Mortgage credit impulse approaches GFC lows

Credit growth stalls

Credit growth followed up the weak 0.3 per cent seasonally adjusted growth in December with another soft result of just 0.4 per cent for January.

In particular investor mortgage credit growth has been running at close to zero since November, at a time when population growth is running at a record high of about 500,000 per annum. 

The credit impulse for housing is now the worst nick since the global financial crisis, even before the latest interest rate hikes took hold. 

Business credit has also moderated over recent months.

Nothing too surprising here.

New home sales essentially point the way towards a monumental housing shortage, in turn paving the way for Labor to spring their state-subsidised corporate landlords solutions. Yuck. 

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The retail turnover figures came in with a fairly soft report, rebounding a little after the sharp -4 per cent drop in December, but to below September 2022 levels.

Overall, this suggests retail volumes slowed sharply in the second half of 2022.

James Foster reports here.

Big Picture podcast

Big Picture podcast

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Sydney unit supply to shrink 84pc

Inventories drag

The Q4 business indicators for the Aussie economy came in a bit soft, overall.

Mining profits had an absolute bonanza through 2021 and 2022, and it looks as though the quarterly peak in profits fell in the June quarter of 2022.

Previously strong quarterly mineral exploration is now set to follow commodity prices lower, with a modest quarterly decline in expenditure to around $1 billion led down by gold exploration spend. 

The total wages and salaries bill in Q4 increased by +2.4 per cent, rounding off a strong rebound in activity for 2022, although it looks as though the strongest part of the rebound was also experienced around June 2022. 

The quarterly sales figures came in very soft, however, all but stalling in the final quarter of the year.  

Domestic demand appears likely to be barely positive in Q4, and inventories will be a significant drag on growth in the final quarter of 2022, subtracting a significant -0.8 percentage points.

There are more figures to come in yet, but evidently economic growth in Q4 is going to be soft, and possibly negative in per capita terms.

Rental crisis accelerates

APRA announced yesterday that the 300 basis points lending assessment buffer will remain in place for the time being, presumably until there is greater certainty around where the terminal cash rate for this cycle will be. 

The dilemma is clear enough - having missed the inflation target on the low side for half a decade, policymakers and regulators can't afford to appear similarly half-arsed about bringing inflation back down to the 2-3 per cent range.

Thus we may expect the tough talk to continue for a while yet.

The cost of this will be a continuation of the rental crisis in some parts of the country.

In the short-term there may be some respite as the long pipeline of completions comes onto the market, however...

Unit supply set to shrink

Over the next two years, Charter Keck Cramer's latest report anticipates a -73 per cent decline in unit supply, led by a decline of -84 per cent in Sydney, and -65 per cent in Melbourne.

Sydney's unit commencements have slowed continuously from 31,000 in 2017 to just 7,700 over the latest financial year, reported the AFR, just as population growth ramps up. 

Brisbane unit commencements have similarly dropped from 13,300 in FY2016 to just 1,900 in FY 2022.

Charter Keck Cramer reported that unit prices would have to increase within months due to the chronic shortage, and indeed they already are in Brisbane.

The Housing Industry Association (HIA) has also warned of "long and dangerous lags" associated with ongoing interest rate increases. 

I was chatting to a guy this week who is currently living in a parking space (Sunshine Coast), but that said it looks as though the main rental pressures this year could well be felt in Sydney and Melbourne as immigration restarts fully. 

In Melbourne, total rental listings hit another all-time low this week, according to SQM Research, with population growth now set to accelerate.

Source: SQM Research

Asking rents for units in Melbourne (and Sydney) are now almost going vertical, rising +7.4 per cent over the past quarter.

Source: SQM Research

Looking further ahead, Australia is set to embrace the eco-socialist utopia of "Build to Rent" tower blocks, especially in Melbourne, from around 2026, so renters can "own nothing and be happy" (with the UK leading the idiotic charge for limiting social movement to a 15-miute radius from your home. Something else to be resisted at all costs!). 

