Property strategy with Realty Talk

Realty Talk

Great to be back on Realty Talk with Bushy Martin, and some other top guests.

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

Auctions results today were still solid - especially in Melbourne - but Sydney sales volumes were well down.

Source: Domain

Podcast: Top 10 investment books

Podcast mini-series

The final episode in our 10 best books mini-series, where we discuss Mary Buffett and Ben Graham.

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You can listen to the whole podcast back-series on Apple here.

You can also tune in to the full podcast series at Soundcloud, Stitcher, or Spotify.

You can download our new e-book here.

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Race against time

Stroll-out to rollout

With 'those in the know' insisting that Sydney must remain in lockdown until...well, apparently until November (!), potentially - the previously leisurely vaccination stroll-out has now become a genuine race against time.

Perhaps this in itself will encourage more speed in terms of injections. 

The past 24 hours showed that the capability now exists to vaccinate the equivalent of about 1 per cent of Australian adults in a single day.

And this pace should hopefully increase considerably over the coming weeks and months.

Of the 11.6 million doses administered, around 8.1 million Aussies have now had their first dose.

Vaccinating the vulnerable

While this only equates to about 40 per cent of adults to date, there are at least some reasons not to be too gloomy. 

Most of the deaths from or with the coronavirus in Australia took place in aged care homes (758 of 921 deaths), which should now be better protected and fully vaccinated.

And, mercifully, the spread of deaths by age cohort shows very few occurrences of deaths in anyone under the age of 60, with effective treatments likely to be improving all the while.

Moreover, as more vaccine supply becomes available, and as pharmacies begin to administer doses, then the speed of the rollout should begin to increase rapidly. 

Things are at least moving in the right direction, with a fresh record of 1.12 million doses administered over the past week. 

Thus while Europe is running out of new arms to vaccinate, Australia is beginning to ramp up the pace.

With its very significant migrant community - about 30 per cent of Aussies were born overseas, and close to half have at least one parent born overseas - Australia may suffer some challenges with regarding to messaging and vaccine hesitancy.

But with Sydney now in a tough lockdown, the race is on. 

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Australia appears likely to record around 170,000 deaths in total in 2021.

The first three months of the year were all running above historical averages - about 5 per cent higher than the 5-year average - but not due to the coronavirus...instead, due to increased deaths from cancer, dementia, and diabetes.

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Property transactions rebounded in FY 2021 in New South Wales, raising almost $10 billion for Revenue NSW - alas, now to be spent elsewhere!

Fruit, fuel, and furnishings: Inflation stuck below target

Inflation transitory and sagging

Headline inflation came in at 0.8 per cent for the second quarter, taking the annual pace up to 3.8 per cent... an apparently hefty figure which will likely capture the, erm, headlines.

But the inflation is likely to be transitory; and context is also important.

Basically with an outlying figure dropping off the annual measurement, the high headline figure is largely due to the base effect.

Looked at another way, inflation has effectively been running some way below target for about half a decade and counting.

The core inflation measures came in at 1.63 per cent and 1.67 per cent for the financial year, with the quarterly prints as follows:

Therefore, the underlying rate of inflation quickened a little, but remained below the 2 to 3 per cent target, as has been consistently the case since 2015.

For various measurement-related reasons the surge in regional housing rents is not reflected in the national rental CPI, which was stone dead flat over the year to June 2021 (you could make a similar point here about housing CPI overall, which was actually negative over the year). 

Due to the base effect, non-tradables CPI lifted to 4 per cent over the financial year. 

The wrap

Overall, there was some inflation in food, fuel, and furnishings, but with half of the Aussie population once again being impacted by restrictive lockdowns in Q3, the outlook for inflation has already shifted considerably. 

QE looks set to continue at the current pace for the remainder of the year, rather than any tapering coming into play.

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More credible detail on the inflation figures as always from data king James Foster here. 

Speed limits on mortgage lending

Limited lending

The Reserve Bank of Australia produced a technical paper yesterday discussing the Australian experience with macroprudential policies since 2014. 

