Porsche cruises towards IPO

Winning together: Porsche set to float

Apropos of nothing in particular, it seems that Porsche, one of the great brands, may be heading for a sooner-than-expected IPO in September:

Porsche Holding - which has zero debt and is all equity - holds more than a 50 per cent voting stake in perpetually hated and significantly undervalued Volkswagen (with a market cap of just EUR 86 billion), which itself has a tremendous brand portfolio, including 668,000 employees, revenues of a smidgen over EUR 250 billion...and indeed a 100 per cent ownership of the outstanding Porsche brand. 

One might expect any Porsche spin-off to realise a value far in excess of the EUR 12 billion at which Volkswagen has had it valued, while moreover the clamour for widespread media coverage appears likely draw attention to the true value of the group. 

Related article from Barrons here (or click on the image below), or Arab News here: 

Apartment approvals crash to decade lows

Approvals crash

Building approvals for attached dwellings crashed 44 per cent lower in July to just 3,349, which is the lowest level in a decade.

And this comes just as immigration starts to ramp up. 

Total attached dwelling approvals haven't been lower than this on a monthly basis since the global financial crisis in 2009. 

Of course, the monthly data for unit approvals is lumpy, and always will be.

Looking instead at a rolling 12 month graph shows that the decline has been driven by Greater Sydney, where there were only 863 units approved in July, down from 1,987 a year earlier (and a thumping 5,109 back in July 2016, just before the surcharges on foreign purchasers kicked in). 

House approvals were flat in July, to be 18 per cent lower year-on-year.

Approvals are trending lower across the board for detached homes. 

The value of non-residential building approved fell 23 per cent in July, though the annual figures remain solid, and there is still a high volume of work in the pipeline for the time being.

The approvals figures are becoming a little less indicative at the moment, with so many projects being scrapped and developers going bust. 

Rental shortage

SQM's weekly for rent listings have continued to decline to series lows, despite the population of Australia increasing by 4 million between the 2011 and 2021 Censuses. 

Source: SQM Research

Australia appears to be sleep-walking towards a rental crisis.

It was reported earlier this month that excessive taxation and regulation has led to there being only around 700 rental properties available across Ireland, with regular reports of long queues outside the few remaining properties being made available for rent. 

Australia isn't in this kind of crisis mode just yet, but things seem to be grinding inevitably in that direction, with more landlords looking to sell up. 

We already had the restrictions on depreciation benefits deductibility post May-2017, and now the Queensland government is planning changes to land tax levies...even for properties located outside the state. 

And with major reforms to no-eviction laws and minimum property standards (including, for example, the sustainability of appliance energy use in Canberra), many landlords will choose to sell their rentals to move into asset classes where the goalposts aren't continually shifting from beneath their feet.

With foreign investors also effectively taxed out of the market by stamp duty surcharges, the new unit supply is drying up just as immigration resumes into the busy summer months, while the Airbnb phenomenon may have also had a role to play in the rentals shortage.

There's also the small matter of the enormous 300 basis points lending assessment buffer put in place by regulators, while a rapid series of interest rate increases also tends to shift the buy versus rent equation towards the renting side of the ledger.

There’s no easy fix here, but a useful start would be bringing the serviceability buffer back down from 300 basis points in September.  

After the next interest rate hike the lending assessment buffer in place will be effectively stress testing for a scenario which financial markets see as remote.

Alastair Lias: What’s happening around the traps?

Property Pod

This week I discuss what's happening around the country with property expert Alastair Lias, as well as what's coming next.

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

You can also tune in at Apple podcasts, Spotify, and at other podcast providers.

You can also tune in at Youtube:

Retail sales still high, for now

Record dollar spend

Retail sales defied expectations in rising by 1.3 per cent in July, to a record dollar high of $34.7 billion, seasonally adjusted. 

Data king James Foster with the charts:

This result appears to stand in stark contrast to other indicators, such as consumer sentiment, for example.

There are a couple of factors to take into account.

Firstly, part of the increase is due to price increases, of course, rather than retail volumes.

And secondly, there was a blistering increases in the number of overseas arrivals in July (with a provisional estimate of 1.083 million arrivals, up from 730,000 in June). 

