Deflator!

See y'later, price deflator

Goodness me, some potentially very significant developments on the retail front!

Retail turnover, having declined by -0.5 per cent in August was one again miserably flat in September 2017. 

Retail turnover was -0.7 per cent lower over the quarter, which is an extraordinarily weak result, even if it is coming off the back of some more robust readings.

In annual terms, this was the weakest result since June 2013, with the trend now looking decidedly limp.

A key takeaway is that retail volumes were higher over the quarter (following on from a solid second quarter), albeit marginally, with the decline in retail turnover reflecting price discounting. 

The retail deflator came in at at -0.4 per cent, the weakest result in nearly two decades, to be -0.3 per cent lower over the year. 

Yes, that means deflation - and it was reflected across most industries, with cafes & restaurants being an honourable exception.  

Across the board

The weakness in retail turnover over recent months has been experienced across most industries, with household goods recording a particularly soft quarter. 

Chain stores and the major retail players have continued to fare reasonably well, but smaller retailers are finding it tougher to gain traction. 

And while some states and territories fared worse than others over the third quarter - most notably the Northern Territory - retail turnover was down across the board. 

The wrap

It rarely pays to get too carried away with monthly figures - they can, after all, have a tricky habit of turning corners - but the trend suggests that we may be experiencing some instances of quite significant retail price deflation. 

In plain English, retailers have cut prices, but thus far have failed to inspire much in the way of increased sales volumes. 

In particular, the prices of some household goods, food, certain clothing & footwear, and new car prices are all looking favourable for consumers right now, in spite of the more widely reported spike in electricity prices. 

Unsurprisingly, in light of this evidence, the Aussie dollar took a bit of a tumble, and markets are no longer pricing any rate hikes in 2018.

Owners of retail stocks should be concerned about this, with the sector already seeing some high-profile casualties, and valuations being downgraded.

And now comes Amazon.

Weekend reads: must see articles of the week

Summarised for you right here at Property Update.

Great sprawl of China

China rising

Australia notched a seasonally adjusted trade surplus of $1.75 billion in September, as net exports are set to make a small but welcome positive contribution to the national accounts for the third quarter of the year. The rolling annual trade surplus increased to a record high $19 billion...

...as annual merchandise exports to China blazed to well beyond a thunderous $100 billion.

September was a more upbeat month for gold and iron ore export values, largely accounting for the improved surplus. The value of LNG exports, although lower in the month, also hit new highs over the year to September.

Price action in iron ore markets has been substantially weaker of late, however.

Tourism firing

The lower dollar has helped the trade services balance to haul itself all the way back to a $201 million surplus in September, the highest result in 14 years. Meanwhile, Australia's tourism boom continues to go from strength to strength...to strength. 

This has also largely been a Chinese phenomenon, and so too the international students boom. In fact, most of the thriving sectors of Australia's economy can in one way or another be tied back to China's urbanisation.  

The coal price rebound and the ramp up in LNG exports has been welcome news for Queensland - as indeed has been the surge in international tourists - and the Sunshine State is now accordingly racking up substantial trade surpluses. 

The lower dollar has helped New South Wales to make its merchandise trade surplus somewhat 'less worse'. 

The wrap

Overall, Australia's volatile commodity prices continue to be, well, volatile, but it's been good to see services exports consistently delivering improved results since their 2013 nadir. 

The importance of China to these figures can hardly be overstated, with more than a third of all merchandise exports accounted for by our largest trading partner. 

Let's hope, then, that China's economy doesn't hit a brick wall! 

Approvals get the nod

Second wind

September's residential building approvals rose in to a seasonally adjusted 7-month high of 18,849, to be slightly higher than in August 2017, and surprisingly even a little higher than a year earlier.

The market has swung sharply away from high-density approvals, which were running at unsustainable levels, and towards houses and townhouses.

Annual approvals are now tracking at 214,725, well down from record highs of close to 242,000 at the 2015 peak. 

Allaying fears of a cataclysmic slowdown in construction, the uptrend in the value of non-residential approvals extended to eight months, to notch a record high. 

The strength in non-residential approvals has clearly been driven by Melbourne, specifically relating to recent approvals for office blocks and education buildings. 

Around the traps

Building approvals for houses have been strong for five months now in Brisbane, as demand shifts northwards from the other eastern capitals.

Sentiment in Perth has finally turned something of a corner now, with mineral exploration, then employment, and now asking prices for houses all shaping moderately higher. 

The strong monthly result for approvals was largely driven by attached dwellings in Sydney, while Brisbane continues to decline very sharply. 

Nerida Conisbee, Chief Economist of REA Group, noted a sharp uptick in offshore searches for Brisbane apartments, as bargain-hunters sense opportunities (in contrast, Sydney searches declined). 

There's also been keener interest in Melbourne apartments, meanwhile, including from offshore, with education again likely to be a key driver. 

Rents appear likely to rise in Melbourne in 2018, with population growth soaring yet approvals in a trend decline.

Elsewhere, attached dwelling approvals in Hobart are now rising, albeit from a very low base. 

The wrap

Overall, this was a surprisingly strong result, with residential building approvals catching a bit of a second wind, and the trend value of non-residential approvals at the highest level on record. 

Isentia to recover?

Afraid not, 

The share price crashed by more than 4 per cent yesterday to 95 cents, following on from yet more declines.

