Fat of the land

Land prices soar

Land is arguably the most important part of any property investment.

It can't be removed, relocated, destroyed, or replaced. 

The Housing Industry Association (HIA) reported today that Australia's median lot value rose by +8.5 per cent in the 2017 financial year to a record high of $256,683.

This came in spite of about a 9 per cent year-on-year decline in turnover, suggesting that supply may still be struggling to keep up with demand. 

All land is not created equal, of course, even within cities.

It's considerably scarcer in 'landlocked' locations in the capital cities than it is out on the city fringe. 

In Melbourne the median lot value exploded by +19.6 per cent over the financial year. 

In Sydney the median price of vacant land also rose by +9.8 per cent. 

Sydney's lot sizes have been shrinking over the years, too.

Indeed, the price of vacant land per square metre in Sydney increased to beyond $1,000 for the first time.

At the national level, land values have increased by about 35 per cent since the 2012 financial year.

Negative skew

First-timers surge

It's been obvious that first homebuyers have been pouring back into the major housing markets since the beginning of July.

The housing finance figures, although to date only running to the end of August, confirm as much.

The September and October figures will warrant watching closely when they are finally reported. 

This is potentially only part of the story, though, with many parents now helping their offspring onto the housing ladder. 

Some parents may be cash buyers, while others may simply be financing purchases themselves. 

'Negative skewness'

It was pointed out on the Property Chat forum that although the median auction result in Sydney remained very high on Saturday at $1,295,000, the average or mean result was considerably lower at a shade under $1 million. 

Compare this with the same weekend last year when the mean value of properties sold at Sydney auctions was far higher at well above $1.3 million.

There's a similar trend afoot in Melbourne, albeit not nearly as pronounced.

What gives? 

When the mean is lower than the median - such as was the case in Sydney's auction results this weekend - this indicates a left-skewed distribution, or 'negative skew'.

In other words, a spread of lower value transactions, potentially also suggesting a shift towards the first homebuyer cohort.

Note, however, that there will be many more auctions in Sydney next weekend, so in turn next week should deliver a much better guide to the state of the market.

More than 1,000 Sydney homes are scheduled to go under the hammer on 'Super Saturday', making it the second biggest weekend of the year. 

Gizza job!

How low can you go?

The New South Wales economy has added a stunning +123,800 full-time jobs over the past year.

And how low is the New South Wales unemployment rate now?

The answer is: very low at 4.6 per cent.

That's now equal to the lowest seasonally adjusted unemployment rate in 9 years for the Premier State.

And the way things have been tracking, it may not be all that long before the unemployment rate across across the state approaches the lowest level on record, across decades of data.

In February 2008 the state's unemployment rate fleetingly plummeted to just 4.2 per cent, if only for a month.

Casting one's mind back, that was an extraordinary time in Sydney's labour market.

With the mining boom in full swing, there was such a shortage of skilled labour that it felt at times you could get paid a bonus just for turning up to work, so fearful were employers of losing qualified staff.

Certainly pay rises were expected for tenure, while employees could easily leave a job in the full expectation of sourcing another position comparatively easily.

We're not seeing conditions anything like that just yet.

However, the Jobs Vacancies figures for New South Wales recently soared to the highest level ever recorded for any state or territory, suggesting that there may be further gains on the horizon. 

New South Wales is...'Making it Happen'!

Weekend reads: Must see articles of the week

See here, from the world's number 1 ranked real estate website, Property Update!

How'd you like them apples?

12 on the bounce

Goodness me, a thunderous +371,500 increase in Australian employment over the year to September 2017, for a massive increase of +3.1 per cent in the total number of employed to nearly 12.3 million. 

That makes it 12 months in a row for employment growth.

Meanwhile jobs vacancies have also increased to the highest level on record, meaning that there's likely to be at least some more good news in the post. 

Better still, the jobs boom has been driven by full-time jobs, with a cracking uplift of +316,000 over the year to September. 

The unemployment rate fell to 5.5 per cent, to sit at the lowest level in 4.5 years.

Female participation hit the highest level on record, while the total monthly number of hours worked was up by +3.4 per cent from a year earlier, the best annual result since those morose financial crisis days.

In trend terms, hours worked were a slightly more moderate +2.9 per cent higher. 

She'll be apples

Although things are looking a bit bleak in the Northern Territory, there has been positive news across most states. 

Although Victoria (+113,600) added the most jobs in absolute terms over the year, by far the fastest rate of annual employment growth is now held by Queensland at a thumping +4.1 per cent, following a prolonged dry spell. 

If this persists, it will likely result in a further rise in interstate migration to Queensland. 

New South Wales added another +21,100 jobs in September, and the seasonally adjusted unemployment rate in the state fell to a post-crisis low of just 4.6 per cent (and it's lower still in Sydney).

Plotting the figures in trend terms reveals a marked improvement for South Australia too. 

The wrap

Overall, there has been an massive increase in employment over the past year, especially full time employment. 

The good news is that it seems to have spread across the states. 

Household formation to surge

Formation

A valid point is raised here by fund manager roger: there's an awful lot of focus on population growth in Australian property market analysis, and not nearly enough on trends in household formation. 

The comment was posted in relation to another finely balanced article on roger's blog, entitled "PREPARE TO LOSE ENORMOUS [PROPERTY] WEALTH".

roger was prompted by one of the blog readers that had linked to a thing I wrote about accelerating population growth hoovering up the excess apartment supply in Melbourne. 

What can I say? Melbourne's riotous population growth has hoovered up the excess supply, and Victoria's population is now growing by ~150,000 per annum. 

In fact Melbourne is now diving headlong towards a rental crisis and increases in rents as the supply rolls over.

