Credit growth hitting the skids

Housing supply challenges ahead

After a surprisingly solid April for business credit, total credit growth slowed to 0.39 per cent in May.

With credit growth dropping from 6.6 per cent to 6.2 per cent over the year to May, it's clear that current policy settings are contractionary. 

Credit growth to property investors dropped to just 0.19 per cent, while lending to buy or build new dwellings is already at the lowest level since the global financial crisis 15 years ago.

This doesn't bode well for the supply of rentals or new dwellings. 

Overall housing credit growth slowed to 0.39 per cent in May, taking the annual growth down to 5 per cent. 

As such the housing credit impulse appeared to lose some momentum in May, but the market is being supported by record growth in rents in Sydney, Melbourne, and Brisbane, and a dearth of properties for sale.  

Overall, it's clear that interest rates at currently levels are slowing the growth of credit and the money supply.

Jobs vacancies on the way back down

Job vacancies easing from high levels

Jobs vacancies dropped in each of the three most populous states over the three months to May 2023.

The series break relates to a period of funding cuts when the data weren't collected. 

Although still historically high, jobs vacancies had declined from a high of around 480,000 a year earlier to about 430,000 by May 2023. 

  

By May there were just over ½ million unemployed, meaning that the average number of unemployed persons per jobs vacancy remained historically low at just 1.2, although the figure will likely be mean reverting over the next couple of years. 

That's not a boom

Retail turnover increased +0.7 per cent in May, leading to talk of a potential resurgence in spending. 

A glance at the chart shows that retail turnover remained lower than it was in October 2022, despite the very large increase in the resident population (and retail prices) since that time, although spending on eating out looked surprisingly solid.

It must be the oldies spending their pandemic savings. 

Card trackers reported by the major banks suggest that retail spending dropped very sharply in June.

The population figures are a different matter entirely.

One month ago on 28 May Australia's population clock passed 26½ million.

However, with estimates being revised it turns out there are now an estimated 26.6 million residents, 100,000 higher than we thought only a month ago. 

That's a boom. 

Aussie inflation plunges

Inflation figures drop (literally)

Some welcome news indeed, as the monthly inflation figure fell from 6.8 per cent over the year to April, to just 5.6 per cent over the year to May.

This large drop was right at the very bottom of the market forecast range, with some economists even tipping an increase this month (despite the obvious base effect). 

It's now clear, then, that inflation peaked in late 2022 in Australia and is now coming down fast. 

Westpac Economics put together a neat chart to show the relationship between monthly and quarterly inflation. 

Source: Westpac

More cautious commentators may note that the 'core' inflation figures may not come down as quickly.

But at the very least there was nothing to spook the horses in these figures, and markets expect the central bank to put a pause on interest rates in July. 

It's important to note that changes in interest rates tend to operate with a long lag, and because of the high volume of fixed rate mortgages still resetting to variable rates there remains plenty of monetary tightening 'in the post'.

Indeed, any further hikes from here would be pushing the recession risks higher. 

The key drivers

Fuel prices were 8 per cent lower than a year earlier, but housing costs have been an obvious pest.

There are now some indications that rental prices are approaching a peak as higher rents are leading to a pushback from tenants and more flat-sharing, though asking rents suggest that actual rents may continue to rise for a while yet. 

New dwelling costs were up +21.7 per cent over the year to July 2022, but the inflationary pressures from this component should fade fast from here. 

The enormous declines commodity prices such as coal, gas, and now oil also bode well for lower inflation ahead. 

The US inflation rate peaked earlier than in locked down Australia, and will likely drop to 3 per cent next month, while Canada has already seen its inflation rate drop to 3.4 per cent. 

In Europe producer prices are collapsing and the money supply growth is the slowest on record, meaning that inflation will be surely defeated in due course.

Lower oil prices portend lower input prices, while the cost of shipping container freight has dropped by close to 90 per cent from the highs.  

Despite this, energy prices in Australia are one potential source of 'sticky' inflation.

Reducing household energy and power bills was, ironically, a key election pledge from the government, but instead prices have rocketed higher. 

The wrap

Overall, this was very welcome news which financial markets enjoyed, with an interest rate pause now expected in July, but with one further hike still priced as a possibility before interest rates finally begin easing in 2024. 

This is how housing policy should change, with Peter Tulip

Housing policy podcast

This week Peter Tulip, Chief Economist of the CIS and former Reserve Bank researcher, joins me on the podcast to discuss how housing policy should change.

