed all of the main states have recorded substantial increases.

Source: LMIP

Job advertisements have now ricocheted higher for 7 consecutive months.

Western Australia is benefitting greatly from its control of the virus and booming iron ore prices, which touched fresh 9-year highs this week. 

Overall, strong signs for hiring which can help to push the unemployment rate down into a normal range by the first quarter of 2021. 

Retail records

Retail breaks records

Retail turnover exploded in November, up another 7 per cent to an all-time high of $31.62 billion.

Turnover ripped higher as Victoria reopened, and was pumped along by Black Friday sales. 

Turnover is now tracking some 14 per cent higher than a year earlier, and at absolutely unprecedented levels. 

Extraordinary numbers as the stimulus kicks into gear and Aussie dollars remain trapped at home.

It increasingly looks as though Australia suffered an intermission, rather than a real recession in 2020. 

The final hurdle is how to reopen the international borders, with immigration and international students currently switched off, and potentially tens of thousands of Aussie expats stranded overseas. 

Election year rolling around again?

2020 draws to a close

Despite a great deal of uncertainty in 2020, Australia has emerged well to date from the virus disruption. 

Total employment is now but a strong print or two away from hitting 13 million and recapturing record highs. 

The Australian dollar has soared from a low of close to 57 US cents to 76 US cents, which unfortunately won't help the economic adjustment in 2021. 

In domestic stock markets, the ASX 200 initially increased this year from around 7,000 to January to a heady high of above 7,150, and despite a dramatic crash to around 4,550 in March looks set to close the year only modestly lower in the 6,600s.

Valuations remain relatively high in some sectors, but Australia may have an ace up its sleeve if commodity price strength continues, driven forward by China's recovery. 

The iron ore spot price ballooned to yet another record high for 62% Fe, at $164.39, to be a rip-snorting 329 per cent higher than the lows of 5-year ago.

China's reluctance to import Australian coal may prove to offset this boost to some degree. 

In property, solid auction volumes ran through all the way until this weekend, yet still finished with strong preliminary clearance rates in the mid-70s in Sydney and Melbourne.

Sydney has reported a cluster of virus cases, though zero to date have been recorded as ICU or ventilator cases, and by the time auction markets reopen in earnest around Australia Day weekend this spike appears more likely than not to be under control. 

Housing prices will end the year a bit higher than they were a year earlier, except in Melbourne which bore the brunt of the effective lockdowns and where prices are 1 per cent lower. 

The momentum is all positive now, though, as mortgage rates have continued to grind lower. 

By the end of last month Prime Minister Morrison was in a remarkably strong position (a massive 32 points ahead on Newspoll's preferred PM metric), to the extent that it's possible that the next Federal election might be contemplated any time from August. 

It doesn't seem to be all that long since Shorten's lack of personal popularity couldn't drag Labor over the line in 2019, in spite of opinion polls consistently inferring a two-party preferred lead, all the way through to the exit polls. 

Shorten's expected win was forecast to topple property markets, but prices are 13 per cent higher in Sydney since that time, while in Melbourne housing prices are 8 per cent higher. 

You can download the consumer version of our Risks & Opportunities report here, including the capital city housing market forecasts for 2020. 

Weekend reads & podcast (last one before Xmas!)

Must see articles

The last weekend reads of the year includes the winners and losers from the COVID-19 recession.

See here (or click on the image below):

You can tune into and subscribe for the Yardney podcast here.

Switzer TV: property outlook for 2021

Switzer TV

I discussed the likely 25% per cent surge in property transactions with Peter Switzer on Switzer TV here (watch from 31:30):

Jobs recovery storms on (V-shape)

Sweet V-shaped recovery for jobs

Employment soared another 90,000 higher in November.

Between February and May the Aussie economy lost 878,000 jobs.

Over the past six months 734,000 or 84 per cent have been recovered, for a classic V-shaped bounce.

The unemployment rate fell again despite record high participation, from 7 per cent to 6.8 per cent.

The highest recorded monthly unemployment rate to date was 7.48 per cent in July.

Is it possible that was the peak, and that things will only improve from here? 

This month nearly all of the jobs gained were full time, and hours worked have almost totally recovered to where they were a year earlier. 

The gains were led by another 74,000 in Victoria, and a further 24,000 in New South Wales. 

Employment has almost totally recovered in New South Wales, while in Western Australia employment is actually higher than last year. 

Amazing effort. 

You can find the detailed information as always here with James Foster. 

New home sales at decade high

New houses sell

New home sales increased 15 per cent in November to hit decade highs, according to the Housing Industry Association.

Victorian sales rose 21 per cent as the state emerged from stage 4 restrictions.

The remaining states recorded rises too, with South Australia recording its second strongest result since 2013. 

Source: HIA

The data largely precedes the extension of the successful HomeBuilder program on November 29, reported the HIA. 