Remember that when you have a drawdown of 80 per cent on an investment, you'll need it to go up by 400 per cent, just to recover the loss.

Which ain't gonna to happen.

On a brighter note - at least for those that remained fully invested - the Australian All Ordinaries  index went through 6,000 to hit its higher level in 10 years. 

Unemployment falling...everywhere else

Sweet as...

Another country is powering back towards full employment as Australia dithers around discussing its financial stability mandate, whatever that means. 

New Zealand's unemployment rate fell from 4.8 per cent to just 4.6 per cent in September 2017 quarter, the lowest result since 2008. 

NZ pumped out a huge increase in employment both for the quarter and for the past year, while the participation rate somewhat surprisingly jumped to the highest level on record at 71.1 per cent.

Great effort, and no signs of immigration having hurt the economy there.

Quite the opposite, in fact, with the sum of the parts being greater than the whole, with immigration fuelling the economy by boosting its productive capacity, raising GDP, and immigrants flowing to locations where there is a need for workers.

Immigrants are often thought to be more likely to move than incumbent residents, and as such can increase the effective speed limit of the economy by shifting to areas where there is demand for labour (various reports in Australia have concluded that immigration delivers a demographic dividend here too). 

Australia's unemployment rate has admittedly eased to a multi-year low, but comparatively speaking is now being left in the dirt by economies all over the world. 

The unemployment rates elsewhere are even lower again, including in the UK (threatening 40-year lows at 4.3 per cent, in parallel with a record high employment rate) and the US (4.2 per cent, with only Cyclones disrupting the longest run of employment growth on record).

Unemployment rates have also been trending down for years in Japan, the Eurozone, and elsewhere besides.

And yet, there's very little inflation.

In Australia, Moody's reported that mortgage arrears fell once again in August 2017. Financial stability, yay!

Them's the brakes

Credit growth slows

The Reserve Bank of Australia (RBA) released its Financial Aggregates figures for the month of September 2017, which revealed a softer month for credit growth ex-housing, with total credit growth still tracking at +5.4 per cent over the year. 

Annual business credit growth is no more than ticking along (+4.3 per cent), while personal credit remains in negative territory. 

Housing credit expanded by +6.6 per cent over the year to September, actually a little faster than the +6.4 per cent pace seen a year earlier, contrary to what you might think.

However, a closer inspection shows that the monthly rate of growth was +0.48 per cent in seasonally adjusted terms, the slowest increase since March 2016, so lending constraints are gradually taking effect.

Total housing credit is now sitting at a tick under $1.7 trillion.

Still powering along for now then, although there has been a concerted push to get borrowers off interest-only products lately. 

The purpose of some $59 billion of loans has now been switched from investor to owner-occupier since July 2015.

The RBA data showed that after accounting for loan switching, the growth in investor credit slowed to +7.2 per cent, with further declines almost certain to follow. 

Watch your speed

APRA also released its monthly ADI figures, which showed investor credit growth slowing to a crawl - implying that the non-banks have picked up some market share in this sector - with the total value of owner-occupier loans up by +0.48 per cent in the month. 

None of the major banks is now even remotely close the 10 per cent 'speed limit' or regulatory threshold for investment lending, with only Westpac of the main players still pushing this sector along. 

A number of the second-tier lenders, including Suncorp, Macquarie, and others, have significantly cut back their investment mortgage exposure, perhaps suggesting some regulatory pressure. 

The wrap

While total housing credit is still rising at a solid pace, investor lending is clearly being snipped back sharply.

With population growth now tracking at historically high levels as I looked at here, it remains to be seen whether rents begin to rise sharply in the two largest cities in 2018 (personally, I believe that this is likely, especially in Melbourne, though few appear to agree with me at this juncture). 

The major banks are now growing their investment loan books at way below the arbitrary 10 per cent cap, so theoretically at least investor loans could begin to feature more prominently again next year, but this may need the regulator to remove its foot from lenders' throats.

New home sales plunge

In other news, new home sales continued the decline begun in 2015 with another -6.1 per cent drop in September 2017, according to Housing Industry Association (HIA) figures.

The drop was driven by a significant -16.7 per cent drop in multi-unit sales.

New home sales are a leading indicator for building approvals, and following the longest ever upturn in building there now comes the dwelling construction downturn. 

Changing of the guard

Shift change

Stock listings declined by 1.4 per cent in October 2017, to be 4.6 per cent lower year-on-year, according to data reported by SQM Research. 

Having been depressed for some years now, listings in Australia's most populous city are now reverting higher - listings in Sydney are some 17 per cent higher than a year earlier. 

Listings also increased in the month of October in Canberra (up +2.8 per cent) and Adelaide (up +2.6 per cent). 

Focus is gradually shifting towards other cities, particularly those with a resources bent, with listings declining in October in Brisbane (-1.4 per cent), Perth (-1 per cent), and Darwin (-2.6 per cent). 

Over the year to October the decline in listings nationally has been driven by Melbourne, with stock levels down by another 12 per cent.

If this trend persists Melbourne will have fewer listings than Sydney before the year is out. 

Asking prices for houses in Melbourne are up by a thumping 21 per cent since October 2016. 

In booming Hobart total listings declined to only 2,377, to be 25 per cent lower than a year ago. 

Listings normally record a pre-Christmaas rise in November, according to SQM Research, so expect to see a bit of an uptick next month.