Listen out for some forthright views on the current macroprudential restrictions...

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

You can also watch the video on YouTube here:

Big Picture podcast

Big Picture podcast

I joined Michael Yardney this week on the Big Picture podcast!

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

Construction insolvencies take off alarmingly

Going bust

A quick stroll through the latest insolvencies figures from ASIC shows how interest rates are already deeply into contractionary territory, with much more tightening still to come in the post.

Insolvencies in May 2023 jumped to their highest level since 2015, at 868.

Source: ASIC

Voluntary administrations had been artificially low through the pandemic, but they're really taking off in earnest now. 

Overwhelmingly this is being driven by the construction sector, with 2,074 instances of business entering external administration over the financial year to date, including some large industry scalps. 

Source: ASIC

New unit approvals in the blue chip inner suburbs have crashed to almost zero, according to research by the AFR. 

And while the residential construction pipeline theoretically remains large, many apartment projects are being significantly delayed or scrapped outright as businesses fail.

It's a fascinating dynamic: with lending conditions remaining tight there's a pressure cooker situation building in the capital cities as record high immigration meets an inadequate supply of new dwellings.  

"Supply" pressures easing

Supply chain pressures at record low

Amidst all the panic about persistent inflation, it's reassuring to stop and consider how supply chain pressures are now easing (and how!). 

Let's take a look via a few illustrative graphics.

Firstly, oil prices - a key input into production - are down from around US$110 to under US$70. 

This hasn't yet been fully reflected in fuel prices, which have still been averaging close to $1.90 per litre for unleaded through the fuel cycle. 

Meat prices achieved by farmers have crashed lower since a year ago, although this also hasn't yet been reflected in supermarket prices for consumers. 

The brilliant analyst Charlie Bilello fired out a few illuminating charts on Twitter this weekend.

Global container freight rates have fallen by a remarkable -88 per cent from their highs, and are now at their lowest level since 2019, he highlighted.

The global supply chain pressure index has thus actually fallen to its lowest level in history - lower than at the depths of the global financial crisis or the bursting of the dotcom bubble.

Used car prices have fallen dramatically from a year ago, and they still have a long way to go yet to get-back towards pre-COVID levels. 

The average price of a used Tesla, for example, has fallen by US$23,000 since July last year. 

Demand set to slump

With most Aussies mortgages being on variable rate terms or short-term fixed rate mortgages, demand is about to get absolutely slammed by a rapid 400 basis point increase in interest rates. 

Logically the next phase of the cycle is heavy price discounting around the country's shops and supermarkets as demand hits a brick wall. 

We've never seen anything quite like this twin dynamic before, and it wouldn't be a huge surprise to me if quarterly inflation turned negative later next year. 

2 Sense: Population & jobs boom & the most millionaires migrate to Australia

2-Sense podcast

This week on the Australian Property Podcast, Chris Bates and I discuss the ongoing population and jobs boom, and the millionaire migration to Australia...and what it all means.

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

You can also watch on YouTube here:

Taxing Times

Realty Talk

I joined Bushy Martin at Realty Talk to discuss Victoria's new land tax proposals.

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

Domain forecasts new highs in these cities

Price forecasts

Domain reported its house and unit prices forecasts for the coming 2024 financial year.

Sydney is expected to lead the market higher over the next 12 months, with a shortage of stock being a key driver of the market momentum.

Here's the summary:

Source: Domain

And here are the numbers:

Source: Domain

The full Domain report is here.

This is how to value property like a pro

Australian Property Podcast

I joined Amy Lunardi to discuss how to value properties like a pro.

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

You can watch the video version here:

Disinflation ahead, folks...

Prices in decline

Pretty amazing to see the enormous slowdown in producer prices in Canada.

Raw materials prices have dropped far more than expected, down by a massive -18.4 per cent over the past year, helping overall PPI to decline to -6.3 per cent over the past year. 

This is very interesting because there was an argument that construction costs would be 'stickier' than this. 

Not so!

Germany's producer prices also fell twice as much as expected in May, dropping -1.7 per cent, taking the year-on-year growth down to around just 1 per cent.

This is important because the relationship between producer prices and consumer price inflation trends to be a strong one.

The US has also seen producer price inflation fall to 1 per cent, while in much of Europe it looks like the inflation story has almost run its course.

