2 Sense: Builders going bankrupt, what the RBA reform means for you & the mortgage "dilemma"

2-Sense

This week on the Australian Property Podcast, Owen Rask and I discuss the proposed Reserve Bank reforms and what that means for you, builders going bankrupt, and what to do if you're facing mortgage stress.

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

You can also tune in at Apple podcasts, Spotify, and other podcasting outlets. 

Evans calls rate cycle peak

Interest rates peak

The ABS released its producer price index figures, which increased by 1 per cent over the March 2023 quarter.

Over the past year prices at final demand increased 5.2 per cent, but on the bright side price increases don't look quite so hot now.

Over the past year producer prices have largely been driven by a rampant surge in electricity and gas prices (up 22.6 per cent!). 

Quite how a country like Australia has high electricity and gas prices - especially as a reduction in power prices was the key Labor election pledge - is another story!

Another major driver of producer prices over the year has been building and construction prices (+9.6 per cent), but at least there is some improvement underway here, with prices up only +1.1 per cent in Q1. 

The Housing Industry Association reported that there has been a painful shortage of tradies over the past couple of year, however this is gradually being righted as new skilled migrants arrive. 

In fact trade prices increased only 0.03 per cent in the March quarter on the HIA's index, with the recent series of interest rate hikes yet to flow through here (since there remains a large volume of construction work in the pipeline):

Source: HIA

Construction prices will decline eventually, and financial markets believe we have seen the end of the interest rate hiking cycle.

Source: ASX 

The legendary Bill Evans of Westpac amended his call today to no further hikes, a lower peak than had previously been expected. 

Further details from Westpac are here. 

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Import prices also fell -4.2 per cent in the March quarter on lower fuel prices, according to the ABS.

Sydney heading for rental crisis

Capital city vacancies drop

PropTrack released its latest rental report this morning, showing capital city vacancy rates falling to new record lows in Q1 2023. 

On the other hand, regional vacancies have now begun to lift a little as the new supply hits the market, and as more workers head back to their city-based places of employment. 

In fact, if you follow my Twitter feed, you'll have see SQM Research's data showing rental vacancies lifting in Hobart, Sunshine Coast, Gold Coast, Blue Mountains, Mornington etc.

Nationally, advertised rents across accelerated, with house rents up 6 per cent over the quarter, and with unit rents up 4.3 per cent. 

Looking ahead, regional rental markets may continue to ease a little, due to a combination of new housing supply and internal migration back to the cities.

Capital cities, on the other hand - excluding Hobart and Canberra - have population and demand outstripping the supply of rental stock, so the rental pressures continue to intensify. 

The rental dynamic in Sydney looks particularly alarming, with demand soaring at a time when supply is stuck. 

PropTrack's rental report can be found here. 

Tightened lending

With more and more people sharing rooms or living in tents and cars, it's surely past time to normalise tight lending conditions, especially for investment loans. 

It's worth rewinding the clock back to February 2023, to the latest update on the 3 percentage points serviceability buffer settings in place. 

This update noted that the buffer would remain in place, in part due to the potential for further interest rate rises. 

Source: APRA

On the interest rates point, markets are pricing a near-zero chance of an increase in May.

Looking further ahead - and indeed up to several years out - interest rates are expected to decline.

On the risky lending point...well, arguably there isn't enough of it right now, given new home sales have crashed to decade lows, and construction insolvencies are steepling to record highs: 

There has been quite a lot of online discussion on why the 300 basis points buffer - and for that matter higher mortgage rates for investors - have been maintained. 

On the credit growth point, this has also slowed to only 0.3 per cent per month (which is basically nothing at a time when population growth is as high as it is).

The only remaining factor appears to be 'financial stability' risks, but this is always a nebulous point.

At some point tight lending conditions becomes a net negative for financial stability, while needlessly locking many would-be buyers out of the market. 

In the meantime, I'm not exaggerating the case in saying that rents in many parts of Sydney are set to take a 50 per cent leap higher. 

Inflation now in decline

Inflation beyond the peak

Some good news, finally, for borrowers!

Inflation came in a little softer than expected for the March 2023 quarter.

Specifically, the year-on-year trimmed mean inflation figure dropped from 6.87 per cent in the December quarter to 6.57 per cent, confirming that inflation peaked in late 2022.

The weighted median figure was some way lower at 5.8 per cent, but this measure attracts less attention these days. 

Notably, the monthly inflation gauge also continues to fall away sharply.

From 8.4 per cent in December, the March figure was down to 6.3 per cent, and sliding away.

