Big Picture podcast

Big Picture podcast

I joined Michael Yardney on the Big Picture podcast to discuss 2022, and the outlook for 2023.

Tune in here:

You can also tune in at Apple podcasts here.

China reopening after 3 years

China set to reopen

After three long years, China suddenly looks set to scrap its home quarantine restrictions and reopen.

This is a sudden and dramatic development, which may in time see international travel in and out of China reverting higher. 

Over the year to January 2020, Australia had a record 2.3 million arrivals from China, Taiwan, and Hong Kong.

Of course, this number promptly fell to near zero in 2021, as international borders were shuttered. 

The return of international students is likely to be seen first in the rental markets of Sydney and Melbourne, around the University hubs. 

Reopening surge

This is potentially huge news for Australia.

Financial markets are clearly concerned that the ensuing China reopening could be an inflationary force, as Chinese demand for LNG and other commodities is now likely to surge, which could push gas prices higher in Europe. 

Thankfully the weather in Europe appears expected to be relatively mild over the coming weeks, which for now at least is helping to keep power and energy prices under control. 

On the other hand, China's shutting down of low-cost production was one of the many supply shocks which drove up global inflation in the first place.

Theoretically, then, the resumption of production and ongoing easing of supply bottlenecks could be a disinflationary force, as the supply of i-Phones and electric goods supply resumes. 

For Australia's domestic economy, of course, the prospect of the return of Chinese international students, tourists, and permanent migrants is potentially momentous. 

Relationships with China have soured somewhat over recent years.

However, China is still Australia's number one trading partner, and the election of the ALP combined with the diplomatic skills of Senator Penny Wong will probably go some way to repairing the relationship. 

Rental listings sink to record lows

Rental tightness

In theory available rental listings should increase over time, as Australia's population grows.

This week - as the Aussie population touches a record high of 26¼ million - they fell to the lowest level on record, on SQM's data series, which stretches back to 2011.

Source: SQM Research

The recent declines have been driven by Sydney, and in particular Melbourne, as more employees head back to the cities. 

This trend is likely to intensify in 2023 as skilled immigration gets back up to speed, and as more employees require workers to attend the office. 

Some cities, like Adelaide, already have chronically tight rental markets.

Perth's rental market will soon be even tighter than the extreme lows seen during the construction phase of the resources boom. 

Asking rents for units have increased by 23 per cent over the past year in Sydney, and 22 per cent in Brisbane.

The tightness will intensify for as long as interest rates are trending higher, and for as long as regulations require stress testing for a 300 basis points buffer (for context, the UK now has a 100 basis points buffer). 

It's quite possible that we see population growth of close to ½ million in 2023. 

Source: Australian Bureau of Statistics

Only time will tell, of course, but the ABS population clock is currently estimating a rate of population growth in excess of 500,000 per annum.

20-video series #8

20-video series

Tune in here for part 8 of my 20-video series on goal-setting for 2023 (or click on the image below):

4 million visas processed

Backpackers return

The Australian reported yesterday that the visa backlog has been brought down to around 600,000.

Notably, as of last week, there are 120,000 working holiday maker visas issued, rebounding from a mere 20,000 at the pandemic lows.

Back in my backpacking days you could only work for one employer for a 3-month stint, but these rules have now been eased to allow six months at a single employer (to be honest, I doubt there would be much checking of whether a company employed a working holiday maker for longer than six months). 

To get a visa extension, it's still required for working holiday makers to work for 3 months in agriculture, though there have been calls to expand this into other industries experiencing skills shortages. 

The rapid processing of temporary visas will be a huge relief to regional businesses, in particular, where staff shortages have been chronic. 

Businesses are also calling for more to be done to get temporary visa holders numbers back up to above their pre-pandemic levels. 

The Australian tourism body also wants to see the qualifying age for working holiday visas lifted to 50. 

Home Affairs has hired 400 extra staff this year, and has processed over 4 million visas since coming to government. 

Despite the rapid rebound in temporary visas, the processing of the skilled stream intake has been slow this year, and will need to ramp up quickly in 2023.