The paper showed that measures taken to restrict investor and interest-only mortgages...reduced the flow of investor and interest-only mortgages.

This will be case closed for the Twitterati, no doubt: macropru clearly works!

There's no doubt that the measures taken hit the build up of interest-only mortgages for six, even if there were a few hairy moments for households along that path. 

On the other hand the economy has largely been putting in a sputtering performance since 2014, with inflation below target for half a decade, so it's not as though were in economic utopia. 

Overreaction

The paper did also find that the measures led to some "disproportionate responses".

You can say that again! 

It become almost impossible to get a loan for many investors.

And even for those that did manage it, the rigmarole of providing supporting 'evidence' for $5 standing orders for swimming lessons (or whatever) basically rendered the entire process of questionable worth. 

In fairness, a good part of all this particular nonsense was related to the Royal Commission into Naughty Bankers, rather than the specific macroprudential measures themselves, so it was clearly a bit of a double-whammy effect. 

The RBA paper also found that:

"The largest banks substituted into non-targeted mortgage products while smaller banks did not."

Set and forget

Anyway, my point is that there are often unintended consequences of tweaking lending rules too often, as I discussed here:

It hasn't really shown up in any numbers yet, since they tend to lag, but there are increasingly housing markets around the country where there are no appropriate rental properties at all for relocating families, which is one of the potential issues with cutting off investor credit (unless the government builds rentals). 

Hopefully the construction boom for detached housing will help to alleviate this issue over the next six months.

It's a bit of a moot point at the moment anyway, since half of the country is in lockdown, so moves to slow down credit growth probably aren't too high on the agenda. 

But it's something which might come back into focus in 2022, so worth watching. 

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Property listings continue to fall as demand exceeds supply, especially regionally (but actually across the country):

Source: REA Group

Full report from Cameron Kusher at REA Group here.

Property strategy with Realty.com.au

Auction numbers sag

Sydney auction numbers are dropping right off now as lockdowns are extended, with extended lockdown looking increasingly likely as Australia maintains pursuit of Covid zero.

Source: Domain

Vacancy rates in Queensland are tightening towards record lows, reported the REIQ.

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In other news, this week on Realty Talk I discussed property strategy with Bushy Martin.

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

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The vaccine strollout continues to accelerate gradually, with a new high of 1.06 million doses administered this week, taking the total administered to date to beyond 11 million.

Locked down New South Wales (3.4 million doses) leads the way, ahead of Victoria (3.1 million doses), and Queensland (2.1 million). 

Big Picture podcast

Big Picture

I was back on the Big Picture podcast to discuss...the big picture.

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You can subscribe for the free podcast series here.

Podcast: Top The 10 books - Poundstone and Taleb

Podcast

I know not everyone likes Taleb's work (sorry Ricardo!) - but nevertheless a thought-provoking read.

Tune in to our latest podcast episode here (or click on the image below):

You can listen to the whole podcast back-series on Apple here.

You can also tune in to the full podcast series at Soundcloud, Stitcher, or Spotify.

You can download our new e-book here.

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

Stock 25pc below average

Supply drought

Property sales have increased to the highest levels since 2004.

And with stock being absorbed so quickly, total stock on the market is 25 per cent below average according to CoreLogic's figures. 

Source: CoreLogic

New listings in Sydney and Melbourne are now plummeting, due to lockdowns.

Stock levels were already very tight in Brisbane, Canberra, Adelaide, and Hobart, as well as regional New South Wales and Victoria.

Expect there to be a stock shortage or supply drought for the remainder of 2021. 

QE to continue apace

Bond purchases to continue

No sooner were commentators excitedly announcing the prospect of interest rate hikes next year, than New South Wales, Victoria, and South Australia have all been plunged into lockdowns. 

GDP will probably now shrink significantly in the third quarter - perhaps by up to 1 per cent - while what happens in the fourth quarter is anybody's guess. 

Reserve Bank bond purchases may not be tapered in September as previously planned, and this will likely be a 'live' discussion in next month's Meeting. 

