The BIP Show: talking resi & commercial real estate, gold, elections, inflation, Spurs, & more

BIP Show

Great to be back on the BIP Show talking office assets, residential property news, and more.

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

Builders going bust all over the place

Credit growth stalls

Credit growth is still reasonable over the year, but slowed to an anemic 0.3 per cent in February, even before the latest interest rate hikes took hold in full.

Over the past 3 months, credit growth has slowed to an annualised pace of just 4.3 per cent, the lowest in 2 years...and there's further slowing to come yet. 

Housing credit growth for the month was again slow at just 0.34 per cent, a very modest uptick from similarly sluggish figures in December and January. 

Notably with the lending constraints in place investor credit growth was again negligible, at just 0.2 per cent for the 3rd month in a row, with the rental crisis gathering a serious head of steam now. 

The housing credit impulse did at least turn a corner, and overall capital city housing prices rose in March, led by an increase of around +1.5 per cent in Sydney. 

Unfortunately, tighter lending policies are sending more and more developers to the wall now.

This morning Victoria's 4th largest homebuilder - the award-winning Porter Davis Homes - folded into liquidation, leaving 1,700 homes unfinished and 470 employees (as well as subcontractors) potentially in the lurch.

A further 779 homes have had contracts signed, but work has yet to commence. 

All work across the group has ceased, effective immediately. 

Within an hour or two, the developers Lloyd Group also collapsed, leaving 60 projects unfinished. 

There's a lot of infrastructure and public works underway at the moment, but this is in turn only hampering the capacity of the residential sector to deliver housing, and as such the capital city housing shortages will be exacerbated. 

Not a great day for the construction industry - and unfortunately the beatings will apparently continue until morale improves. 

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Catch up with the latest from the Australian Property Podcast here. 

Sydney the king of jobs

Sydney creates jobs

Job vacancies had declined for a 3rd consecutive quarter, from their May 2022 peak of 480,300 to 438,500 by February.

Many of these job vacancies are lower paying positions, accounting for the huge ramp up in immigration.

But still, it's equivalent to 3 per cent of the labour force, which is historically high number, albeit now declining. 

The figures suggest that the cycle lows for the unemployment rate are now passing. 

Tell you where has a LOT of jobs available: Sydney. 

Record high immigration, just a 3 per cent state unemployment rate for New South Wales, and jobs vacancies tracking at around record highs of nearly 150,000 too. 

No wonder everyone's pouring into Sydney...boom times!

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Markets have priced out any movement in interest rates in April, and the major banks CBA and Westpac are calling for a pause, with NAB also downgrading their cycle peak forecast for the cash rate target to 3.85 per cent. 

Inflation drops sharply

Inflation plunger

The ABS released its monthly inflation gauge, and it showed inflation dropping sharply from 7.4 per cent to 6.8 per cent in February.

This was way under market estimates, and confirms inflation as well down from 8.4 per cent last year. 

After an implied -0.4 per cent last month, the monthly inflation figure was only about 0.2 per cent.

Source: ABS

Much of the drop was driven by a -15 per cent decline in travel prices.

Of course, this was one of the major drivers of inflation in the first place due to Australia's extremely extended lockdowns and the massive disruption to aviation.

If you strip travel out of the figures, annual inflation was actually slower again at 6.6 per cent.

As for the wages 'spiral', well, that didn't happen either...and immigration is now set to record highs, so you can forget about further increases in the rate of wage inflation. 

The RBA is set to pause interest rates in April now.

And of course with 1- and 3-year bond yields far below the current cash rate target, the 300 basis points lending assessment buffer should be canned as well to help ease the chronic dwelling supply shortage. 

Australian Property Podcast - Episode 1

Episode 1

Tune in to the Australian Property Podcast on Apple podcasts, Spotify, or at the main website.

Or, you can simply watch on YouTube here:

Consumption weakening

Retail softening

Very soft retail figures today in a broader context.

Retail turnover increased +0.2 per cent to a seasonally adjusted $35.1 billion in February, despite rampant population growth.

Turnover is actually still lower now than it was in October and November last year. 

After factoring in price inflation, retail volumes are clearly falling, and the March indicators are for another softer result, especially for household goods. 

Overall, domestic demand is softening, and in per capita terms is dropping away. 

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I've read a few hot takes about retail turnover still being above pre-COVID levels.

Well, yes, that's generally how a spike in inflation and population growth would work. 

In terms of retail volumes, though, we'll be back on trend by March 2023, and then falling...

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James Foster did more of a deep-dive review of the numbers here. 

Big Picture podcast

The Big Picture

I joined Michael Yardney on The Big Picture podcast here (or click on the image below):

Not selling...

Low listings continue through selling season

With very few forced sellers around, new property listings continue to track miles below average as we move into the cooler autumnal months. 

CoreLogic reports: 

Source: CoreLogic

The low level of listings is mainly being experienced as a capital city phenomenon, with listings way down in Sydney, Melbourne, and Brisbane.

