Hobart mounts full-scale property boom

Hobart lift-off

Sydney and Canberra listings crept higher in the lead-up to the spring selling season, taking national listings a little north over the month of August from 316,748 to 318,825, according to SQM Research. 

Asking prices in Sydney nevertheless moved higher than a month earlier, both for houses and units. 

Nationally total listings are -4.3 per cent lower than a year ago, however, driven by excessive annual declines in the firing Melbourne and Hobart housing markets. 

Both monthly and annual listing numbers are also now in decline in Perth, suggesting that it's only a matter of time now before prices begin rising again in Western Australia, especially in light of the commodity markets rebound. 

Listings in Melbourne have now broadly fallen from ~50,000 to ~30,000 since 2012, with listings a massive -15.3 per cent lower year-on-year, suggesting that house prices will continue to surge in the Victorian capital. 

In Hobart listings have plummeted some -20.2 per cent lower since August 2016, with now just 2,520 listings across the entire capital city market and a surfeit of willing buyers, both locally and from interstate.

House prices are recording gains of ~15 per cent per annum across Greater Hobart.

Simon Pressley, founder of Propertyology, notes that gains in inner metropolitan Hobart have been tracking at closer to ~20 per cent per annum. 

Supply sluggish

Hobart is a relatively small capital city of about 225,000 persons. 

Normally, one would associate such a rapid run-up in demand and house prices with a decisive supply response.

Hobart is not a mainland city, however, and some larger developers may be a little more reluctant to get involved, due to logistics and cost.

To date the increase in dwelling approvals has been muted to say the least, suggesting that the Hobart price boom will likely continue well into 2018. 

SQM sees more first homebuyers entering the market in New South Wales and Victoria, drawn in by first homebuyer grants, but more stock likely to be hitting the market too.

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GDP to be solid

In other news, the current account deficit widened in the second quarter to $9.6 billion on weaker commodity prices - albeit from a tremendously improved position - while net foreign debt declined for another quarter. 

Exports exceeded imports, however, and are expected add +0.3 percentage points to GDP growth when the national accounts are released today.

Furthermore there was a very strong +2.2 per cent increase in public demand, set to add another +0.5 percentage points to GDP. 

Thus, despite the significant drag from inventories, Westpac now expects quarterly GDP growth to be around +1 per cent.

And with a negative quarterly print to drop off in due course, GDP growth now seems likely to surge into the end of 2017.

One other interesting point of note for the phantom rate hike brigade to take note of, the Reserve Bank Governor noted in his dinner speech that the Board had considered the merits of lower rates still, but appears to have held off to allow the heat in the Sydney housing market to ease (which it now has). 

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Land, down under

Land, down under

A quick look at how land prices have risen across each of the main capital cities over the past half decade. 

Melbourne's land prices were flat for years, but are now ripping higher on supply shortages and rapid population growth. 

Sydney has seen by far the greatest land price inflation in its median vacant lot values.

In Sydney the median lot size has also dropped by about a fifth over the past ten years.

So the land price per square metre has soared. 

Land prices across regional Australia have lagged significantly, although some larger regional centres close to Sydney have witnessed price inflation lately. 

Wages & salaries equal best result since 2013

Wages & salaries pick up

Another prod or two in the eye for the record mortgage stress meme today.

Firstly job ads have fired up to their highest level in 6½ years, while shifts in capacity utilisation rates suggest that this rally can potentially continue towards 2018. 

And then there's the improving outlook for Western Australia. 

Furthermore, the business indicators results for June 2017 showed wages and salaries recording their equal best quarterly result since 2013.

The seasonally adjusted estimate for wages and salaries increased by +1.2 per cent in the June quarter, following a string of poor results. 

The gains were largely driven by swelling pay packets in the healthcare (+2.8 per cent), administrative  and support services (+2.2 per cent), and professional, scientific, and technical services industries (+2.0 percent). 

This release does not measure the same thing as the wage price index - rather this is a measure of gross earnings before tax, plus employee entitlements - although many similar trends are mirrored over time. 

What the figures show is a tremendously weak period over recent years.

But a quarterly lift of +1.2 per cent is not too shabby at all, though we'll need to wait and see whether the rebound is sustained as the year rolls on.

Don't get me wrong, I'm the first to have a good old whinge when things aren't looking so bright, but at the moment most indicators are generally improving. 

The major test will come when mortgage lending and residential construction slow in tandem, though my guess is that banks and other lenders will loosen mortgage rates at the first sign of declining dwelling prices in Sydney or Melbourne. 

Funding costs are, after all, incredibly low, and banks have been racking up colossal profits. 

Elsewhere in the release it was noted that inventories will suck a fair hole out of the GDP result this quarter, though the likely upbeat public demand figures are not due out until tomorrow.

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Incoming...

In other news, I sense a somewhat justified shitstorm of a debate about immigration rates is in the post this week.

