Millennial falcon

A feast for the Census

Demographic demigod Bernard Salt wrote a searching piece in The Australian today, with data research from Simon Kuestenmacher picking out future housing market hotspots based upon the growth in the 25 to 50 year old cohorts across certain regions of the country.

One challenge with the intercensal data is that since it relates to the period between 2011 and 2016, it's somewhat limited in that it can only tell you what was happening a few years ago.

Take the example of the Northern Territory, where the economy and prime working age population were on fire until the peak of the mining boom. 

The resources construction boom will not be repeated, however, and today the NT has the lowest population growth of any state or territory (in fact, the population was actually shrinking over the most recent 6 months of estimates). 

Still, it's hard to disagree with many of Salt's conclusions, which included south-east Queensland and Geelong as locations with strong prospects.

Moreover, it's refreshing to see analysis which goes a level deeper than the headline data.

Housing slinky

I've been following demographic statistics with interest, and have been particularly fascinated by the extraordinary growth in the 25 to 32 year old cohort in recent years. 

Somewhat amusingly, when I ran the chart it reminded me of the ingenious childhood toy that could stretch and re-form itself, the 'Slinky'.

If charts aren't your thing, what this shows is that, for example, in 2005 there were about 269,000 persons aged 26 in Australia, but by 2016 this figure had ripped nearly 100,000 or 37 per cent higher. 

The number of 25 to 32 year olds has exploded from about 2.2 million to 2.9 million, for an increase of 31 per cent, or just shy of 700,000.

Millennial falcon

As far as I'm aware nobody was forecasting anything remotely close to that back in 2005. 

It's an extraordinary increase in prospective household formation, and since it's been driven by immigration, it's intensely focused on the capital cities.

And this is also a significant factor which makes a severe housing market correction appear unlikely - if prices fall a bit, just look at the swelling headcount of potential bargain hunters waiting to swoop. 

Surprisingly to some, the Baby Boomer cohort moving into retirement is smaller, and in any event there does not appear to have been a meaningful decline in housing demand from Boomers (if anything, they've been adding to demand, by buying investment property). 

It was interesting to note that Salt found, as indeed I did, that the impacts of this will be felt most keenly in certain housing markets of Greater Melbourne. 

I wrote a bit more about this dynamic here, and M. Pascoe picked up the ball and ran with it a bit further in the Sydney Morning Herald.

Upside funk

Affordability declines

UK City house price inflation increased to +6.1 per cent in October 2017, up from +5.4 per cent a year earlier.

It's the fastest rate of growth since September 2016, according to Hometrack's latest figures. 

Manchester now has the fastest rate of growth, at +7.9 per cent, while Aberdeen continues its decline.

Source: Hometrack

In London, the house price to earnings ratio rose to 14.5 times, an all-time high, while Cambridge is not far behind. 

In Bristol, the ratio is now 9.7 times and rising. 

Prices in both Cambridge and London have increased by +60 per cent since 2007.

Hometrack sees furthers upside for the regional cities:

"Were cities such as Leeds, Manchester and Birmingham to see the price to earnings ratio reach 30% over the 15-year average, this would equate to a house price increase of 20% to 25%. 

We believe this is very feasible so long as mortgage rates remain low and the economy continues to grow. 

These increases are equivalent to 3 years of growth at current levels."

In arrears

Mortgage arrears figures charted by Macquarie Bank.

Detailed analysis of mortgage arrears and where they are heading next are beyond the scope of this blog - please see our monthly subscription reports for more.

At any rate...

At any rate...

Trying to second-guess where interest rates are heading has almost become a national sport in Australia, so I've been trying instead to write about a range of other topics lately. 

Nevertheless, an interesting titbit from Bill Evans of Westpac this week is worth looking at.

Later this week the Reserve Bank of Australia (RBA) will report its household credit growth numbers, with annual growth to households seeming likely to slow over the months ahead, partly due to tighter lending criteria. 

Evans was able to ask the RBA Governor during a post-speech Q&A session how he'd view the prevailing levels of credit growth of around 6 per cent, if income growth was to return to 3 to 4 per cent by 2018. 

"His response was clear. He accepted that household credit growth at around 6% (not even meeting the slowdown which I expect) was quite okay, implying that even if leverage was rising due to tepid income growth, financial stability was not being threatened."

The full note from Evans is well worth a read. 