More hikes to come

Despite the above challenges, economists have been calling for more rate hikes, goaded along by market pricing in the US, although pricing in more hawkish policy at this late stage in the cycle arguably encourages the market to price in more and faster interest rates cuts when they do arrive. 

Source: ANZ, Bloomberg

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Unfortunately as the rental crisis and homelessness increases, that means we're consigned to another month of debate on the Noosa Community Notice Board of whether Victorians should be banned from leaving the state. 

Borderline unhinged, I know, but rental markets are becoming extremely tight right now, and lending assessment settings are now set to be tightened even further. 

The pendulum swings...

ausbiz TV

Looking forward to being back on ausbiz TV next week.

Outgoing anchor David Scutt sums up the interest rate predicament, with commentators getting more hawkish by the week:

Net migration +400,000 in 2022 (more to come)

Record immigration

Westpac calculated that net immigration was a record high +400,000 last year, with another +350,000 to come in 2023, to add to the natural growth in Australia's population.

That equates to a record reopening boom, reports Westpac. 

Source: Westpac

Net visitor arrivals exploded to a record high late last year. 

Some commentary had predicted - for reasons that were never quite articulated? - that international students would never come back to Australia.

In any case, they are...and in record numbers. 

Source: Westpac

Overall, 2022 and 2023 will see the biggest population growth on record. 

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ABC News reported today that more Australians that ever are living in tents, caravans, and cars, as the rental crisis gathers pace, and rental vacancy rates hit record lows. 

As discussed previously, lending settings need to see the handbrake removed from prospective landlords, as assessments rates are too high and the net rental supply continues to diminish. 

200 basis points buffer would be ideal but 250bps would be a start.

Source: Effie Zahos, Canstar/Today Show

Money Cafe podcast: The super trap

Money Cafe

I joined The Australian's James Kirby on the famous Money Cafe podcast to discuss the proposed changes to superannuation.

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

You can also tune in at Apple podcasts here.

Wage pressures moderating

CapEx recovery is muted

Capital investment moved modestly higher in Q4, despite sluggish investment in equipment, lifted by more building investment in Tasmania and Victoria. 

The detailed labour force figures showed the usual seasonal lift in unemployed persons.

It's been a wild ride, from 1 million unemployed persons down to just 460k in the third quarter of last year and a chronic shortage of workers as the lockdowns ended. 

But that number of unemployed persons has lifted by more than 100,000 to 561,000 over the past four months, and anecdotally we are well and truly through the worst of the squeeze now. 

Gareth Aird of the CBA certainly thinks so.

Australia doesn't really share the risks of a wages breakout with countries such as the US, with immigration now running at record levels. 

The RBA's forecasts were for wages growth to peak at 4.2 per cent at the end of this year - and unemployment to reach 3.8 per cent by the end of December - but both of these assumptions may already looking a little shaky. 

Today's average weekly earnings growth figures from the ABS lifted to the highest level since May 2020 at 3.4 per cent, mirroring the surprisingly soft wages figures from yesterday. 

Xero's wages growth index for small business is also slowing sharply (Macquarie Macro chart):

Gareth Aird from the CBA thinks the Reserve Bank will pause interest rates "very soon" with inflation expectations falling and wages growth running at levels consistent with the inflation target.

Wages miss big, slowing to 0.78pc; record fall in inflation expectations

Wages growth stalls

Wages growth missed expectations badly.

Some economists had predicted a spike of up to 1.3 per cent in Q4 due to tight labour market conditions. 

In the event wages growth was a paltry 0.78 per cent, well down from the 1.1 per cent seen in Q3 as the minimum wage was increased by the FWC.

Over the year wages growth was below the Reserve Bank's forecasts at 3.3 per cent. 

Public sector wages growth was a miserable 2.47 per cent over 2022.

