Trump factor

Trump boost

The US economy is now growing as fast as it can sustainably grow (potential output) for the first time since 2007.

Yet President Trump is set to deliver tax cuts, followed by a potentially significant 2018 infrastructure plan.

US GDP growth was revised up to +3.3 per cent in the third quarter, so things could now get quite interesting.

Even allowing for hurricanes the economy has averaged +170,000 new jobs per month over the past three months.

In November nonfarm payrolls expanded by +228,000 to rack up a record 86th month of expansion.

The unemployment rate again came in at just 4.1 per cent.

Despite this average hourly earnings still only increased by +2.5 per cent from a year earlier.

Rates in the US look to be heading higher, albeit gradually.

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First homebuyers take the baton

Non-banks up to the plate

The total seasonally adjusted value of housing finance increased by +0.6 per cent to $32.5 billion in October 2017, led by a modest +1.6 per cent increase in investment loans. 

Industry data and polled economists had predicted a weak or very weak month for housing loans in October, but it appears that they failed reckon with the strength in non-bank lending, which has begun to kick in quite hard.

In the event there were 55,406 owner-occupier commitments in the month, above even the expectation of even the most optimistic of forecasters.

That makes it 4 consecutive months with more than 55,000 commitments, showing that home loan demand remains strong.

Of the mainland states, Victoria has by far the strongest homebuyer market.

Average loan sized are creeping up again for non-first homebuyers at $380,300, up from $370,900 a year earlier, but have stalled for first homebuyers as serviceability constraints bite. 

Investment lending ticked up a little in October too, but drilling the trendlines through the figures to smooth out the noise shows that the total value of investor activity is about 6 per cent lower than a year earlier.

Piecing it all together, total housing finance has been pretty robust, coming it at a solid $32.8 billion in trend terms - if there's been any cooling in the market, it may relate as much to muffled overseas investor interest as it does to the domestic market.

Moody's reported that it expects to see only a moderate increase in mortgage delinquencies in 2018, and this appears to be borne out by these figures, with refinancing activity some 11 per cent lower year-on-year.

Financing for new dwellings is tracking at extremely high levels, with the trend result hitting the highest level since Boney M was at number 1 in Australia with Rivers of Babylon in July 1978.

Ye-ah, we wept.

First homebuyer takeover

First homebuyers accounted for 17.6 per cent of finance commitments, up from 17.4 per cent in September, with lending to first homebuyers up by a thumping 38 per cent over the year as government incentives draw in new buyers. 

There has clearly been a sharp increase in first homebuyer activity in New South Wales and to a somewhat lesser extent Queensland.

But it's Victoria that's really driving the way forward, with its 3,250 financing commitments being the highest monthly result since 2009. 

That's upbeat news for turnover in Melbourne, Geelong, and some other regional housing markets in Victoria.

The wrap

Overall, a solid result, in terms of both the volume and value of housing finance written.

So it looks as though 2018 will kick off with the now-familiar "surprisingly resilient" articles. 

This is insania (Bitcoin)

Manic miners

The last thing I want to write about is Bitcoin, but how else will I get any readers in this sad era of internet clickbaitery, hey?

Record highs for Bitcoin today, and then some, of course.

One of the key characteristics of a mania is the lack of a valuation anchor, and Bitcoin has this characteristic in spades. 

Today the 'market cap' of Bitcoin, if that's even a real thing, went blazing towards US$320 billion, at least for a while, which made it more valuable than all but a handful of America's greatest companies. 

There are presently just over 16.7 million Bitcoins in circulation, with each one worth more than $19,000 on one exchange earlier today.

Bank of America, for example, is valued at much less that that, and it has more than a couple of trillion dollars in assets, not to mention annual revenues of about $90 billion, and the banking behemoth employs a couple of hundred thousand people. 

Bitcoin is also valued higher than Visa, which handles nearly $9 trillion in transactions per annum.

Bitcoin has no revenue, or assets (at least in the conventional sense), I'm not sure about employees, and delivers a yield of zero per cent per annum in perpetuity.

Not the type of investment that would normally grab you as sensible or see you rushing in!