It's significant, because it appears to all but rule out interest rate hikes in the event of moderating credit growth, even if household leverage rises a bit further. 

Given the low inflation environment and the Governor's reluctance to cut rates further, the only reasonable conclusion seems to be to expect interest rates to be on hold next year, and quite possibly for the next two years (cash rate futures are pointing to a possible hike around the middle of 2019). 

Bonds price lowflation

There's been quite a bit of discussion of bond yields over the past week or so.

Although lower than in the past, in recent times Australia's government bond yields have been higher than elsewhere in the developed world (US, Japan, Germany, UK), as global rates have plummeted, even turning negative in some countries.

Australia has a 2 to 3 per cent inflation target, which is higher than many other countries, but our inflation target has been consistently missed on the downside in recent quarters.

Aussie bond yields have consequently been on the slide again since the September quarter as markets adjust to the low inflation environment and outlook. 

Bond yields, particularly 10 year/2 year spreads, are said to be a reliable indicator of recessions - or market's expectation of a coming recession - if they turn negative. 

Normally investors are expecting lower returns when their capital is tied up for a shorter period, logically demanding a higher yield on longer term investments. 

But the yield curve can become inverted when the market has sagging confidence in the near-term economy (and consequently yields, as bonds are rolled over), and in these circumstances investors may accept lower returns for tying up their capital for a decade. 

Australia last saw this indicator flashing between June 2006 and July 2008 as the financial crisis unfolded.

The yield curve doesn't seem especially troubled now, despite a bond rally since the beginning of the year, implying a low risk of recession.

Westpac expects to see the economy having grown by about 0.9 per cent in the third quarter (the official estimates aren't reported until next week), with growth of about 3 per cent in calendar year 2018.

However, persistently weak inflation figures do suggest that interest rates will be lower for longer, even if the next move does prove to be up.

Westpac is now offering via mortgage brokers 3-year interest-only fixed rates for investors from 4.29 per cent (a discount of 0.50 per cent), with lower rates available on a 2-year fix, perhaps a signal that interest-only lending will resurface in 2018.

Peak cranewatch

Peak cranes

It's been an exciting few years for Australian crane-spotters - as well documented on this blog! - but the peak is now in, at least for the residential sector.

In fact the most active quarter for residential building work done was all the way back in June 2016; it just mightn't feel that way if you live in Sydney. 

Looking at the value of work done on new houses, the uplift through this cycle only looks moderately impressive, with a steady contraction underway, broadly since 2015.

Of course, this cycle has been far more notable for the record building of higher density projects.

This dynamic has helped to address an inherent undersupply of capital city housing, especially in a number of inner suburban areas where land availability had previously been limited.

Crane your neck...the peak is in

Jonathan Kearns from the Reserve Bank of Australia (RBA) noted in a speech this week that attached dwelling approvals have soared from less than half those of detached dwellings under a decade ago, to almost on par across recent years. 

The annual number of attached dwellings approved peaked more than a year ago back in the September quarter of 2016, but with longer build times there can be a risk that completions peak just as the residential market turns down. 

If it feels as though Sydney developers are still building new townhouses and apartments like the clappers, then this is well borne out by the statistics. 

Indeed, New South Wales is propping up the national figures, although even here the peak is probably imminent.

In Victoria, attached building activity levels have been fairly flat now for about 1½ years, while in both Queensland and Western Australia activity has been falling quite significantly throughout 2017. 

The scale on this chart matches that for detached housing, and shows how Sydney has shifted markedly towards higher density living over the past two decades (while Melbourne has simply seen lots of dwellings built of all types, both in the inner city and on the urban fringe). 

Shift in composition

Brisbane's dwelling stock historically comprised only a very small share of apartments, but the total stock of attached dwellings has now lifted by more than one-third since 2015, which is remarkable, with completions set to peak this year.

Perth has also seen a strong uplift from a comparatively small stock of existing units. 

Despite this, the RBA speech noted that apartments in Perth and Brisbane have witnessed only small median price falls in recent years.

To date there have not been widespread reports of valuations at settlement being lower than off the plan purchase prices, nor has there been a marked increase in settlement failures or arrears.

The RBA also noted that purchases by foreign buyers accounted for just 10 to 15 per cent of new construction (and about a quarter of new apartments), which intuitively feels low, although the share is higher in Sydney and Melbourne. Of these offshore buyers, about ¾ hailed from China.