Interest rates have been higher for longer to tackle inflationary pressures, but the narrative shift will soon see the conversation move towards recessions risks...and lower interest rates.

Deflation next?

The past few years has been unprecedented in many respects, and I wouldn't be at all surprised to see inflation going into reverse next year as supply chain disruptions are resolved and as interest rate hikes bite. 

Residential prices playing whack-a-mole

ausbiz TV: property trends

I joined Danielle Ecuyer on ausbiz TV to discuss record population growth here (or click on the image below):

2-Sense: Interest rates deep dive; war-gaming a 5pc cash rate

2-Sense podcast

This week on the Australian Property Podcast, Chris Bates and I war-game what would happen with a 5 per cent cash rate.

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

You can also watch at YouTube here:

More Sydney buyers than sellers

Auctions packed out

Property stock listed for sale remains exceptionally low, and Sydney recorded a surging preliminary auction clearance rate of above 80 per cent this week (albeit on fairly low volumes for this time of year). 

Anecdotally there were some very busy open homes in Melbourne this weekend, though the preliminary auction clearance rate slipped to 69 per cent in the Victorian capital.

Has confidence down there been knocked a little by rising interest rates and proposed land tax changes? 

Possibly. 

One thing that is becoming increasingly evident is that the rental market in Melbourne is a steaming hot mess, with would-be tenants reportedly having dozens upon dozens of unsuccessful applications knocked back. 

In the UK - over the past five years or so - policy has pursued the removal of tax deductibility of mortgage interest for landlords with now-record population growth, and - surprise! - the rental market is a disaster in the making.

Melbourne is apparently following down the same path, seemingly continually tightening the screws on private landlords, most recently by increasing the scope and rate of land taxes on rental properties...and this is in an already chronically tight rental market.

It's a daft move, with the Greens geniuses still calling for rent caps on top. 

The grand plan was apparently to get big institutions to build the rental housing, but good luck with seeing their provision of affordable rentals when the cash rate has already been hiked by 4 per cent...

Supply versus demand race

The Federal Government is wising up to the growing discontent, and is set to announce over the next fortnight that it will make $2 billion of funding available to build social housing. 

Each state will receive $50 million - enough to deliver about 100 social housing units or so - with the remaining funding to be divided across the states on a per capita basis to upgrade public housing or construct some new units.  

The thing is, the population is currently growing by an estimated 1,838 per day, so there's no way on earth new housing supply can keep up with that in the current environment.

A good start would be restoring normal lending assessments, but that's not going to happen any time soon. 

Record immigration is at least solving the skills shortage.

Gareth Aird of CBA shows that slack in the labour force is now increasing, and is set to increase significantly over the months ahead. 

This is one of the ways in which Australia's inflationary pressures will be resolved, while consumer spending is quickly being curtailed by higher interest rates. 

This week it has been reported that the fate of leading Australian retailer David Jones is "hanging in the balance" (OK, well that was the Daily Mail's interpretation anyway), while Solomon Lew's Premier Investments has reportedly notched a shellacking, with a shocking -20 per cent year-on-year drop in retail turnover.

This is now leading to consumer price discounting, with Retail Food Group (Donut King, Gloria Jeans, etc.) the latest retail group to report moribund trading conditions, alongside Zip, Kidstuff, and others, as reported in the AFR.

And thus in real time inflationary pressures will soon be a thing of the past...but not until the energy/insurance bill shock has washed through. 

Uncertain times

Dealing with uncertainty

The wild ride of the past few years continues.

In today's blog I took a look at how to deal with uncertainty.

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

You can also watch the short video here.

Follow the money...

Millionaire migration accelerates

There was an old real estate quote about finding out where the people are moving to and buying the land before they get there.

Where are the world's High Net Worth Individuals moving to in 2023?

Australia, that's where.

Via New World Wealth, Henley Global tracks the most up-to-date and timely available global migration data and projects Australia to be by far and away the biggest destination country in 2023. 

Source: Henley Global

The wealthy have been leaving Russia, with the main countries of departure in 2023 set to be China and India, largely accounted for by their gigantic combined population of around 3 billion.

After a blip, millionaire migration is expected to hit record levels over the next couple of years and beyond.

Source: Henley Global

It's a big wall of wealth heading to Australia. 

I guess the recent mammoth population figures settle the argument of whether migrants will come back to Australia...