Pack 'em up, pack 'em in (time to get a flatmate)

Investor credit growth slows again

Housing credit growth was slow again at 0.3 per cent in April, following a result of 0.3 per cent in March, according to the Reserve Bank's Financial Aggregates.

Credit growth continues to slow over the year for housing, down to 5.2 per cent (from 7.9 per cent a year earlier). 

Some investors are choosing to sell their properties in the face of rising mortgage costs and tough financing buffers, and investor credit growth slowed to just 0.26 per cent in April.

Clearly this is an extremely low figure given record high population growth.

To an extra decimal place, housing credit growth did at least pick up a bit from 0.31 per cent to 0.33 per cent last month, so the credit impulse suggests we'll likely see home prices rising ahead.

That's especially likely to be true in Sydney where the prevailing tight lending conditions mean the chronic housing supply shortage is going to prove to be of an Olympic standard. 

Overall, credit growth slowed to 6.6 per cent over the year, though there has been a methodology change for business credit (and to be perfectly honest I haven't yet looked at quite what that means). 

Tight lending buffer to continue

I've been suggesting/arguing for some time that lending buffers for mortgages are too tight, which seems to me at least to be borne out by all-time low rental vacancies and the lowest building approvals in over a decade. 

The prudential regulator is holding the line, however, suggesting that a 3 percentage point assessment buffer is the appropriate setting given the high inflation we've seen over the past year.

Ironically a big chunk of the inflation going forward is now going to come from rising rents, with the number of temporary visa holders in Australia climbing to a record high 2.46 million in Q1 2023, up dramatically from 1.82 million a year ago.

Despite record demand for rentals, many landlords are selling, and not many are buying.

Personally I think this combination of settings is a disaster in the making, and rents in Sydney, Melbourne, and Brisbane will ultimately spike to reset around 50 per cent higher for sought-after properties as landlords pass on higher costs (now including a more sweeping land tax in Victoria), however much this may or may not be picked up in the official inflation figures. 

But, whatever, it looks like I'll be losing this debate...

Capacity constraints

There is a valid counter-argument that arguably the capacity to build homes is already fully stretched, and the dearth of building approvals figures won't make much difference to housing supply this year.

Today's construction work done figures for the March 2023 quarter showed another strong +5 per cent growth in engineering work for public and infrastructure projects, but residential building slowing as builders and developers go bust left, right, and centre, to be down -5 per cent over the year to half-decade lows.

Engineering work done is up +15 per cent over the year, and given it’s much more lucrative than working in the residential building sector right now there's no realistic way housing supply is going to keep pace with population growth in the largest capital cities at the moment. 

More people ditching their home offices and taking in flatmates will, in the end, make more efficient use of the dwelling stock, albeit through higher housing prices and higher rents, noted the Reserve Bank governor today...so eventually the problem will right itself.

We'll just need to pack everyone in a bit tighter, but in the meantime there'll be some whopping rent increases for tenants in the three largest cities.

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CoreLogic reported an acceleration in housing prices in May, led by Sydney, Brisbane, and Perth - the details from Property Update are here. 

Listings on the market continue to dive towards decade lows.

Rental vacancies remain very tight, with rents up +0.8 per cent for the month.

Sydney unit rents led the way over the year rising +19.3 per cent, with Brisbane units +16.4 per cent.

Source: CoreLogic

Tim-berrrr: Building approvals lowest in 11 years

Tim-berrr...

Building approvals continued to crash in April, with unit approvals soft all year in Sydney and Melbourne.

Unit approvals were -35 per cent lower than a year ago, with Sydney and Melbourne leading the plunge.

House approvals are also declining across the board, with only the strong Adelaide market holding the line. 

Overall, building approvals fell to the lowest level in the 132 months since April 2012, and are trending sharply lower. 

Not much more to add here, except that lending standards are too tight, and with the high costs of construction there isn't much incentive to buy or build a new dwelling at the moment.

Although there is still a very high number of homes 'under construction', many haven't progressed passed the 'slab down' stage, with capacity constraints still impacting the sector. 