On the other hand, some regional areas and smaller capital cities have bucked the trend.

Source: CoreLogic

In a similar vein, rents are now easing in Canberra, Hobart, Darwin, and a number of regional areas.

In the big cities, however, asking rents are rocketing.

SQM's latest figures show asking rents in Sydney for units up by +30 per cent from a year earlier, and accelerating (Melbourne isn't far behind). 

Source: SQM Research

Disinflation is ahead

Inflation set to fade

Inflation expectations are falling, with implied forecasts dropping to around 2-year lows in the US. 

Australia's 3-year bond yield is trading at 2.79 per cent this morning, which is of course a long way below the current cash rate target of 3.60 per cent. 

I reckon it will be important to stay focused on the big picture over the next 3 to 6 months.

There will probably be a lot of jumping at shadows and shouty headlines about stagflation or a return to the 1970s.

But overall markets clearly expect disinflation to set in, and then lower interest rates over the next few years.

Consumers already sense this, of course, and in Sydney the housing market is rising from the lower end as the looming chronic shortage of properties on the market begins to bite. 

Banking jitters roll on in Europe

European pressures

With the UBS/Credit Suisse takeover dominating news flows over recent days, jittery financial markets turned their attention towards fellow struggler Deutsche Bank.

Deutsche's share price is down -26 per cent to EUR 8.50over the past month as fears of a default rise (and is of course way down from pre-financial crisis highs of around EUR 92). 

There are the usual charts showing an alarming spike in credit default swaps over recent days.

Zooming out the graph to a decade timeframe is still pretty alarming, but at least shows the situation in some broader context.

Source: Bloomberg Terminal

Germany Chancellor Olaf Scholz moved quickly to announce that the banking system in Europe is stable, which naturally brought to mind the old Thatcher adage that if you need to state that you're powerful then you probably aren't (or something like that). 

Whatever, global markets have been further shaken to the extent that futures have priced interest rate cuts in the US beginning as soon as June.

Not sure about that but in any event the trend will inevitably be down over the next few years. 

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Domestic news: tent cities

There are two keys news items this week in Australia.

Firstly, retail turnover, which is expected to be flat in nominal terms for the month of February, with domestic demand now fading. 

And then there's the monthly inflation release, which is volatile and incomplete, but nevertheless watched by the Reserve Bank for an indication of whether a pause in interest rates is now appropriate.

Housing markets have continued to firm over the past 8 weeks in the face of a looming chronic shortage of rentals in the capital cities, with steady selling price increases also set to be reported. 

Most weeks now there are reports of tent cities popping up in Australia.

Last year they were mainly being pitched in regional areas, but now they're popping up in the capitals. 

Properties coming up for rent in Sydney and consistently seeing rents being repriced 30 to 50 per cent higher due to the ongoing dearth of new landlords in the market and skyrocketing demand.

 

Labor won the NSW election at a canter yesterday, having campaigned hard for tenant rights, including ending unfair evictions by landlords. 

We'll have to see how that plays out, though it's unlikely to encourage more rental stock (well, actually the opposite).

The settings are all wrong for the city rentals market at the moment: record high immigration, workers moving back into town from regional Australia, higher interest rates being quoted for investor borrowers, and a nanny state lending assessment buffer accounting for a hypothetical 12 interest rate hikes scenario (when futures markets are expecting rate cuts ahead). 

A 50 per cent step-up in Sydney rents is pretty much locked in while those settings remain in place. 

Economy - and prices - slowing

Judo chopped

Following on from ANZ reporting a sharp slowdown in spending in March comes some more reassuring figures from Judo bank.

All sectors of the Australian economy are now in contraction, suggesting that the interest rates hikes are more than just doing their job.

And input price pressures are easing sharply, confirming that the peak inflation pressures are behind us.

This graphic actually tells a very interesting story about how the lockdowns resulted in a large spike in price pressures, which are now falling as the world economy reopens and returns to normal.

Last call for rate hikes

Inflation easing

The US Federal Reserve lifted the Funds Rate by 25 basis points overnight - very likely the final interest rate hike for this cycle - sending the bank indices into a bit of a tizz.

Powell's speech revealed a dovish tilt, however, and interestingly financial markets are pricing for 3 or 4 interest rate cuts ahead by January next year. 

Bond yields also dropped back in Australia on the dovish rhetoric. 

The most US recent data released yesterday suggests that inflation pressures are still easing overall.

Source: Philly Fed

Down Under pressure

The dynamic in Australia is somewhat different.

In contrast to the US, wage price growth Down Under is only running at a very modest 3.3 per cent, and now appears to have peaked as immigration ramps back up. 

And with most borrowers on variable mortgage rates - or short-term fixed rates - spending is already slowing sharply.

ANZ observed services spending in March as being down by more than 12 per cent from a year earlier, with softness in evidence across the board. 

These dynamics largely accounts for why markets see Australia's cash rate target peaking imminently, probably within the next couple of months.