Thus while there was an increase in department store spend and eating out, household goods retail recorded a third decline in four months. 

Source: ABS

A stitch in time

Overall, at first blush this was a surprisingly strong headline result, but there's plenty of evidence around in various surveys that retail spend will moderate in the months ahead.

In the current inflationary environment central banks will likely want to act sooner and more aggressively, erring on the side of hawkishness.

Thus despite many other indicators being in a weakening trend - and taking into account the lag effect from the rate hikes already delivered - the balance of probabilities suggests that next month's interest rate hike will be greater than 25 basis points (i.e. 40 or 50). 

Freight rates collapsing, but...

Freight rates in freefall

Freight rates were down another 6 per cent this week, continuing their multi-month plunge.

You can argue the toss over whether is this a 'good thing' (declining inflation pressures) or a 'bad thing' (a recessionary indicator)...

On the one hand, this suggests that inflation should gradually fall back to earth.

But markets are clearly still worried about energy prices, while the Biden administration doesn't appear to be doing all that much to help.

After the EV tax credits (which increased electronic vehicle prices) and the Inflation Reduction Act (which is inflationary), yesterday came the announcement of a $10,000 student debt forgiveness for those earning under $125,000. 

This controversial $300 billion policy appeared to infuriate almost everyone and almost broke the internet with the range of highly partisan takes.

Taking a step back from the the politics to look at market-based measures of inflation expectations it does look as though the Federal Reserve will have to be more aggressive in fighting inflation. 

10-year Treasury yields were also up. 

Down Under

Back in Australia, the latest wages figures showed very little sign of significant acceleration. 

And the latest PMI figures reported this week see the economy heading towards contractionary territory.

Charts from CBA: 

And, hopefully, there is some easing of price pressures on the way too. 

CBA sees the terminal cash rate for this cycle at 2.60 per cent, with two rate cuts to come in 2023. 

From CBA:

"The PMI data today supports our RBA call.  We see the cash rate target peaking at 2.60% in late 2022 (a level which we consider to be contractionary).  And we have two 25bp rate cuts pencilled in for H2 23.  

We think that provided the RBA pause in their tightening cycle when the cash rate is ~2.60% (close to the 2.5% level the RBA have nominated as their estimate of neutral, which is ~100bp above our assessment of neutral) the data will indicate that there is no need to continue to take the policy rate higher.  Indeed taking the cash rate higher would likely generate a hard landing in the economy."

This is where property buyers are buying the dip

Buying the dip

A bit of a look around the traps at where property buyers are still buying here (or click on the image below):

Calls for APRA to ease lending buffers

Mortgage jail

Topical:

Ben Kingsley: This is why APRA needs to ease lending buffers

Lending standards

This week on the Property Pod I spoked to PICA Chair and founder of Empower Wealth Ben Kingsley.

An expert in the lending and policy space, Ben discusses recent changes to APRA's lending assessment buffer policies, reforms to tenancy laws, and Queensland's latest land tax proposals.

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

You can also tune in at Apple Podcasts, Spotify...and Youtube. 

Is there a 'buy the dip' moment coming for property? (Livewire)

 Livewire markets

A bit of a Q&A with the guys at Livewire markets here (or click on the image below):

Employment falls 41k; earnings are...rubbish

Employment falls 41k

Employment fell sharply by -40,900 last month, missing market expectations significantly, and another signal that the economy is beginning to roll over. 

There were some big swings in the sample rotation figures, and there will be another significant change next month, so there's clearly some volatility in the monthly numbers to be taken into account.

The employment declines were experienced across each of the three most populous states, although New South Wales still has growth in total employed persons of +144,000 over the past year, and quarterly employment growth remained positive on a national basis. 

Big drop in participation

The participation rate suddenly dropped in July from 66.8 per cent to 66.4 per cent. 

I'm not going to pretend to understand such a sharp move in a single month, except to acknowledge that school holidays (and now the ability to take international holidays) have wreaked a bit of havoc with the payrolls figures of late. 

As an indirect result, the unemployment rate fell to a new cycle low of 3.38 per cent. 