The construction industry employment surged +12.4 per cent jobs over the year to November 2022, to 1.32 million - remarkably that's almost 10 per cent of all jobs! - though many are employed on major infrastructure and resources projects, and not only in residential construction. 

Source: Aus Gov, Labour Market Insights

Materials are also going to remain a problem for the industry.

Population growth is projected to be 4.4 million over the next decade, yet the native timber logging industry is following on from the power stations to be shut down by the Victorian government, so I'm not sure what the plan is to resolve all that (assuming there is one). 

Probably importing expensive timber instead, I guess. 

Aussie population passes 26½ million

Australia 26,500,000

The estimated Australian population just passed 26½ million, according to the population clock.

Population growth is currently estimated to be running at faster that one person per minute, or around 575,000 per annum.

That's the fastest population growth on record.

I personally think the lending settings need to change, as on a net basis we have as many clients looking to sell their rental properties as buy.

And this at a time when the capital city rental markets are already chronically tight.

This 1-bedroom unit 25 kilometres from Perth had 75 would-be tenants in attendance, which seems to be putting the balcony at risk.

Source: Twitter, @sayazmohammad1

The capital cities need more rental supply, but instead we have record lending assessment buffers for prospective landlords at 3 percentage points, and Victorian Premier Dan Andrews looking to increase property taxes to pay for the 7 long months of lockdowns.

It's a bad combination for the rental market.

2-Sense podcast: Big 3 property news stories of the week

2-Sense podcast

I ran through the big 3 property news stories of the week with Chris Bates here (or click on the image below):

And you can catch the video version here:

Retail sales going backwards

Retail sales fall

Retail turnover fell slightly to a seasonally adjusted $35.26 billion in April.

These numbers don't look too bad, but don't forget retail prices are higher than a year ago, and we need to look at these figures in the context of blazing population growth, with the Aussie population projected to surge past 26½ million this weekend. 

Retail volumes are therefore correspondingly falling, and significantly so on a per capita basis. 

Baby Boomers are still eating out more than they used to, although cafe and restaurant turnover was flat in April. 

But households goods retail expenditure is now -5 per cent lower year-on-year as higher interest rates bite.

At the state level, only Western  Australia and South Australia have any signs of momentum, with sales declining in New South Wales and Victoria in April. 

A strong feature of Australia's economy is that changes to interest rates can have a fast impact on sentiment and spending, because most of us have variable rate mortgages. 

The major banks credit card and spending trackers are showing that spending is slowing by the week, leading CBA to call for an extended pause on interest rates from here, with 125 basis points of interest rate cuts expected in 2024.

In other words, for those with mortgages...hang in there. 

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James Foster provides the detailed analysis here. 

Demographics and property with Simon K

Aus Property Podcast

Simon Kuestenmacher from The Demographics Group joins Chris Bates to talk demographics and property here:

You can find all of the other listening formats here. 

ausbiz TV: Property roundup

ausbiz wrap

I joined Dani Ecuyer at ausbiz TV to discuss the rental crisis, the fixed rate cliff, and more.

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

Aussie households cut spending hard

Rate hikes weigh on spending

Aussie households are cutting spending hard, with a significant drop in the first quarter of 2023, according to CBA. 

Government handouts have been wound back, and real wages growth has been negative, although older Aussies have seen an increase in their rental and investment incomes. 

Source: CBA

The number of Aussies accessing hardship arrangements has also begun to rise again in early in 2023, as mortgage rates rise.

Source: CBA

With many fixed rate mortgages still due to reset from around 2 per cent mortgage rates to around 5½ per cent over the next six months, there's plenty more tightening to come. 

This aligns with Westpac's rapidly deteriorating credit card tracker, and underscores that interest rates are in contractionary territory. 

In related news, Commonwealth Bank set a message around to all employees this week requiring workers to spend at last 50 per cent of their working week in the office, according to The Australian. 

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VIC Budget

Having run Victoria's finances into the ground with absurd expenditure and waste over recent years, the state government launches into the ever-worsening rental crisis by...ratcheting up taxes on landlords. 

You can't teach it...rents to the moon.

