The long run

We're all dead

Wow, some tremendous excitement about the recent sharp increase to 43,727 Melbourne stock listings (thanks for all the Tweets!).

Since you're interested, below is the split between houses and units, per SQM Research.

Stock levels are broadly about back to where they were three years ago, and this is mainly due to a surge in completions and slower sales.

New listings are way down in Sydney and Melbourne, which is not all that surprising given unemployment rates in these cities are about 4 per cent and 4½ per cent respectively (meaning that are there are few forced sellers). 

Note that the population of Melbourne is increasing - up by a record high of +125,400 in FY2017 - so over time a higher number of listings is to be expected, given the larger overall stock of dwellings. 

One of the interesting things I noted from the Census is the remarkably low share of population in Melbourne living in an apartment, for a city that is now home to more than 5 million people. 

It's an idea I explored in a little more detail in my free workshop here. 

Also worthy of note about the downturn in Melbourne and Sydney prices over the past 18 months or so, is some longer term context. 

'In the long run...' etc.

In saying that, there would be some nervous off the plan buyers in some areas of Sydney, in particular - this from Cameron Kusher of CoreLogic, shows the Hills District copping major fallout:

Source: CoreLogic

The wrap

It seems to me that with population growth at a record high and investor credit growth now at a record low, Melbourne's rentals market could end up in an almighty mess, especially with the 'Brains Trust' in the Labor Party proposing measures to 'level the playing field' by restricting interest deductibility.

Melbourne will need many more landlords, not fewer.

Bit of an eclectic post today, but there you go, 'tis done now!

Melbourne listings surge out of the blocks

Listings surge

It's an easier buying environment for property seekers in one sense right now, but it's also become considerably harder to get a mortgage. 

It may be a buyer's market, but many can't afford to buy what they thought they might be able to. 

Stock listings rose in November, as they are wont to do, but the increase in listings in Melbourne has been by far the most substantial, with total stock listings running all the way up to 43,727 from 33,070 a year earlier. 

The latest figures from SQM Research are charted below, and showed that the usual November increase was noticeably more marked in Melbourne (as always, you can click on the graphics to expand them): 

In Sydney there has also been a marked increase in listings in certain regions.

Here's one such postcode, via SQM's detailed figures - a looming glut that was flagged many moons ago, and one which is clearly reflected in the Ryde sub-region experiencing the greatest fall in prices from the market peak in early-to-mid 2017. 

At last there is some stock on the market in Hobart, with a 17 per cent monthly increase to 2,427 listings, but in spite of extraordinarily low vacancy rates in the Tasmanian capital prospective investors are still finding it hard to borrow.

Anecdotally investors are also now selling up in Canberra, unable to face down the huge rise in property rates in the ACT and associated holding costs, even for apartments.  

Listings are 33.2 per cent higher than a year earlier in Melbourne, and 22.3 per cent higher in the ACT. 

Overall, it's a considerably softer environment, with the Reserve Bank noting in its Statement today a point of concern that under the prevailing tighter credit conditions some lenders have 'a reduced appetite to lend'. 

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Gold in them thar hills

Commodities strength in 2018

For all the gloomy reporting out there at the moment, the Reserve Bank of Australia reported today that its index of commodity prices increased by 19 per cent over the past year in Aussie dollar terms, in turn leading towards a windfall of revenues and tax receipts. 

The soaring result for the year to October was driven by a surge in iron ore, LNG, and coking coal prices, all of which are key commodities for Australia.

The value of exports from Australia has exploded since the turn of the century.

Paradoxically the ALP is now trying to position itself as 'sort of anti-coal' - depending on where they are campaigning, of course - as a scaled down version of Adani project once again hoves into view. 

The hypocrisy is almost, but not quite, beyond belief - Labor presided over much of the greatest resources investment boom in 150 years - however, the rapidly disintegrating Coalition has made itself all but unelectable, so all the ALP really needs to do is set back, grab some popcorn, and enjoy the implosion. 

Getting away from the politics and back to the data at hand, the quarterly trend for mineral exploration spend has accordingly increased by a hearty 26 per cent over the year to September 2018. 

This has largely been driven by gold and base metals, which in essence means great news for Western Australia above and beyond all other states and territories. 

Goldman sees commodity prices soaring in 2019; but needless to say they've been known to be wrong before.

GDP partials

Today's business indicators included further outperformance for company gross profits, in part driven by record high mining profits in the September quarter.

The trend for mining profits rose another 4.6 per cent in the quarter, with mining wages and salaries up by 1.5 per cent.

I hadn't intended to go down this path, but since I'm here now - total wages and salaries at current prices were up by 4.3 per cent over the year to September, so a looming Budget surplus is all but a shoo-in, at least temporarily.

Record profits are great to see; it would be even better to see that translating into higher pay packets!