At face value that means there was a marked decline in the number of unemployed persons from 493,900 to 473,600, meaning in turn that there are apparently more jobs vacancies (480,000 in May) than unemployed persons.

I could be off track, but it appears to me that the number of persons available for work is now set to increase quite dramatically as new arrivals surge into the summer months, while the most timely available jobs vacancies data series from ANZ and the Skills Commission are both now falling. 

It had quite reasonably been expected that average weekly ordinary time earnings would accelerate, but...nah, in the event the figures were rubbish. 

Mr. Macro at the carpet store underscores the dichotomy.

The wrap

Overall, this week's data dump has broadly suggested that the central bank should cool the proverbial jets, with weak wages and average hourly earnings figures, a huge surge in overseas arrivals, and a big monthly drop in total employment. 

Yes, this is only one month of job declines, but the economy is going to need to generate consistent jobs growth as labour supply returns. 

There may yet be a case for a 40 basis points interest rate hike next month, roughly splitting market pricing and bringing the cash rate target to a 'neater' round figure of 2.25 per cent. 

Whatever, we appear to have moved one step closer to the pause. 

---

You can read the detailed analysis of the release with James Foster here.

Wages growth limps

Wages growth lame

Bank wages data has told us for months that wage prices growth is only modest, despite many concerned claims to the contrary.

Well, I guess we can put that one to bed, for the time being at least. 

Wage price growth was once again lame at 0.7 per cent in Q2, and 2.6 per cent over the financial year. 

Both measures missed expectations to the downside...again.

Just for context, headline inflation is forecast to hit a lazy 7¾ per cent by the end of the year. 

Public sector wages growth was only 2.43 per cent, and for the private sector it was just 2.65 per cent.

Queensland recorded 2.9 per cent wage price growth, the fastest growth since 2013, and Tasmania was a relative bright spot. 

At the other end of the spectrum, the Northern Territory recorded wages growth of just 2 per cent. 

Neatly summarised, as ever, by the outspoken Mr. Keane:

Quite.

From Paris to Berlin...

Arrivals rebounding fast

Overseas arrivals into Australia increased much, much faster than expected in July.

The revised figures for May and June were 650,500 and 730,300 respectively.

Meanwhile the provisional estimate ballooned to 1,083,240 for July, a huge increase and way ahead of what analysts had expected (admittedly with finger in the air estimates). 

Of course, this remains well down on the record high for the month of July of more than 2 million arrivals which we saw in 2019, but it's certainly a hell of a lot better than the 87,000 (!) we saw the same time last year.

Source: ABS

Closer to pausing

This adds to the case for slowing down the pace of monetary tightening, for a couple of reasons.

Firstly, because the rapid acceleration in arrivals will soon help to ease labour force capacity constraints, especially as the international students and backpackers begin to pour back in to the country.

And secondly, because while the lack of ability to travel overseas was hugely stimulatory for Australia's economy up until the end of 2021 - as Aussie dollars were trapped at home to slosh around the consumption economy - this dynamic no longer holds true. 

Now Aussies can travel abroad, and hailing one of the wealthiest nations per capita on earth, they are doing so en masse...and spending profusely as they do so on the evidence I've seen in Europe! 

That's a timely boost for economic activity in Rome, Athens, Paris, Berlin, London, and Madrid, no doubt...not so much in Australia, though. 

Noted Lord Pascoe of the Twitter shire:

The spate of new arrivals will put pressure on rental markets on rents, granted, but that could be solved quickly and easily enough: by letting landlords refinance /borrow again. 

Rental markets under pressure

Rental pressures switch focus

There were signs of easing pressures in regional markets in July, as employers bring workers back to their offices in the big cities, according to SQM Research. 

In Sydney and Melbourne, on the other hand, rental markets are tightening quickly, and even CBD rental vacancy rates are down to well below average.

With the ramp in immigration largely likely to impact Sydney and Melbourne, those rental markets are set to keep tightening, while there are also far few high-rise apartments towers being built now.

There aren't the foreign buyers around for developers to secure the requisite pre-sales, and construction insolvencies are surging in any case.