Temp visas +600,000 from the lows

Student visa rebound continues

The number of temporary entrants visa holders for Australia increased to 2¼ million in November.

The total has now increased by +600,000 from the lows of Q3 2021, with little signs of a slowdown.

Student visas increased by another 10,000 over the month to 427,714.

Student visa numbers remain well below the 2020 highs of more than 566,000.

However, the ongoing increase should take the pressure off tight labour markets, with the cap lifted on the number of hours that international students can work.

Despite the rebound, total temporary visa numbers are still well down on the highs of more than 2.4 million.

There are still more than 287,000 bridging visas on issue, so as yet the visa backlog remains far from cleared. 

The seasonal troughs don't usually occur until the end of the University term times in June, so there will be enormous pressure brought to bear on rental markets over the coming six months.

Skilled stream visa issuance is running way behind target for this financial year on a pro-rate basis, and will need to be accelerated dramatically in 2023. 

Even with the recently added additional staff the Department of Immigration is likely struggling to keep up with huge numbers of applications for skilled migration, record high student visa applications, the rebound in visitors, and a backlog of applications for asylum. 

20-video series #7

20-video series

In today's video, I discuss making the best use of time.

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

Investors pulling out of the market

Rental shortage ahead

Credit growth was revised down to 0.54 per cent for October, and the November figure was just 0.49 per cent. 

Annual credit growth thus dropped sharply from 9.3 per cent to 8.9 per cent in October, and we can expect the annual figure to drop much further from here. 

Housing credit growth has slowed to 0.4 per cent over the past couple of months, and the 3 month annualised pace is now way down from the highs at around 5 per cent. 

The main driver of this has been investor credit, which over the past two months has slowed to a crawl, at under 0.3 per cent. 

Even if investors wanted to come back into the market to address the chronic shortage of rentals, many are unable to do so due to the restrictive lending assessment buffer at 300 basis points. 

The housing credit impulse took a leg lower after the revisions to last month's figures, with capital city prices now about 8½ per cent below their highs. 

Property investors tend to become despondent at this stage in the cycle, with borrowing capacity still severely curtailed for many borrowers, even in spite of rocketing rents and rising household incomes. 

On the other hand, I can't ever remember a time when we were headed for such a chronic shortage of rental properties, with many instances of rents rising by 25 to 30 per cent over the past year in Sydney and other capital cities. 

Immigration is set to rise to unprecedented highs next year. 

For reference the UK has already seen net immigration explode to an all-time highs as visa backlogs are cleared, while Canada's population growth has hit an all-time high of +865,000 over the year. 

Of course, Australia is next cab off the rank as the huge visa backlog is cleared, and this at a time when new home sales have crashed back to their pandemic lows.

20-video series #6

20-video series

Video 6 in my 20-video series on designing your dream life is here (or click on the image below):

Shared equity scheme to launch

Shared equity scheme

Overall, the Aussie housing market continues to be battered by the salvo of interest rate hikes since May.

Hit particularly hard has been the most expensive quartile of the property market, and notably the areas which saw prices screaming higher through the pandemic. 

The ultimate timing of the rebound remains uncertain for as long as interest rates are rising (though some areas are still faring quite well, in fairness). 

But when the rebound does come, it will be driven by New South Wales, which has seen the biggest decline in median price to date.

Employment in NSW is now a thumping ¼ million higher than a year earlier, with record high employment in both Greater Sydney (2.87 million) and regional New South Wales (1.46 million). 

Property market incentives for NSW

The New South Wales state government has already passed legislation stating that first homebuyers will be to opt out of paying stamp duty from January 2023 for properties priced up to $1.5 million, in favour of paying an annual property tax. 

Now the launch of the shared equity scheme for qualifying key workers, single parents, and older singles underscores that the recovery will likely be driven by the bottom end of the housing market in Sydney and New South Wales.

The price caps for the shared equity initiative are lower at $950,000 in Sydney and $600,000 in regional New South Wales, and combined with the land tax reform will see the new year start off on a brighter footing for transactional activity in NSW.  