---

UK house prices rose +5.4 per cent over the year to November 2020, to an average price of 245,000.

Source: ONS

This was largely driven by stamp duty exemptions, rather than any fundamentals (which are awful). 

Vacancy rates stable at 2.1pc in November

Steady as she goes

National vacancy rates were stable at 75,947 (2.1 per cent) in November, down from 2.2 per cent (72,879) a year earlier, according to SQM Research's latest figures. 

Sydney's vacancy rate eased down a little from 3.6 per cent to 3.5 per cent, but Melbourne vacancies remained very high in November at 4.4 per cent. 

The vacancies continue to most acute the in CBDs of the two largest capitals due to the absence of tourists and international students, although in Sydney the CBD vacancy rate has dropped from 16.2 per cent to 9.5 per cent since May. 

Brisbane's vacancy rate has continued to decline from 2.5 per cent a year earlier to 1.8 per cent. 

All other capital cities have tight vacancy rates of under 1 per cent. 

You can click to expand the chart for trend figures: 

A surprise shift north this year has seen Darwin's vacancy rate drop to just 0.7 per cent in November, while Perth isn't far behind with its freshly thriving economy and a vacancy rate of just 0.9 per cent. 

Australian QE to be extended through 2021 and 2022

Aussie confidence rebound continues

Consumer confidence continued to increase on the latest Roy Morgan surveys.

In-store card spending also crept higher, to increase to a 9-month high. 

Source: Commsec

Inflation expectations slipped a little lower, however, and remain substantially below pre-pandemic levels. 

Weekly payrolls increased again this week to the highest level in 8 months - James Foster with the charting:

Source: James Foster via ABS

The state of Victoria suffered the biggest hit, but is now recovering, while South Australia suffered a blip from its own 'Pizzagate' shutdown. 

But overall, improvement is happening. 

Source: James Foster

Support to continue

It seemed likely the the Reserve Bank would need to keep support in place until there are defintive signs that we are approaching NAIRU or full employment, which is likely to mean an unemployment rate of about 4½ per cent or thereabouts.

Obviously that's a long way from where we are today at about 7 per cent, and the latest Board Minutes did suggest that the Board is prepared to do more if necessary:

Source: RBA

Bill Evans of Westpac revises his forecast for the size and duration of QE, out until the end of 2022:

Source: Westpac

Brrr.

Podcast episode: what are bubbles?

Podcast: bubbles

Do bubbles really exist?

And, if so, what should we do about them?

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

You can also tune in at Soundcloud, Stitcher, or Spotify.

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

You can also order a copy of our book here, and download a free chapter here.

Transaction levels to increase 25% in 2021

Transactions set to bounce

Property transactions are forecast to bounce 25% higher in 2021.

Click here for more (or on the image below):

Artificial intervention

Credit policies

A personal opinion on the endless media demands for tweaking lending rules: see here (or click on the image below): 

Weekend reads (and more)

Must read articles

This weekend at Property Update, a look at why now is the time for property investors to pull the trigger and buy using their record war chest of household savings, a post on the rebound in job advertisements, and a shufti at 2021 property market forecasts.

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

You can follow and subscribe for for the free podcast here. 

---

New highs once again for iron ore today, and moreover what a fortnight it has been for the red dirt.

Genuinely, quite amazing stuff, and big news for Western Australia.

Fortescue Metals has mooned to $23 for a market cap of more than $70 billion. 

Interestingly the Aussie dollar has bounced from close to 57 US cents at the March lows to well above 75 cents, and is climbing fast. 

Negative yield...just

Negative rates

Apparently some people have been talking about Australia's recovery being so strong that interest rates could be hiked next year.

That's what the smart money is allegedly talking about, even though the unemployment rate has a long way to fall from 7 per cent to ideally somewhere under 5. 

Meanwhile the AOFM slides into today's inbox with respect to a short term Treasury note tender...

Source: AOFM

For the first time ever the best bid or lowest accepted yield on the March 2021 series was negative, at -0.010 per cent.

Australia is effectively 'paid to borrow', for want of a better phrase, thereby joining the UK, Japan, NZ, and much of Europe in this expanding club. 

Too much can be made of this, given that yields have generally been extremely low since the cash rate was dropped to 0.1 per cent.

As explained by Bloomberg's Stephen Spratt here, the negative yield is largely a function of liquidity, and strength of demand from investors for defensive assets over the volatile Christmas period, especially given the surging Aussie dollar.

The coverage ratio on the comfortably oversubscribed tender was 5.471x.

But still higher interest rates probably aren't a significant risk for the next couple of years, and not only in Australia...

Iron ore soaring

Part of the strength in the Australian dollar must surely be driven by commodities.

In particular, there were fresh 8-year highs for iron ore at the close today as the chart turns vertical.

The 65% Fe grade hit the highest level on record. 

Positive news for the Western Australian economy here.