Capital city asking rents rose another 1.2 per cent in the month, to be 17.2 per cent higher over the year. 

Louis Christopher of SQM Research was reported in The Australian stating that although rental markets pressures should ease for regional tenants, the same cannot be said for those in Sydney in Melbourne. 

WTI oil -5.2pc; lowest since January

Oil price retreats

Some welcome news on the inflation front as some more of the sting comes out of oil prices, down by more than 5 per cent today to the lowest levels we've seen since January. 

Weak China data was the explanation for today’s plunge.

This downturn has been reflected in some good news for fuel prices in Queensland.

There's a bit of a sting in the tail here, though, with the fuel excise cut of 22.1 cents per litre due to expire at the end of September. 

There's a similar trend afoot in the US, with gas prices falling to a 5-month low of $3.95/gallon.

The US dollar weakened a bit today against the Aussie on soft business conditions, manufacturing, and other data (1 Aussie dollar is now buying just over 70 US cents). 

Hopefully this won't hurt either, putting a little bit of further downward pressure on domestic inflation. 

Labor to kickstart record immigration

Record migration program

As in many developed countries, Australia's economy has been grappling awkwardly with capacity constraints.

The cavalry will soon be on the way, though!

Visa processing is being fast-tracked, there are now on average some 10,000 student visa applications per week, and the Labor Party - having being essentially silent on population policy plans through the election campaign - is now reportedly looking to ramp up the immigration program to 200,000 per annum. 

As the number of temporary visa holders rebounds, it's entirely possible that the growth in resident population could reach or exceed a record high of 500,000 per annum over the next couple of years, after accounting for the natural growth of the population of around 150,000 per annum (i.e. births minus deaths).

For the time being, at least, tens of thousands of Aussies are taking a well-earned break and travelling overseas, but the return of international students appears likely to take some of the pressure off the labour market as we head into the summer months. 

Week ahead

There is a huge data dump due out this week, so let's take a quick preview of some of the key releases.

Firstly, while overseas departures are riding fast (increasingly so as the rising number of short-term arrivals begin to cycle back out), we'll start seeing monthly arrivals come surging back to above 1 million over the coming months. 

Wages growth is likely to come in at around only 0.7 per cent or 0.8 per cent for the June quarter, perhaps allaying some of the concerns of a 'spiral' in incomes (wages growth is also rebounding from record lows in 2020). 

The jobs release is another hugely important and anticipated  data series; and looking at jobs vacancies figures it's likely to be another very solid set of numbers. 

The unemployment rate is already very low at just 3.5 per cent, after a huge drop last month. Will it fall even further this month? Naturally this could further inform monetary policy if so. 

Turning point

The Sydney Morning Herald reported upon a symbolic turning point for the big smoke today, as 60,000 runners showed up for the resurgent City2Surf, while the SCG was a packed house of 44,500 for the Sydney Swans game (the third highest ever AFL crowd at the cricket ground).

Sydney is back, read the headlines!

In a similar vein, SQM Research will report a national residential rental vacancy rate of just 1 per cent for July, with rental pressures easing in Adelaide, Hobart, Perth, and Canberra respectively, but with clear signs of a huge rotation back towards Melbourne and Sydney, both of which will record another drop in rental vacancy rates. 

Source: SQM Research

Rents are continuing to accelerate across the capital cities, according to CoreLogic's latest figures. 

Sentiment shift

There has been some evidence of a sentiment shift in the property market over the past week or two, with rents and now auction clearance rates both rising, immigration about to surge towards record highs, and fixed mortgage rates falling back following some alarming spikes. 

Consumers are perhaps starting to believe that the terminal cash rate for this cycle may not be quite as bad as previously feared.

There is a missing piece in the housing market puzzle, though, and that's the massive 3 per cent assessment buffer on new loans, which will be far too high from next month, and will stymy the ability of landlords to borrow and supply badly needed new rentals.

In fact, plenty of landlords have actually been choosing to offload rental properties due to their ongoing inability to refinance, punitive changes in land tax rules, ever-trickier tenancy and ‘no eviction’ laws, as well as rising mortgage rates and trades/renovation costs.