Although residential building is now turning down, to date the downturn has been only moderate.

Moreover, there is also now a strong pipeline of infrastructure projects, especially in New South Wales, which might help to explain why the reported monthly unemployment rate of only 3.9 per cent for Greater Sydney has not been lower since 2005. 

Corridor of uncertainty

Gabbatoir

As a cricket tragic, I was thrilled a little over a year when we named our son Stanley, being in part a subtle or oblique reference to one end of the Gabba cricket ground in Brisbane (I felt a reference to the old Clem Jones stand - or even 'Sir Gordon Chalk'! - might have been pushing it...). 

There's been a tremendous amount of excitement in Brisbane this week as the English cricket team is in town to the play the first Test Match of the historic Ashes series.

The view of the Stanley Street End skyline today takes in many cranes, as well as the imposing $85 million Trafalgar Residences, a 20-storey apartment block at 855 Stanley Street (being a new development since the last time an Ashes test was played here). 

Looking back towards the opposite Vulture Street End of the ground, the television cameras picked up the apartments advertised for sale and for rent at 444 Vulture Street, where apartments are advertised for rent from $360/week for 1-bedroom units, and from $750/week and above for 3-bedders. 

At this stage of the construction cycle there's a risk of vacancy rates being understated as a single online advertisement can account for multiple new apartments.

The ubiquitous offers of rent-free periods for tenants, free internet (and so on) in Woolloongabba apartments reflect the clear weakness in the rental market. 

In a moment of wry amusement, even match commentator Damien 'Flemo' Fleming was moved to mention the glut of new building in the suburb, a rare yet curiously welcome departure from the discussion of Bowlology, the Fast Bowling Cartel, and heavy metal music!

Avenue of apprehension

The new high-rise apartment market can be a risky one for buyers, in part because the apartments can lack uniqueness or scarcity value, and partly because the duration of projects can span several years from approval to completion, at which point the market can suddenly become swamped with new supply. 

This cycle has played host to Queensland's greatest ever apartment construction boom, eclipsing even the post-recession boom of the early 1990s, although far fewer houses have been built this time around.

As we have seen in Perth since 2014, the long lead times mean that by the time projects are completed demand may have slowed significantly.

In fact, until relatively recently Western Australia was seeing the number of new dwelling completions exceed the growth in headcount, as population growth had slowed so dramatically, resulting in a surge of rental vacancies and falling rents. The city of Darwin went down a similar path.

Queensland has suffered from this dynamic too, albeit to a lesser extent. The good news for Brisbane landlords is that the Queensland economy, employment growth, and thus the three components of demographic change (natural growth, net overseas migration, and net interstate migration) are now aligning to create faster population growth. 

Meanwhile new apartment commencements are slowing to a crawl, helping to rebalance the market over time.

The Brisbane apartment market is heading back towards equilibrium eventually, then, but 2018 will nevertheless be a splendid year for renters, especially in some of these inner-city unit markets. 

Hunter's gathering pace

Recovery momentum

Job vacancies continue to rise solidly, up by another +8.4 per cent over the year to October 2017, according to the Department of Employment.

Vacancies have now increased by +37,000 or +26.5 per cent since the October 2013 nadir. 

In New South Wales vacancies are up by +6.4 per cent over the past year in seasonally adjusted terms to the highest level since March 2011.

The recovery since 2013 has really been a Sydney and Melbourne phenomenon...at least, until now.

Regional rebound

It's good to see momentum shifting away from the centre of the city a little, with advertisements now surging back to life in regions such as Newcastle & the Hunter (+26.8 per cent), and Gosford (+21.1 per cent).

Similarly in Victoria there was strong year-on-year growth in vacancies in Geelong (+13.4 per cent) and Bendigo (+13.5 per cent).

Of course, the absolute numbers of vacancies are much lower in regional cities than in the capitals, but the direction is nevertheless heartening. 

There was also double digit growth in Queensland and Victoria, while Western Australia (+16.5 per cent) has clearly turned the corner. 

In trend terms job ads rose in seven of the eight occupational groups over the past year, with the strongest gains recorded for technicians and trades workers (+13.6 per cent), machinery operators and drivers (+12.4pc), and professionals (+11.7pc), noted the Department of Employment.

Good to see.