Formation rising

roger is quite right to note that household formation rather than population growth drives housing market demand.

The rate of household formation had been outpacing the rate of population growth in Australia for years, but echoing global post-financial trends this dynamic reversed during the last intercensal period from 2011 to 2016, partly due to under-building (at least initially), and partly driven by affordability challenges.

However, household formation is now expected to outpace population growth over the next two decades, according to research by BIS Oxford Economics, with the average household size resuming its downward trend. I'll take a look at the reasons why below. 

Let's not go over old ground, except to note in passing that roger's analysis of 18 months ago in May 2016 - partly derived from building approvals figures - concluded that Australia had an oversupply totalling in the hundreds of thousands of dwellings. 

The thing is, Australia will never have a massive oversupply of unsold new dwellings - projects simply don't get financed and built unless enough units are pre-sold.

It's true that the market anticipates demand incorrectly we can end up with an oversupply or mismatch of rentals temporarily, and sometimes in a downturn listings can rise sharply if owners dash for the exits.

But we haven't got hundreds of thousands of dwellings too many; not with the ramp up in headcount.

First homebuyer return

Since the introduction of new incentives, the number of dwellings financed by first homebuyers bolted to the highest level in 92 months in August 2017, so households are now being formed apace, especially in the two most populous states. 

There's much, much more to household formation than just this, though.

Recall I showed from the 2016 Census figures that Australia's migration programme has led to a demographic tsunami, being millions of 25 to 32 year-olds in Australia, about to swamp the housing markets, heavily focused on Sydney and Melbourne. 

Separate figures reporting the characteristics of recent migrants showed that it's overwhelmingly now the capital cities that are about to be swamped, because new migrants flock to the capital cities, and end up staying there. 

Many first-timers are electing to rent where they live, and are instead buying investment properties as their first step onto the ladder, so the real number of first-time buyers is tracking at close to the long run average. Plus there's the trend towards co-ownership, as recently reported. 

The 'bank of Mum & Dad'

Perhaps as significantly, there are the parents buying homes for their kids, which is new household formation not reported in the first homebuyer finance numbers. 

We are now seeing this going on practically all the time at auctions in Sydney and Brisbane - to be blunt, it pushes up prices - and evidently it's a big thing down in Melbourne and Geelong too. 

Cate Bakos of Cate Bakos Property in Melbourne notes that it's not only the first homebuyer sector that's being impacted by inherited money:

"Parents are impacting competition levels significantly. Firstly in the first homebuyer concession range - which is already screaming along with heightened borrowing capacity - and secondly the upgrader stakes. We are seeing and hearing of parents paying it forward with inheritance money."

Affordability has been a drag on household formation to some extent since the financial crisis.

However, this is projected to be more than offset by an ageing population - empty-nesters and downsizers - more divorces, more separations, widowhood, and a nascent yet growing trend towards lone-person households living in apartments. And that's before we mention all the empty dwellings.

Over the longer term, the ABS forecasts that the number of households will increase by well over 50 per cent to 12.7 million over the 25 years to 2036.

Boom & bust time

SQM Research's Louis Christopher has had a few minor skirmishes with fund manager roger in recent times, so it's intriguing - to me anyway - that SQM forecasts in its base case scenarios home prices rising in 2018 in all eight of the capital cities.

SQM has been Australia's most accurate forecasting house over recent years. 

SQM's base case scenario is upbeat about the prospects next year for Hobart (+8 to +13 per cent), Melbourne (+7 to +12 per cent), Sydney (+4 to +8 per cent), Adelaide (+0 to +4 per cent), Canberra (+5 to +9 per cent), and Brisbane (+3 to +7 per cent). 

And SQM also sees a positive turnaround for the resources capital city housing markets of Perth (+1 to +4 per cent) and Darwin (+1 to +4 per cent) in its base case. 

See here for more details of this year's Boom & Bust report. 

Touch too much

ASX catches a bid

"Sell everything!" came the cry.

"Get into cash and wait for better value!".

Unfortunately, the high priests of market timing might have had their holy garments pulled down a bit here. 

Wonder of wonders, the ASX has finally burst out of its tight trading range, having briefly traded above 5,900 in April and May. 

It's been stuck in a narrow band ever since. 

Until now...

Might it be time to dust of the 'XJO 6000' hats at last?

We dare to dream.

Investor beach ball submerged

Investor loans slowed

A nice pick-up in commercial lending to businesses in August 2017, which will hopefully flow through to business investment. 

Personal lending has dropped by a quarter since 2010 and is tracking at around the lowest level in 15 years. 

However, business lending is up +15 per cent from a year earlier, which is a positive for the economy. 

Lending for major renovations looks solid, but no more than that, while owner-occupier property lending is rising strongly in trend terms. 

The crackdown on investor lending has been marked. 

Mortgage Choice reported that interest-only loans accounted for only 14.64 per cent of loans written in September, down from 35.95 per cent in April. 

Thus the repricing of interest-only loans has been swift and effective. 

Interestingly, the slowdown in investor lending appears to have most impacted the states where investor lending was already moderate. 

The one state that does not appear to have been slowed too much is Victoria. 

As for the Top End, investor lending in Darwin is now well and truly dormant.

The heady mining boom years, but a distant memory in the Northern Territory!

The wrap

A solid result, then, for business lending. 

Although property investment loans have been slowed significantly, it may be too early to write off investors completely.

International experiences from countries such as New Zealand and the UK have shown that while macroprudential measures are effective in the short term, over time lenders and investors may find new ways to get business done. 

It's a bit like trying to hold a beach ball under water, sometimes. 

The one genuine fix would be higher interest rates.