NSW leading wages strength, but...

Wages growth decelerating

Over the past year, the growth in advertised wages has been led by Queensland, with a very solid +5.5 per cent.

However, over recent months the trend has been coming off hard, except in New South Wales, which still managed +1.2 per cent growth in the wages index over the past quarter.

Source: SEEK

The growth between March and April was just +0.2 per cent. 

Source: SEEK

This is further evidence that as labour supply floods into the country wages growth peaked in the the third quarter of 2022, and is now decelerating. 

There's only been modest growth in this index over the past six months. 

Inflation to surprise on the downside

Inflation set to freefall

Something I've been musing for a long while, is whether inflation could fall 'too far', or turn negative over the next year or two. 

It wouldn't exactly be a surprise if it happened. 

After all, on the demand side we've seen the fastest pace of monetary tightening in modern history.

And on the supply side, things are rapidly being righted too.

Shane Oliver of AMP regularly reports his pipeline indicator, and guess what...

Look out below!

2-Sense: Big 3 property news stories of the week

2-Sense podcast

I joined Chris Bates of Blusk to discuss the big 3 property news stories of the week. 

In our second month, we now have around 17,000 unique listeners.

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

You can also watch the video version at YouTube here:

Sydney leads housing recovery

Auctions bounce

Sydney is suffering from a chronic shortage of quality stock on the market, and the auction market is running increasingly hot. 

The preliminary auction clearance rate for Sydney was 79.3 per cent this weekend, and getting close to the 'boomtime' 80 per cent level. 

It's a remarkable rebound, but as PropTrack reported this week, the rental markets in most of the larger capital cities are getting tighter, and tighter, and tighter...and this leading to a fear of missing out from buyers. 

Don't get me wrong, there's still a lot of pain in the post, with today's mortgage rates likely to be excruciating for plenty of existing borrowers, to the extent that interest rates will probably need to fall again at some point over the next 6 to 12 months as consumer spending in the economy crumples (interest rates may need to fall in order to get new home sales moving again from decade lows as well). 

For the time being, however, employment levels remain very healthy, vendors have practically gone on strike, and the in the big cities rental markets are heading to tighter levels than we've seen before. 

Population to grow 4,430,000 in 10 years

Population boom

CBRE extrapolated in a report insight that Australia's population will grow by around 4.43 million over the next decade, following a pause in immigration through the international border closures period. 

Source: CBRE

This will represent an increase in the Aussie population of well over +15 per cent over the decade, driving significant demand for housing, with most of the population growth expected to take place along the eastern seaboard. 

Australia's population growth is presently running at around +2 per cent, one of the fastest population growth rates in the developed world.

The UK and Canada are also following a similar strategy. 

Source: CBRE

The numbers may or may not prove to be accurate, but the Federal Budget figures showed that this is evidently the intended path for Australia. 

With developer insolvencies running at multi-decade highs it's going to be a big challenge for infrastructure and housing supply to keep up over the immediate period ahead. 

Looking ahead, I expect the housing market to be flooded with new high-rise 'Build to Rent' apartments around 3-years from now, mainly in Melbourne and Brisbane. but these will be priced more dearly than the existing rentals on the market at funds will be aiming to maximise profitability. 

Unemployment rate rises to 3.7pc

Unemployment rises

Employed significantly missed expectations in April, declining by -4,300, partly reversing the strong gains of the previous month.

Full-time employment gave back -27,100 jobs in April.

The number of unemployed persons increased +18,400 to 528,000, the highest in 11 months.

This was enough to take the unemployment rate up from 3.5 per cent to 3.7 per cent in the month.

It looks as the low unemployment rate for the cycle occurred around July to September 2022, with labour force pressures beginning to ease since then.

Not only is immigration running at a rapid pace now, there's also been the small matter of 375 basis points of monetary tightening since the start of May 2022, much of which has still to take effect.

New South Wales continues to operate as a powerhouse economy, with an unemployment rate of only 3.3 per cent set to pull in more workers. 

Looking at what's coming for employment, it's notable that SEEK reported job ad volumes down -19 per cent from a year earlier as the market normalises. 