Indeed, some experienced commentators even expect the pace of buying to be dialled back up again, back up to $6 billion per month (Westpac's Bill Evans has argued that such a move would send a strong message to markets).

Data king James Foster articulates these potential trajectories well in the below chart:

Source: James Foster

In any event, there won't be any hikes in the cash rate any time soon.

The Aussie 3-year bond yield has eased all the way back down to around 0.25 per cent.

The good news is that with the huge stimulus bolstering household balance sheets, mortgage stress had fallen to near record lows ahead of the recent lockdowns.

As refinancing continues, the average mortgage rate on outstanding loans has continued to drop sharply.

Source: CoreLogic

And Roy Morgan accordingly reports mortgage stress at a "near record low".

Source: Roy Morgan

With movements now restricted again we might expect to see a return of loan deferrals, with regulators to again offer temporary relief in this regard. 

The Reserve Bank noted in its July Minutes how rental markets have tightened substantially, with unit rents in Melbourne being the main exception (although the pace of decline had eased there too). 

Housing prices increased by more than 10 per cent in the first half of the year, though seems increasingly likely that the second half of the year will likely see a slower rate of growth.

Rents rise

Rents heading up

Rental price growth - somewhat counter-intuitively given the ongoing international border closures - has increased to the fastest level in more than a decade, according to CoreLogic's data and economics guru Eliza Owen:

Source: CoreLogic

Whereas previously many renters were inclined to share rentals, the working from home shift over the past 18 months has likely encouraged more renters to seek out their own rental space for work purposes. 

Following the trend in asking rents, Sydney is now recording increases in the median rental price - driven by detached homes - with cities such as Darwin, Perth, Brisbane, Canberra, and Adelaide all recording strong growth in rents.

Source: CoreLogic

Nothing much has fed through the consumer price index figures at this point, which are in any case largely weighted towards Sydney and Melbourne.

Some of the fastest growth in rents has been seen across the combined regional markets, reflected in a double-digit percentage increase over the year. 

Black Swan events and how to prepare

Black Swans

On the Property Diaries podcast with the great Cate Bakos, industry thought leader - tune in here (or click on the image below):

Vaccine rollout accelerates

Operation warp-ish speed

REA Group's Cameron Kusher found a real dearth of property listings in his latest report.

Auction results held up just fine this weekend - mainly over the medium of Zoom - despite New South Wales and now Victoria being in a lockdown.

Victoria's lockdown is supposed to be for five days, but with another 20 virus cases overnight who knows how long the state's fifth lockdown might actually go for?

New South Wales recorded 111 cases yesterday, so now appears to be locking down the state indefinitely, as truckies from the western suburbs barricade the city in protest of the latest lockdown measures. 

The vaccine rollout is now finally accelerating, with 821,000 doses administered over the past five days.

There will be enough supply to fully vaccinate 80 per cent of the 16+ population by October, but the rollout will likely take longer.

Source: Justin Fabo

In any case, Australia will need a huge mindset shift away from the current panicked stance before the borders are reopened for stranded citizens abroad (as opposed to, say, the French rugby team, or Katie Hopkins for Celebrity Big Brother). 

Pencilling in Q1 next year for the narrative change. 

Jobs recovery stalling out

Stall speed

Employment growth slowed in June, though there was still a decent increase of +29,400 or +0.2 per cent in the estimated number of total employed, to a record high of 13,154,200.

Employment was about +801,000 or a massive 6½ per cent higher than a year earlier. 

With population growth still only running at about +0.5 per cent, the unemployment continued to decline, now down to a decade low of 4.91 per cent. 

Victoria has been leaking residents to Queensland, and with the state's labour force actually shrinking since late 2019 the Victorian unemployment rate has plunged to just 4.4 per cent. 

With both Sydney and now Melbourne heading into renewed lockdowns - the fifth iteration for Victoria - Queensland is benefitting tremendously from interstate moves, with employment growth already leading in the nation by June at +235,000.

The growth in hours worked also looks to be losing momentum. 

Overall, a continuation of the excellent results since the nadir or May 2020, but with fresh lockdowns coming into force in July the momentum will likely now dissipate.