The truth is that the statistician's figures prior to September 2006 don't readily compare with today's figures (and in all fairness, though aware of the methodology change, I've been guilty of failing to point this out each time I post charts).

For the sake of clarity, I think I'll just post like-for-like numbers from 2006 going forward. 

It's important to note that estimated resident population figures are just that - estimates - and furthermore you can never really predict who is going to be physically present in Australia, or what their plans might be between Censuses. 

Indeed, my own family spends several months of each year out of the country, sometimes more, and I often quip to my wife while boarding with Qantas that this may not be accurately captured by ABS 3401.0 (I normally get crickets in response, perhaps understandably). 

As I type this I'm in the outer environs of London, so I'm not physically present in Australia. 

Essentially I'm a part time resident of Australia, but since my plans are often different from one year to the next, this sort of behaviour presents a tremendous challenge to the official statistics.

I'm an Australian citizen, pay tax in Australia, own properties in Australia, and if anyone asks I live in Brisbane...but sometimes I'm not always there. How on earth to classify?

Putting all vested interests aside, the rate of permanent immigration into Australia isn't especially high against historical averages when assessed in percentage terms, though in absolute terms the figure is tracking at a reasonably rapid run rate.

Moreover, a foremost challenge is that while population growth has either faded or been weak in Perth, Darwin, Adelaide, Hobart, and almost without exception every regional centre in the country, on the other hand Melbourne (and more recently Brisbane) has been sucking in migrants internally at an electric pace, while also attracting a high number of immigrants from overseas. 

In other words, there's a concentration issue afoot. We have similar challenges right here in little old England.

WA recovery picks up momentum

Commodities back in favour

Further evidence that the mining cliff is over as metres drilled for mineral boomed by +28 per cent year-on-year in the June 2017 quarter.

Estimated dollars spent on minerals exploration increased by a similarly impressive +26 per cent. 

The recent rebound has been driven by base metals and is reflected most other minerals - but over a couple of years especially gold exploration - which is great news for Western Australia. 

In fact, if you're betting on a WA recovery, you're now looking pretty good from here.

That's the best quarterly result since 2013 for Western Australia, with plenty more in the post from iron ore drilling and exploration to come. 

Some light at the end of the tunnel for WA at last?

Jobs market still improving

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Anecdotally, having spoken to a few mortgage brokers, the word is that mortgage lending has been slowing through August and beyond.

So I'll just add that as a brief addendum to yesterday's post.

While on the subject of leading indicators, ANZ reported that job advertisements jumped again b+2 per cent in August to 181,435.

That now makes it six monthly gains on the bounce. 

Total advertisements have ripped +13.2 per cent higher since the beginning of the year

And they not sit at the highest level in six years. 

This should keep monthly hiring tracking at a rate of about +15,000 to +20,000 per month for a good while to come.

And if that happens the unemployment rate is likely to continue its decline. 

All measures of vacancies and advertisements have been rising solidly since 2013. 

Record year for housing lending

Credit growth eases

The Reserve Bank of Australia (RBA) reported credit growth of +5.3 per cent over the year to July 2017, a fair bit slower than the +6.6 per cent seen a year earlier. 

The slowdown has partly been a reflection of business credit growth ambling along at an annual rate of +4.2 per cent, although surveys suggest that business investment is set to gather a bit of momentum. 

Growth in credit relating to housing market investors has slowed a touch to +7.4 per cent, now well under the 10 per cent cap, with more slowing to come based on recent monthly figures.

Owner-occupier credit growth is still powering along, though, and total housing credit growth is still a sprightly +6.6 per cent, unchanged from a year earlier.

Personal credit growth remains negative, as consumers tend towards mortgage buffers and offset accounts instead of of credit cards and personal loans. 

Shifts at the margin

There's no doubt that it's become more difficult at the margin to gain access to housing credit, particularly for investor loans, and most especially for interest-only mortgages. 

The growth in investor loans is now well below the regulatory 10 per cent cap for each of the major banks, which between them account for most of the mortgage market.

A couple of minnow lenders have been pinged with a speeding ticket, including the tiny Heritage Bank, so they'll be putting investor loans in the sin bin, perhaps for a month or two. 

But on the flip side, there's plenty of potential for most of the main lenders to loosen standards again for investment loans as we head into spring and beyond. 

Moreover, while APRA's latest ADI monthly statistics hinted at a marginal slowdown, the reality is that non-standard loans have to some extent been picked up by alternative lenders such as Pepper and their ilk. 

The RBA's figures show that over the year to July 2017 the total stock of outstanding housing credit increased by $113 billion to $1.69 trillion.

In dollar value terms, this is the biggest annual increase ever recorded.

So, there may be a 'slowdown' of sorts underway, if you will, but as the above chart shows it looks like a shift in composition too.

Moreover, every single one of the main lenders continues to increase its stock of mortgages outstanding, even if there has been a move towards home loans and away from investor loans.

The wrap

Some one-track observers have noted that out of cycle rate hikes has crashed or destroyed demand for mortgage debt.