Source: NSW Government

Unit prices and cheaper properties have generally held up better through this cycle's downturn, perhaps in part due to soaring construction and development costs, as well as reduced borrowing capacity pushing more buyers towards lower price points. 

Asking rents for units in Sydney are up 23 per cent over the past year, which is probably a factor too.

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The S&P 500 is down a further -2.2 per cent today, taking the year-to-date return to -21 per cent.

The technology sector NASDAQ index has taken a beasting, dropping by just under -3 per cent today, bringing the year-to-date shellacking to around -34.5 per cent.

Tesla is grabbing most of the headlines, being down -69 per cent this year, but others have taken bigger hits, with one example being Coinbase, which has dropped by more than 92 per cent from its post-float high of $429.54 to a fresh 52-week low of $32.95.

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US 30-year fixed mortgage rates continued to inch down by a further 4 basis points this week, to 6.27 per cent.

Mortgage rates are now down by a cumulative 81 basis points from 7.08 per cent in late October, but they need to fall further to get market activity happening again. 

Are we there yet?

Pause considered

CBA's Gareth Aird with the note today, predicting that the tightening cycle is done, with rate cuts to follow later next year, taking the cash rate target back down to below 3 per cent.

The Reserve Bank Minutes for December show that an interest rate pause was considered for the first time in this cycle, given that there will be an especially long lag between interest rate changes and transmission (due to the huge surge in fixed rate mortgages over the past two years). 

Monthly inflation fell short of expectations last time around and the MI inflation gauge is already plummeting, even before the latest rate hikes begin to have an impact, and supply chain disruptions are being repaired all the while. 

Unlike in Europe, the Reserve Bank of Australia didn't wait until inflation was at nosebleed levels before beginning to hike interest rates. Accordingly, inflation will on the way back down in 2023. 

With 300 basis points of tightening already having been delivered, there is a strong case for a pause now to see how much the economy softens over the next few months. 

With economists already forecasting a per capita recession in 2023, there should be little need for further tightening from here. 

Westpac forecasts GDP growth of just 1 per cent next year, with zero growth in the second half of the year. 

The Australia Institute notes that the average annual wage rise from enterprise agreements lodged since 15 July has been just 2.8 per cent, underscoring how there remains no risk of a wage price spiral in Australia.

Source: Australia Institute

Indeed, Australia is now embarking upon it's largest immigration program in its history, so wages growth is likely to become sluggish again in 2023.

The latest Cordell Construction Report showed a sharp decline in both new projects and the pipeline of work to be completed, confirming that the economy is already in the grip of a slowdown.  

Gas prices signal falling inflation ahead

Inflation fears easing

There are now about 20 US states with average gas prices below $3/gallon, according to the AAA.

US gas prices are now down a thumping -37 per cent from their excruciating highs, and are actually lower over the year. 

Fuel prices tend to impact inflation in other parts of the economy, so while lower prices can also be a stimulus for consumers, it's clear that inflation is going to ease in 2023. 

We are just starting to see lower unleaded prices in Australia too, albeit with a lag.

Westpac expects Aussie inflation to peak at a lower level than previously forecast due to a combination lower fuel prices, food prices now easing, lower dwelling prices for new homes, and the government's energy price caps. 

Lumber prices are now down -79 per cent from their 2021 highs as US homebuilding conditions have been smashed, so this should begin to flow through to Australia soon too.

AMP expects weaker data to see interest rates on hold in February, as weaker data flows through.

CBA sees clear signs of spending slowing now, both for goods and for services.

This gels with anecdotes I've been hearing about more cautious consumers, with the most recent interest rate hikes yet to take effect.

Perhaps not surprisingly, ANZ-Roy Morgan reported consumer confidence some 30 points below the long-run average.

All of this points to interest rates peaking soon, and being cut in the second half of 2023. 

Rental demand shifts back to cities

City rents rising fast

Rental vacancies remained flat at 1 per cent in November at the national level, according to SQM Research.