But all of the Bitcoins combined are valued higher than Coca Cola, JP Morgan, or Chevron, because as far as I know, nobody has a reliable way to value them (or if they do, the market is acting very strangely).

At the current rate, Bitcoin will be bigger than Exxon Mobil by tomorrow.

There was some concerning news about Bitcoin theft earlier...wait, no-one cares!

The market may have liquidity risk, has wild spreads between exchanges, and the currency function is wracked with uncertainty, not least because of the price volatility. 

But the "this time it's different" meme is another market mania box that's well and truly ticked.

Shake it off?

Interestingly Bitcoin possibly doesn't appear to fit some of the other criteria for a market mania, such as the excessive use of margin debt or Ponzi finance (although arguably it reflects the exuberance seen across many markets in this era of easy money).

It does fit the most important characteristic of the lot: irrational exuberance.

It's been difficult to short Bitcoin to date - a dynamic we often see in housing markets - and with the price tending to reflect only bullish opinions, the uptrend has continued unabated. 

I was keeping track of how quickly Bitcoin ticked off each thousand dollar milestone in November, but this was rendered completely useless today when other exchanges had the market rising by a thousand dollars in just a few hours at one stage, which is mania writ large!

The most readily comparable market activity springing to mind might be the Dutch tulip mania of the 1630s, which gripped all members of society and even saw an offer of a dozen acres of land for a single tulip bulb.

This market's different though, no doubt!

The most compelling reason to buy Bitcoin at the moment seems to be that the price might be higher tomorrow, which is jolly good while it lasts, and there was possibly talk of some new derivatives increasing the potential for mainstream demand. 

In fact, paradoxically the higher prices go the fewer people appear to believe it's a bubble, presumably because there have been more willing buyers, making for stronger fundamentals (or warped logic somewhere along those lines).

For all that, my Twitter feed seems to comprise almost nothing but Bitcoin talk - a welcome break from the pain of Ashes cricket, granted - and I even saw Kochie discussing Bitcoin on TV earlier.

On that basis alone, this rally still must still have a way to run!

Ships passing

Listing...

Analysis by SQM Research reported that nationally stock listings in November 2017 were about 4 per cent lower than a year ago at 334,594. 

In Sydney, however, following nearly five years of depressed listing numbers, the market has tilted back into the balance. 

At 33,046, listings were some 20 per cent higher than a year earlier in the harbour city.

Melbourne, on the other hand, continued to tighten, with listings falling another 10 per cent in the other direction over the past year, to a near-identical figure of 33,070.

Ships passing in the night, you might say. 

Continuing the nautical theme, though it might have the proverbial turning turning circle of the QE2, slowly but surely the storm clouds are clearing in Perth, and listings are about 5 per cent lower than a year earlier.

Not exactly full steam ahead; showers ahoy, maybe.

Hobart saw a fair monthly increase in listings to back above 2,450.

But the Tasmanian capital remains an extraordinarily tight market, with stock listings a punishing 28 per cent lower than a year earlier, being down from 3,402 in November 2016, and this has been reflected in sharply rising house prices.

A mixed picture overall, then, but Sydney listings appear to be...well, listing.

SQM's Louis Christopher commented:

"While there is a slowdown in Sydney, and to a lesser extent in Melbourne, we are still of the belief this is just a temporary stay, with a likely acceleration in market conditions next year based on an expansion in lending once again by the banks and still low levels of interest rates."

APRA strikes back

IO smash

If anyone doubted APRA's commitment or ability to quell interest-only lending, then they definitely shouldn't any more.

New interest-only loans have been smashed to smithereens, down from 45.6 per cent of the market at the 2015 peak to just 16.9 per cent.

Banks continue to wind back high loan-to-value ratio (LVR) lending, continuing a trend that has been underway for 4 years now. 

Property buyers will not only need to pay back principal, they'll need to have a decent deposit too.

Despite this, the total value of residential mortgages on ADI books rose by +6.9 per cent over the year to September, as the pendulum swings from investors to homebuyers.

A seismic shift in the market then, as more borrowers will now be compelled to pay back some debt.