Home values -3.8pc so far in 2018

Home values slide in 2018

When I last appeared on the Business Insider podcast back in May I noted that Sydney houses seemed to be transacting at prices roughly 10 per cent lower than at their frenzied peak period of early 2017. 

I've no clue how my smattering of anecdotes translate into a hedonic home value market index, to be honest, but CoreLogic's monthly result does now show median house prices 9 per cent lower year-on-year for Sydney, and apartments in the harbour city down 5½ per cent to a median value of of $721,265. 

At a macro level, that seems to make some sense. 

The weakest sub-regions in Sydney, perhaps unsurprisingly, included supply-responsive Ryde (-12 per cent), Sutherland (-11 per cent), Parramatta (-10 per cent), and the inner south-west (-9 per cent). 

And therein, the premium end of the market, which tends to be the most volatile, has driven the bulk of the price falls to date. 

In Melbourne house prices are down 7½ per cent from a year earlier, with price changes elsewhere relatively modest (booming Hobart excepted).

Nationally home values over the year-to-date are down by -3.8 per cent. 

Source: CoreLogic

The strongest performing regional markets over the past year have been Geelong and Launceston, with price growth of about 10 to 12 per cent respectively. 

You can pick out your favourite property types and cities by expanding the graphic above. 

Yields now rising

Very few properties are now selling at auction in Sydney, according to on-the-ground intel, with auction sales volumes down by ~75 per cent and many buyers struggling to arrange their finance in time for the tail end of the auction campaigns.

'A-grade' properties are certainly still transacting, but even the buyers that are pre-approved for finance are reluctant to make unconditional offers in the twitchy prevailing environment. 

One final observation: I've noted in reports elsewhere that if the ALP goes on to win the election and successfully rams through its proposed changes to negative gearing and capital gains tax, one way or another rental yields in Sydney and Melbourne would probably have to rise by about 1 per cent (other things being equal, that is, including mortgage rates). 

Interestingly with the macroprudential changes implemented this shift is already well underway with gross rental yields in the largest cities heading back up from a very skinny 3 per cent to about 3½ per cent, albeit as a function of lower prices rather than rising rents to date. 

Source: CoreLogic

The downturn in dwelling prices and construction seems almost certain to eliminate the prospect of a higher cash rate in 2019, if that even ever was on the table. 

The TD monthly inflation gauge came in at zero for November, and only 1.6 per cent year-on-year.

CoreLogic noted that the downturn has largely been confined to Sydney and Melbourne, with the strongest capital city markets being Hobart, Canberra, and parts of Brisbane and Adelaide. 

The cost of debt remains the lowest since the 1960s, noted CoreLogic, but credit conditions remain very tight. 

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Some lighter-hearted and 'behind the scenes' shots from BI Live.

Panel.

'Green room' - Cameron Kusher, Stephen Koukoulas, Joanne Masters.

...and Con.

Sydney unit approvals dropping like a stone

Approvals drop

Sydney apartment approvals were some 36 per cent lower than a year earlier in October, and are falling away fast. 

With new unit sales to mainland Chinese and other domestic investors now all but frozen up, the construction cycle at Sydney is rapidly coming to an end. 

The Grattan Institute and others have pointed out that with today's higher levels of population growth Sydney may revert to a dwelling undersupply position more quickly than was in the case in previous cycles. 

Sydney drove the weaker unit approvals result for October, but the trend softness is now spilling over to almost every other capital city...

...except for one: Hobart. 

Hobart has a chronically undersupplied housing market - flirting on the verge of a rental crisis - and detached house approvals in the Tasmanian capital have at least risen to the highest level across the data series. 

Even here, though, a lack of investor access to credit has stymied the supply response for apartments. 

Overall, the monthly trend for total approvals has now fallen by 17 per cent from a rip-roaring 20,441 at the May 2016 cyclical peak to a far more sedate 16,983 in October 2018. 

Further declines in new dwelling supply appear very likely to continue well into 2019.

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With all of that downbeat news around today, here are a couple of snaps of Business Insider's Devils & Details Live event in Sydney.

The wry humour of Westpac's dovish Bill Evans (I think it'd be fair to say that he doesn't have a great deal of confidence in some of the more optimistic inflation forecasts)...

A packed house at The Ivy. 

On stage with Michalakis (CIO, Statewide) and Koukoulas (MD, Market Economics), discussing something or other (a recording of the show will be released next week). 

And the asset allocators panel discuss the outlook. 

It was a super event, and great fun - book early next year to make sure you get a ticket. 

Ageing gracefully?

Pyramid scheme

I saw an interesting article via Twitter by John Mauldin about the US ageing crisis this week, Pyramids of Crisis, which showed that by the year 2050 some 22 per cent of resident Americans would be aged over 65.

I was (am) chronically jet-lagged, so I thought I'd run some equivalent numbers for Australia to see what came of it, if anything.

And here are the jet-lagged results.