In Canberra, rental vacancies are suddenly on the rise, but most other capitals have very tight rental markets, particularly Perth, Adelaide, Hobart, and Brisbane.

Asking rents increased by another 1.5 per cent over the month.

Capital city rental markets have now seen asking rents rise by more than 25 per cent over the past year, led by a 29 per cent increase in Sydney, and similarly outsized increases in Melbourne and Brisbane.

Asking rents have slowed in much of regional Australia now, on the other hand. 

Source: SQM Research

SQM sees rental demand shifting away from some regional areas such as the Blue Mountains, and "NSW North Coast, Gold Coast North, Ipswich, North Queensland, Gippsland, and a number of outer ACT localities."

The demand is shifting back to the cities.

CBD rental vacancy rates are now at or below historical averages in Sydney (3.2 per cent), Melbourne 2.5 per cent), and Brisbane (1.4 per cent).

With restrictive moves on interest rates on borrowing capacity, rental markets in the capital cities look set to become extremely tight next year, with immigration rising, a reversal of demographic flows from the regions back to the capitals, and ongoing lending assessment buffers against landlords.

You can read the SQM media release here.

20-video series #5: Breaking the dependence on the 9-to-5

20-video series

In the 5th instalment of this 20-video series, I discussed breaking the dependence of the 9-to-5 pay cheque.

It can get harder the further you get into a professional career.

Check it out here (or click on the image below):

Inflation set to drop away sharply in 2023

Inflation indicators

More hawkish rhetoric from the Fed this week, but interestingly markets aren't buying it, seeing the Federal Funds rate peaking well below 5 per cent per cent before falling sharply in the second half of 2023 and into 2024. 

Inflation spiked dramatically this year on the reopening and supply chain issues, but many of these contributing factors have gone massively into reverse gear now, in turn boding well for 2023.

30-year fixed mortgage rates in the US have eased back by 77 basis points from 7.08 per cent to 6.31 per cent over the past 5 weeks, signaling that the peak of the interest rates fear has now passed. 

US stocks as measured by the S&P 500 are down 20 per cent (well, -19.7 per cent) year-to-date as policy has tightened. 

The Aussie market is down only -6 per cent year-to-date, albeit a lot more if measured in USD terms. 

Arrears low for now

Mortgage arrears latest

Old news, of course, but S&P Global released their latest mortgage arrears data for Australia.

Prime 30 plus day mortgage arrears were extremely low at 0.69 per cent.

This isn't too surprising given full employment, record low vacancy rates, and surging rents. 

The question is how much they will rise by in 2023 as rising mortgage rates begin to hurt borrowers.

We may just be seeing the first signs of an increase as rising mortgage rates start to bite, but from record low levels. 

A key difference from previous cycles is that whereby 100 per cent mortgages and low-doc loans were once commonplace, today they're no longer a key feature of the financial system. 

Non-conforming arrears ran to an alarming 23 per cent in the early 2000s downturn, but tighter lending standards have made a world of difference to systemic risks since the global financial crisis. 

Variously Western Australia (mining downturn) and Queensland (flooding) have had elevated mortgage arrears over the past decade, but this is not the case at present. 

Recent history suggests that the most highly-leveraged Sydney households could face the bulk of the stress from rising mortgage rates in 2023. 

However, mortgage lending standards are a world apart from the pre-GFC days, and the impact is most likely to be seen in declining household consumption, such as for household goods and recreation expenditure. 

Housing prices continue decline

Interest rate hikes bite

Housing prices continued their decline over recent weeks, to be -8.4 per cent lower than at their highs (albeit after rising by more than 20 per cent last year). 

Prices have taken a further leg lower following recent interest rate hikes, with no slowdown in the pace of decline in evidence.

There has been some substantial price discounting in evidence in Sydney in the $3 million plus price range.

Melbourne's index has also retreated to its pre-COVID level of March 2020. 

Adelaide and Perth have been the most resistant markets in recent months,

Financial markets are looking for further interest rate hikes in 2023, though much will depend on how the labour market shapes in the early part of next year.