Source: ABS

As Callam Pickering - Chief Economist at Indeed - and others showed, the momentum in monthly inflation has dropped off significantly: 

Source: Callam Pickering, Indeed

In fact, monthly inflation has only been running at around 0.3 per cent per month in 2023. 

Market pricing

A few people noted that the inflation figures were still 'hot', but overall that mostly refers to the figures over the past year, rather than what's happening now in real time.

I guess that's semantics, to some extent, but in any case financial markets have clearly eased their expectations for the trajectory of interest rates a little over the past week. 

That's partly because the underlying inflation figures weren't quite as bad as feared, and partly because yet another US bank has been flirting with collapse. 

First Republic saw its share price cut in half yesterday to around $8, down -95 per cent from a year ago.

Bed, Bath, and Beyond also finally collapsed into bankruptcy this week, having previously teetered on the brink for some time. 

Challenges remaining

Back in Australia, while goods inflation has fallen faster than expected, there are still some areas where services inflation is likely to run hot...most notably rents.

While the growth in construction costs is now slowing, the actual rental price inflation figures continue to lag far behind the reality of asking rents for new leases (especially in Sydney).

So there's plenty more inflation to flow through to the official figures here. 

The wrap

Overall, today's figures were something of a relief after some red hot inflation figures last year, with inflation officially now on the way back down.

This potentially allows the Reserve Bank to sit on its hands for the next few months should it choose to do so, by which time the global landscape will quite likely be different. 

Financial markets are pricing no further interest rate hikes in this cycle in Australia, with a decent chance of a cut later in 2023.

Source: Bloomberg, via Shane Oliver, AMP (Twitter)

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On the inflation figures, James Foster provided his usual more grown-up and detailed analysis here. 

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Make sure you catch up with the Australian Property Podcast latest - now in the Top 5 Business Podcasts in Australia:

2-Sense: Big 3 news stories of the week

2-sense

I discussed the big 3 news stories of the week with Chris Bates.

3 weeks in and we now have 11,000 unique listeners - please feel free to spread the joy. 

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

You can also tune in at Apple podcasts, Spotify, and other podcasting outlets. 

SEEK salaries +4.7 per cent

Salaries growths stabilises

Advertised salaries increased by +0.4 per cent in March, according to SEEK. 

Over the year, salaries were up +4.7 per cent in March, the same as in February. 

In SEEK's words, the labour market is still running hot, but it's no longer getting hotter.

This index tends to run higher than the ABS wage price index, so it looks like wages growth on the official figures will peak out at under 4 per cent. 

Australia hasn't faced the challenges of red hot wages growth that some other countries have done.

And now we have rampaging population growth accelerating to +523,000 over the year to March...so that'll do the trick. 

Commsec came out with a really interesting way to look at the population bust to boom rebound:

There shouldn't be any shortage of labour in retail and hospitality going forward, but there might be an ongoing shortage of places to rent. 

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Next week will see the release of the key official inflation figures.

It looks likely that inflation peaked in late 2022, with trimmed mean inflation likely to slow from around 6.9 per cent to 6.6 per cent over the year to March 2023. 

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ANZ cut its fixed mortgage rates by up to 60 basis points today, reflecting the peak of the interest rate cycle:

Source: Eric Wu, Property Talk Australia 

Some lenders have been nudging their variable rates a little higher over the past week or two. 

Podcast: The role of a buyer's agent

Buyer's agents in Australia

I was joined by Amy Lunardi on the Australian Property Podcast to discuss the role of a buyer's agent.

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

You can also tune in at Apple podcasts, Spotify, and other podcasting outlets.

We'll lob the video up on the YouTube channel in due course as well. 

New home sales crunch continues

New home sales fall again

New home sales fell by -7.2 per cent in March, and have effectively been cut in half since the first quarter of 2022. 

With cancellation rates now above 30 per cent, many builders are reporting "negative sales" over recent months according to the Housing Industry Association:

Source: HIA

In New South Wales, new home sales have fallen by more than three-quarters from a year earlier, portending a dire shortage of properties in Sydney as immigration ramps up.

Queensland and Victoria aren't faring much better, to be fair. 

Source: HIA

With more and more development projects being scrapped, Australia is heading for an unprecedented housing shortage. 

Due to the "potential for further interest rate rises" - and for financial stability purposes - a record 300 basis points lending assessment buffer remains in place, despite financial markets pricing something rather different. 