With interest-only lending peaking in 2015, the greatest volume of rollovers will occur in 2020 - see here for my thoughts on what might happen then. 

Households paying less mortgage interest

Investment surges

Australia's economy showed growth at a decent lick of +5.9 per cent over the year to September 2017.

In real terms GDP grew by a shade under +2.85 per cent, the fastest result in 15 months, and annualised growth was solid enough in per capita terms too.

With profits comfortably surging to record highs, the result was driven by a strong surge in business investment (+7.5 per cent, the strongest reading since 2012, and above the long run average) meaning more jobs are on the way.

Most industries are expanding solidly, though agriculture has fallen back abruptly over the past year.

At the state level, New South Wales leads the way with strongest growth in final demand, and with clear signs of improvement in Western Australia. 

Meanwhile domestic demand generally looks to be in the best nick in half a decade (largely because the mining downturn has run its course).

Gross domestic income grew by +5 per cent over the year in real terms, and real net national disposable income was up by a solid +4.5 per cent.

Households a wee bit tight

The weakest part of the National Accounts report related to consumption, with household expenditure having stalled somewhat, now being just +2.2 per cent higher over the year, following a very weak period for wages growth. 

However, the ABS reported that compensation of employees "grew strongly" by +1.2 per cent over the quarter, and with household income growth outpacing expenditure the household saving ratio ticked up just a notch to +3.2 per cent.

The ABS further opined:

"The increase in wages was consistent with the stronger employment and hours worked data that has been reported in the labour force survey.”

Interestingly, households are now paying less interest than 6 to 9 months earlier, as more borrowers took the opportunity to switch to cheaper principal and interest mortgages. 

It looks as though new dwelling construction will no longer contribute to growth in the economy for this construction cycle - while major renovation works declined this quarter - but non-residential construction is rising hard in its stead. 

The wrap

Growth has been decent in 2017 and looks set to hit 3 per cent in 2018, in keeping with the wider theme of steady improvement, albeit at a rather sedate pace. 

There is plenty of public expenditure on transport and other infrastructure projects in the pipeline, and over time the unemployment rate looks set to continue declining from 4½ year lows. 

The implied price deflator for household consumption is now very low indeed, with the major banks and most economists seeming to agree that interest rates will stay on hold for at least the next year (some, including Westpac and Capital Economics, think longer than that).

For all the usual carping, the outlook has generally continued to improve, and the base case for 2018 doesn't look to shabby: growth of about 3 per cent, the unemployment rate falling to about 5 per cent, and interest rates on hold for the whole of 2018. 

Not a headline generator, but still, not too bad as Australia gets set to rack up a 27th consecutive year of growth.

Pressure cooker?

Deflation

Everyone seemed jolly pleased that retail turnover increased by a seasonally adjusted +0.5 per cent in October to $26.06 billion.

And certainly this was far better than the negative results we've seen lately.

But you've always got to consider the figures in context, and the truth is that the trend looks anything but flash.

In fact, the annual trend growth in retail turnover has never been lower, now lumbering at just +1.6 per cent.

This is being driven as much by weakness in prices as it is volumes, and possibly in the household goods sector where retail turnover was down by -2 per cent from a year earlier. 

Disruption!

Amazon Australia went live yesterday. I took at look at some of their appliances, including in this slide, which Carson Scott of Sky News said "captured the zeitgeist perfectly" (click to enlarge).

Of course, it's very early days, and nobody can say for sure how the arrival of Amazon will play out or what their pricing strategies will be. 

The main retailers could be under competitive pressure if Amazon pursues aggressive discounting with free delivery, and they will no doubt be out in force to state that the impact of Amazon has been blown out of all proportion.

So, who's right? Will Amazon cause prices to fall, or are the established retailers to be proven correct?

The truth is no-one knows after one day, and the only sensible thing to do is watch the data carefully.

Note that the retail deflator came in at an extraordinarily weak -0.4 per cent in the September quarter, the weakest result in nearly two decades, so the jury's surely got to be out.

And what little inflation there was in the quarter was largely driven by electricity prices and the 'sin tax' on tobacco.

The environment looks to have a suspiciously disinflationary bent to me, but we shall see.