I'm not sure what data source they're using to draw that conclusion - none, most likely - but the official RBA figures shows a record annual increase in housing credit, with a slowing in investor credit just beginning to flow through to the annual data.

Experiences elsewhere in the world have shown that macroprudential measures tend to be effective for a while before borrowers and lenders find ways to get transactions happening again.

The reality is that, in aggregate, interest rate differentials have only slowed lending slightly at the margin to date, while simultaneously boosting the bottom line and equity of gleeful banks.

Out of cycle rate hikes were certainly never about funding costs, with the cost of wholesale debt barely having broken a decade-long downtrend.

What would genuinely change the landscape would be a statement of intent from the RBA in the form of a hike in the cash rate, but in all likelihood that remains far away.

In the event a couple of dozen lenders have already cut their mortgage rates since the beginning of July, most notably Westpac, in anticipation of the spring selling season.

With the trend unemployment rate declining to its lowest level in more than four years and further improvements expected over the next few ahead by the RBA, it will be intriguing to see how claims of a 'perfect storm' and 'record mortgage stress' are reconciled with what's actually happening on the ground.

I say that because it looks suspiciously as though mortgage default rates are refusing to rise from benign levels outside Western Australia.

Naturally, household cash flows may appear weaker if accelerated mortgage repayments have become the norm.

But the statistics show that although wages growth has been weak, the unemployment rate has been falling, and underutilisation is declining in volume terms.

Genuinely, I'm intrigued to watch what the media will report having run so hard with the unprecedented mortgage stress meme.

Not everyone agrees with the improving economy thesis, mind.

Westpac sees the pullback of Chinese apartment investors leading to a sharp slowdown in residential construction and unemployment heading back towards 6 per cent next year.

Watch, this, space!!!

RIP mining cliff (2012-2017)

Capex outlook brightens

An interesting week indeed for Australian econofans, with an emphatic rebound in engineering construction reported for the second quarter of the calendar year, driven by Western Australian resources projects (or, at least, one project). 

Then on Thursday, a +0.8 per cent quarterly increase to $28.3 billion was reported for private new capital expenditure, which is not something we've been able to say too often over the past five years! 

The increase was largely driven by a +2.7 per cent uplift in expenditure on plant and equipment to $12.5 billion. 

The improvement lately has been as much about a steadying of the resources states as anything else, although Victoria is now seeing a relatively strong expansion in investment. 

Only a tiny fraction of the lift in investment in Victoria has been driven by mining or manufacturing, instead being overwhelmingly accounted for by services industries and other sectors. 

Perhaps more importantly, the outlook is brightening, with a +17.6 jump in the third estimate for FY2017-18 capital expenditure to just under $102 billion (against market expectations of less than $96 billion, so that's a significant beat). 

Mining investment plans have lifted - though remaining unsurprisingly as subdued compared to the heady peak - while services and other selected industries are beginning to hit their straps, with an increase of +18.6 per cent on prior year expectations. 

Construction confounds

AIG's industry surveys, which report on the direction of industry sectors relative to a neutral reading of 50, now record a very strong expansion in the massive services sector (56.4), while manufacturing (59.8) is expanding at the fastest pace in 15 years. 

A salient concern in 2016 was that a disorderly drop in residential construction could lead to widespread unemployment and the strong multiplier effect of that industry going into reverse. 

And yet the construction sector is now top of the pile, with a survey reading of a blistering 60.5 in July. What gives?

I was down in Sydney this week, and was struck by the burgeoning use of serviced and other office space - you can't help but notice the difference from 2012, when office space was abundant and activity appeared moribund. 

Anecdotal, yep, and yet this has become of the key drivers of the construction outlook. 

Building approvals for office buildings, educational space, and other commercial construction are absolutely flying in New South Wales and Victoria, sending the annual dollar value of non-residential building approved nationally to the highest level on record. 

And while high-rise apartment approvals have, as expected, dropped by a quarter, there has been a more sustainable rebalancing towards approvals for townhouses, boutique apartment blocks, and detached housing. 

A bit of reluctant credit where it's due, too: the manufacturing surveys pointed to an uplift in infrastructure investment as a key driver of the rebound, responding to the ramp up in budget spend, as I looked at in more detail here. So, a small hat tip for Treasurer ScoMo there, too. 

New phase

With capital expenditure and engineering construction no longer in material decline after five years of pain, it's fantastic to see the services and manufacturing industries coming to the party to rebalance the economy.

The only people forecasting an imminent recession now are apparently doing so more in hope than expectation, and the unemployment rate is steadily declining back towards the 4 to 5 per cent range. 

With almost all indicators pointing to improving rather than deteriorating economic conditions ahead, the economy and our housing markets are moving into a new phase, with the household sector to become the main point of focus. 

Specifically there will be a great deal of analysis of household debt, and how households cope with the prospect of a normalisation of interest rates from the end of 2018 forth.