With so many builders and developers now collapsing it's hard to imagine anyone rushing out to buy a new home until the tight financing conditions are removed. 

Construction insolvencies to record highs

Construction failures soar

There were another 524 construction insolvencies in the March 2023 quarter, an increase of 93 per cent from a year earlier. 

235 of the failures were in New South Wales, 149 in Victoria, and 89 in Queensland. 

The residential construction sector is known to have a high multiplier, and failures will ripple out through subcontractors and small businesses, in turn hurting the economy.

Over the year to March, there were 2,130 insolvencies in the sector, including 964 in New South Wales, 583 in Victoria, and 332 in Queensland. 

Unfortunately this shrinks the capacity of the sector to build homes, with many projects now failing or being scrapped. 

Financial markets aren't pricing any further rate hikes, but with lending for new homes and construction already sinking to decade lows policy is already well into restrictive territory.

This is why I think any further monetary tightening now would only be matched by further loosening later. 

Big Picture podcast: have housing markets bottomed?

Big Picture podcast

Has the housing market bottomed?

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

Rentals snapped up at a record rate

Rentals crushloaded

Rental properties are being leased in just 18 days on average at the moment, faster than they can be listed and a record speed. 

Source: CoreLogic

Asking rents for units in Sydney are rising at a 30-40 per cent year-on-year pace at the moment, with Melbourne and Brisbane also recording rapid rises.

Unfortunately there isn't much respite on the horizon, with CoreLogic's latest rental report showing a new record low for capital city vacancies.

Source: CoreLogic

Urban Developer reported yesterday that a majority of Australia's building and construction businesses are borderline insolvent, with failures in the sector well above decade highs, and rapidly approaching two-decades highs. 

Thus many approved homes and planned apartment projects are now being mothballed or scrapped, at a time when population growth is running at well over 500,000 per annum.

One sole piece of good news: Cordell reported that construction cost growth slowed to 0.9 per cent in the March quarter, this lowest rate of growth in the 2 years since March 2021 (and well down from 1.9 per cent in the December quarter). 

Otherwise, the pressure on the construction and rental market continues. 

2-Sense: Big 3 property stories this week

2-Sense

I joined Chris Bates on this week's 2-Sense segment of the Australian Property Podcast to discuss the big 3 property news stories of the week.

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

You can also tune in at Apple podcasts, Spotify, Google podcasts, and other podcasting outlets. 

And you can watch at Youtube here:

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High loan-to-value and high debt-to-income lending has dried up over the past year.

Hat tip, Redom Syed of Confidence Finance:

Partly by design, there's such a handbrake on lending for new homes and new housing construction at the moment that the media is awash with articles about rental crisis problems, especially now in the big cities. 

Podcast: Taxes for property buyers

Inflation set to ease

The US saw a big drop in its Producer Price Index overnight, suggesting that inflation in the pipeline is ebbing away.

US headline inflation will be back to around 3.5 per cent by June, suggesting perhaps one more rate hike from the Federal Reserve and then done.

Podcasting time

Today on the Australian Property Podcast, Chris Bates and I discuss taxes and tax settings for Australian property and buyers in the market.

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

You can also tune in at Apple podcasts, Spotify, and other podcasting outlets. 

We'll throw the video up on the YouTube channel later as well.

Underemployment rate just starting to rise

Robust labour force figures

Nothing too much wrong with the labour force figures for March, with the economy adding another +53,000 jobs, taking employment to a record high of 13.88 million.

The unemployment rate held steady at 3.52 per cent. 

Of course, immigration is now picking up apace, and the labour force won't stay so tight for too much longer.

Indeed, the ABS reported today that 142,580 international students arrived in the month of February alone. 

This will mean that wages growth has peaked, and slack will begin to show up in the labour force in due course.

Indeed although the underemployment rate is still tight, it rose from 5.84 per cent to a 13-month high of 6.22 per cent in March. 

Monthly hours worked also decreased, but these were resilient numbers which point towards a more likely soft landing ahead. 

Meanwhile, the labour supply is increasing rapidly.

Not a bad set of figures, overall, but people need to remember that the unemployment rate is a lagging indicator.

And with many builder and developer firms collapsing of late, and engineering and financial services layoffs beginning, the only way is up from here for unemployment. 

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Detailed analysis from James Foster here. 

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With over 142,500 international students arriving in February - and more to follow in March - this was the queue outside Bank of China in Melbourne at 8.30am this morning, with a huge conga line of students waiting to open bank accounts.

That's your leading indicator: labour supply will be plentiful in due course.