Source: SEEK

The wrap

Overall, this was a significant downside miss to economist expectations of +25,000 jobs added and a flat unemployment rate at 3.5 per cent.

The outlook is as ever subject to change, of course, but most likely the implication is for interest rates to be paused in June and quite probably July, with the next quarterly inflation figures set to be released in the last week of July.

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James Foster chimes in with the detailed labour force figures analysis here. 

Wages growth decelerating; peaking lower than expected

Wages underwhelm again 

Wages growth was a disappointing 0.84 per cent over the March 2023 quarter, a little bit lower than market economist expectations of 0.9 per cent.

Over the year, wages growth was only 3.66 per cent, with the past two quarters revealing a slowly decelerating trend, and pointing to a 6-month annualised pace of only 3.4 per cent wages growth.

On the plus side, year-on-year wages growth of 3.66 per cent was, remarkably, the highest in a decade. 

Public sector wages growth was only 2.95 per cent over the year, and really needs to go higher (thankfully it will). 

Private sector wages growth was 3.83 per cent over the year, which was better, albeit still well below inflation, which will restrict consumer spending...especially given higher mortgage rates. 

Western Australia and Tasmania had the higher rate of wage price growth over the year at 4.1 per cent.

The wrap

Overall, a slightly weaker result than already modest market expectations, with no evidence to be found of a price-wages spiral.

The strongest wages growth for the cycle was seen in the third quarter of 2022, and now we have population growth running at about 500,000 per annum, so that just about kills off any chance of accelerating wages from here. 

We might see annual wage price growth peak at around 4 per cent, potentially, but not much more than that.

Detailed analysis from James Foster you can find here.

Rental listings collapse (PropTrack)

Biggest April fall in years

This doesn't look good for renters. 

Although rental vacancies are rising across many regions of Australia - and in Hobart and Canberra - overall, April's rental listings was the largest in many years, according to Cameron Kusher of REA/PropTrack. 

When comparing to the available rental stock from pre-pandemic days, the 40 per cent declines in Sydney and Melbourne are alarming, and the same is true for Brisbane, Adelaide, and Perth,

Source: PropTrack

CoreLogic's figures showed a similar picture, with rental vacancies falling to record lows. 

The Budget projects a population increase of around 2.2 million over the next 5 years, though projections often end up being on the low side. 

Investors often aren't keen or able to invest, with very tight lending restrictions in place, and new home sales are running at decade lows. 

House price expectations surge

House prices to rise

Consumer sentiment took a hefty knock this month, following on from yet another interest rate hike to a cash rate target of 3.85 per cent. 

Consumer sentiment in regional Australia in particular is knocking around record lows. 

House price expectations, on the other hand, have absolutely rocketed back from their lows of Q4 2022.

The Federal Budget figures implied population growth in Australia of around 2¼ million over the next five years, and it's increasingly clear what Aussies think is coming.

That is, a new boom cycle for housing prices, due to chronic housing shortages in the capital cities.

The house price expectations figure rose another +11 per cent this month, and is now even +19 per cent higher than it was a year earlier. 

Source: Westpac

Why does this survey matter, you may ask?

Mainly because the house price expectations index has an almost perfect track record of correlating with dwelling prices. 

Dr. Alex Joiner of IFM extrapolates the figures below:

Lending is much too tight at the moment for new home sales to pick up much, with another miserable month reported by the Housing Industry Association.

There was some respite for the rental market last month, with the preliminary ABS figures for arrivals and departures suggesting that there were around 60,000 more departures than arrivals last month as more Aussies dusted off their underused passports for the colder winter months.

That's a temporary reprieve, though, and rapid population growth will resume over the coming months.

Meanwhile Australia is sucking in an increasingly large share of the migrant millionaire wealth from Russia, India, and China, as the world's super-wealthy seek stability, lifestyle, and confidence. 

The house price expectations figures will be buoyed further by some large sale prices reported this week in Homebush, Kellyville, and Rouse Hill, in Sydney, for example, as well as South Yarra in Melbourne, and Ascot in Brisbane.