By the year 2050 the projected population of Australia is ~37.1 million, up from ~25.15 million today. 

There will be many more females (3.6 million) than males (3.1 million) aged over 65, taking the equivalent ratio of the resident population aged over 65 to 18 per cent. 

Australia is better placed than most other developed countries from a population pyramid perspective, then, largely thanks to its immigration program which typically targets the under 30s cohort.

But the ageing challenge doesn't go away entirely as life expectancy increases. 

Ageing challenges

A few observations.

Firstly, women can expect to live longer than men in retirement, on average. 

The ageing of the population is often pinned on there being too many Baby Boomers, but in Australia's case increasing life expectancy may prove to be at least as important, if not more so. 

This might create a few headaches for social security and the Budget, although the fact that we are living longer and healthier lives is in itself a good thing. 

Secondly, the population pyramid could look a heck of lot more top-heavy without immigration - the median age may yet rise over time, but the modal age in 2050 is still expected to be in the 25-35 age range for both males and females. 

So there will be a big bulge of taxpayers aged 21 to 55, which is handy.

And thirdly, as ever there are some significant uncertainties around the assumptions for mortality, fertility, and migration, not least that improvements in technology could extend life expectancy far beyond what we believe to be likely today. 

Given that there will already be a projected 6.7 million Aussies aged over 65 it's my contention that the traditional picture of 'retirement' in Australia will have changed dramatically by the year 2050. 

After all, if you live beyond the age of 85 you could feasibly be spending as much of your full life outside of the labour force as you did in it, which surely doesn't make a whole lot of economic sense!

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News blast

A 'summer tsunami' of economy news lies ahead for Australia this week, including the national accounts for Q3 and a whole lot more. 

Market median forecasts expect to see the economy having grown by around 0.6 per cent for the quarter, and 3.3 per cent for the year to September, with the drought in New South Wales denting the national result. 

And there's a whole lot more news besides. Bring it. 

Weekend reads

Must read articles 

The must reads from the past week, summarised for you here at Property Update.

Some useful insights into home loan arrears, and apartment construction trends this week.

You can subscribe for the free Property Update newsletter here.

Slower money

Broad money slows further

This is the last time I'll look at the Reserve Bank's Financial Aggregates in 2018, so let's spend a little bit of time on it. 

Firstly, the good: business credit recorded back-to-back 0.6 per cent growth in September and October 2018, for annual growth of a solid 4.7 per cent, up from 3.9 per cent a year earlier. 

Unfortunately this wasn't enough to stop broad money growth pushing fresh quarter-century lows in October 2018 at under 1.9 per cent. Yuck.

While not an easy thing to measure, such weak broad money growth is a poor leading indicator for the economy and tends to be associated with periods of soft inflation. 

Housing credit growth notched only 0.3 per cent in the month and 5.1 per cent for the year to October, down from 6½ per cent a year earlier. 

Housing credit: detail

Owner-occupier credit growth of 7 per cent into the face of softer prices remained solid, but investor credit growth of 1.3 per cent is now the slowest on record. 

It's an unusual situation: real estate groups report that investors want to borrow and invest but can't get access to credit. 

Despite strong growth in the 25-34 year old cohort through the resources boom and beyond, the share of outstanding housing credit pertaining to investors has now dropped from a peak of 38.6 per cent to 33 per cent, and is still falling quickly.

It's difficult to say how long it might take, but eventually this would have to manifest itself in a available rental properties, particularly as Chinese investment has also disintegrated.

Although absolute population growth is strongest in Sydney and Melbourne, these cities also have an overhang of off-the-plan settlements to cushion any such shock to the rental market, at least for the time being. 

For that reason the first reports of a 'rental crisis' are more likely to emerge in smaller capital cities such as Hobart, Canberra, and perhaps Adelaide, and regional locations such as the Hunter Valley, Coffs Harbour, Wagga, Bowral, and Dubbo in New South Wales, then Ballarat, Shepparton, Warrnambool, and Mildura in Victoria, and so on.

Even some of the basket case resources regions could be heading towards renewed rental shortages as once-bitten investors remain spooked away. 

Finally - if you'll kindly forgive some weekend curve-fitting - although housing credit growth has slowed, historically it's tended to be the derived rate of change that's been more important to housing prices, at least at the capital city level (this index of home values itself being heavily weighted to Sydney and Melbourne). 

This 3-months advanced 'credit impulse' - a brainchild of ANZ's research team - deteriorated earlier in 2018, and remains at a level implying soft home prices in early 2019. 

One caveat here is that the shift away from interest-only lending and mortgage prepayments may have changed household cashflow profiles a little, so past performance is no guarantee of future trends. 

Moreover, it's only an indicator - it doesn't tell you much about the performance of localised housing markets, some of which are faring considerably worse than others.

The Royal Commission final report is due for release on 1 February.