The weakest growth was seen in the two territories, where wages growth was 2.9 per cent (ACT) and 2.6 per cent (NT) respectively. 

Western Australia and Tasmania led the way with 3.6 per cent wage price growth.

The peak of staff shortages was last year, so the threat of a price-wage spiral is pretty much dead in the water now, especially with Labor seemingly looking likely to ramp up immigration to even higher levels.

Temporary visa numbers were already up by ¾ million from their lows in Q4, with international student numbers now rising fast.

Paradoxically this could be handy news, as real wages growth of minus -4.5 per cent should slow spending right down. 

Construction work done also fell in Q4, also missing market expectations for modest growth. 

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Roy Morgan reported a record fall in inflation expectations, dropping from 6.5 per cent to 5.3 per cent over the past two months, included a 0.7 per cent drop in January. 

The record decline in inflation expectations show that consumers agree that inflation peaked in late 2022.

The full report from Roy Morgan is here. 

Rate hikes slowing spending

Spending slows

Nice timely indicator from ANZ, showing the slowdown in spending in 2023, as interest rates impact the consumer economy. 

Home-related goods spending fell -16 per cent from a year earlier, and big-ticket items spend on furniture and similar items was also much weaker than last year. 

Even when the Reserve Bank stops hiking, there will still be fixed rate mortgages to roll off at much higher mortgage rates. 

In the context of the above chart, spending should slow down substantially from here in Australia. 

House building set for worst year in a decade (HIA)

Home starts crunch

The Housing Industry Association's Tim Reardon notes in the latest forecasts that housing starts this year are set to fall to the lowest level since 2021. 

Source: HIA

Reported the HIA:

Source: HIA

As such, record high population growth combined with tight lending standards continue to point to a shortage of housing, particularly rentals.

Melbourne rental market tightening at an alarming pace

Rental crunch accelerates

During the pandemic Melbourne's rental vacancy rate rose to 4½ per cent. 

How things have changed, with the rental market now tightening at an alarming pace.

The vacancy rate dropped from 1.7 per cent in December to 1.2 per cent in January, and the way things are going there's going to be another significant drop in February too.

Source: SQM Research

Melbourne's population has grown faster than that of any other city over the past decade, but now rental listings are at record lows and falling fast.

Source: SQM Research

Sydney is also tightening fast as immigration ramps up, while 50,000 additional international students are likely to be on their way from China. 

Lending assessment buffers remaining at an fantastically paternalistic 300 basis points, so the rental supply continues to contract apace. 

Zooming out from the shock

Open home queues

There have been some examples of surprisingly strong property sales in recent weeks, confounding the expert observers, and Sydney actually recorded a preliminary auction clearance rate of above 75 per cent yesterday.

Source: Domain

CoreLogic put the preliminary clearance rate for the week in Sydney at 78 per cent, the highest in a year.

Stock levels are very low, and buyers are getting out and about.

You can argue about the underlying reasons for these dynamics.

'System one' thinking, as described by Daniel Kahneman, is that interest rates have been rising, so asset prices must decline equivalently. 

But with full employment and stamp duty exemptions reinvigorating the housing market in New South Wales, some homebuyers appear to be looking further ahead with a 'System two' mindset at projections for record high population growth, soaring rents, declining dwelling starts, and a possible imminent peak in interest rates.

Zooming out

Moreover, the trendline for interest rates over the past four decades has only been one-way travel...towards zero.

Although the global lockdown measures implemented due to the pandemic and the Ukraine war have caused massive - and perhaps unprecedented - supply shocks and supply chain disruption, today Australia's 10-year bond yield is still only trading at a bit under 3.8 per cent.

Arguably not too much has changed from a structural perspective since the low inflation world of 2019 and before, while accelerating technology developments - such as in the AI and ChatGPT space, for example - could prove to be a significant deflationary shock.

Historically, monetary tightening cycles always break something sooner or later, and perhaps we could be back on the way towards near-zero interest rates earlier than we think?