Rents explosion ahead

A critical emerging issue in Australia is the enormous build-up of pressure in rental markets, especially in Sydney, with rapid immigration returning and a tight regulatory squeeze being maintained on investor borrowers. 

Mortgage rates are generally higher for investors, and stress-testing is being carried out at extremely tight level - with no apparent justification, especially now given record low rental vacancies and the skyrocketing trajectory of rents.

Source: SQM Research

It's hard to see how this can be sustained, so something has to give. 

5 reasons Sydney unit prices will likely rise 25pc

Sydney heading for undersupply

Sydney unit prices are actually now rising, and I believe will probably continue to do so, for a number of reasons.

Firstly, interest rates are at or close to their peak now, with Australia's 3-year bond yield trading down towards 2.7 per cent, from around 3.7 per cent only a few weeks ago.

This largely reflects the emerging banking crises in the US and Europe - which are of course bad - but it is already reducing fixed mortgage rates in Australia, and potentially also portends lower interest rates Down Under over the next few years. 

Secondly, although people like to talk about mortgage stress - which may indeed be a factor for some existing leveraged borrowers, especially portfolio investors - Sydney's economy is still cruising along just fine.

The unemployment rate in New South Wales is actually now among the lowest in the nation - at an unbelievably low level of around 3 per cent - which is something we haven't been able say much over the past couple of decades. 

Thirdly, Australia's population growth is now running at a remarkable record high of almost 600,000 per annum, which in time will be almost impossible for the new unit supply to keep up with, given the woeful trajectory of new dwelling sales. 

Sydney will be the most obvious initial beneficiary of the resurgence in long-term and permanent migration, the rapid return of international students, and to some extent regional COVID refugees being called back to their city offices (at least for 2 or 3 days per week).

Fourthly, construction costs for developing medium-density dwellings have often increased by about 50 per cent from pre-COVID levels, a dynamic which itself partly accounts for the recent crunch in building approvals. 

Crucially, therefore, I believe we won't get any meaningful increase in the new unit supply until prices rise by at least 25 per cent from here, and possibly more. 

Capital raisings show that a swathe of Build to Rent towers will start to emerge from the earth soon - especially in Melbourne - but most probably won't be delivered to the market until around 2026.

And fifthly, for the time being at least, New South Wales has exempted first homebuyers from having to pay stamp duty up to the $1.5 million price point, which is sparking a bit of competition in the unit market, with first homebuyers sometimes competing against downsizers. 

With rents spiking alarmingly by up to 50 per cent in some cases for inner-Sydney apartments, buying a unit has often become a more attractive option than renting, although stock levels remain exceptionally low for A-grade units. 

Rental crisis

In related news, CoreLogic reported today that Sydney unit rents are surging higher at a record annual pace of around 17 per cent and rising (this lags some way behind SQM Research's asking rents leading indicator, which is up by nearer to 30 per cent over the past year). 

Source: CoreLogic

Rental vacancy rates for units in the capital cities continue to fall to all-time lows of 0.8 per cent.

Source: CoreLogic

This has been driven lately by sharp declines in Sydney and Melbourne - where vacancy rates are also now extremely low - and before that Brisbane. 

Adelaide's unit vacancy rate is now close to nil. 

Yes, I've heard all the counter-arguments, in particular about interest rates. 

Noted and bookmarked!

Home values steady

Stock shortage

Very little news from the ABS this week, as the ructions continue in global markets and for banks in the US and Europe. 

In Australia bond yields have fallen markedly over recent weeks.

With a shortage of quality stock foe sale, housing prices have begin to rise in Sydney, as well as in Brisbane and Perth to a lesser degree.

Wages growth cools for a 2nd month

Wages slow

Via SEEK's advertised salaries index, advertised salaries grew up just 0.2 per cent in January, seasonally adjusted. 

It's the second consecutive monthly decline, reported SEEK's Newsroom:

Over the year advertised salaries growths slowed to 4.4 per cent (down from 4.6 per cent in December).

This suggests that we may seen the peak of wages growth for the cycle, according to SEEK's Chief Economist, Matt Cowgill.

This makes sense, with the peak tightness in the labour market having passed in mid-to-late 2022.

Supply issues steadily being resolved

Supply shocks solved

Charlie Bilello always provides sensational insights from the US on Twitter, and is well worth a follow.

From this weekend alone...freight costs are now - almost unbelievably - lower than they were at the start of the pandemic, having plummeted by an astonishing -87 per cent. 

On the rampant demand side, things have been gradually cooling a bit too.

The average price of a used Tesla has fallen by US$21,000 since July last year, as charted by Charlie:

Gas prices are now tracking -20 per cent lower than a year ago.

In Australia we aren't quite there yet, but given the significant drop in oil prices of late it shouldn't be too long before unleaded prices are down by a similar amount from a year earlier (diesel prices have remained strangely high, on the other hand). 

As for US interest rates? Well, they are now expected to fall now over the next two years, as markets price in rising concerns about major stress within the banking system.

Great analysis as always.