House and apartment building very weak

Construction tanks

Economists have been talking a bit about the housing construction 'pipeline' still being strong.

While this looks to be a fair point at face value, in real time, housing construction activity is drying up.

A reading of below 50 denotes contraction (AiG's index for August is below):

There was some rain in New South Wales previously, which accounted for some of the slowdown in building work.

But this is much more significant, with new projects being scrapped or delayed, and with many building firms folding. 

The GDP figures this week for June will be strong, partly reflecting a rebound in activity from a disrupted Q1.

But it's clear that by August construction and manufacturing were deeply into contraction territory (and services activity flat). 

Albo increases immigration cap to 195,000

Migration cap lifted

It was confirmed this week that the government will increase the permanent immigration cap from 160,000 to 195,000 to begin tackling the skills  shortage. 

$36 million will also be made available to Home Affairs to fast-track the processing of an extraordinary figure of 900,000 outstanding visa applications. 

This comes at a time when temporary visas appear likely to rebound from extremely depressed levels, as discussed previously here.

Most new arrivals head to Sydney and Melbourne, and buyer's agent Cate Bakos notes how there has been a resurgence of the housing market in the inner city of Melbourne. 

Last year the big city CBDs were recording some extremely high vacancy rates, but that seems to have reversed now, and in fact overall Melbourne's rental market is tightening sharply. 

Source: SQM Research

The same dynamic applies for Sydney now too.

Source: SQM Research

It looks like total population growth could head to record highs of more than 450,000 per annum from here.

Yet many landlords are leaving the market following a string of tenancy and tax reforms, while the huge lending assessment buffer of 300 basis points is now stymying the supply of credit to new borrowers. 

For context, Australia has around 36,000 rental vacancies nationwide, so it's not at all clear where the new arrivals - overwhelmingly renters - are going to live. 

I mentioned this in passing on last drinks on the The Last Call last night, from around 31 minutes here (or click on the image below): 

Have a super weekend!

MOAR inflation cope

Payrolls increase

A solid payrolls report in the US, with nonfarm employment up 315,000 (versus 300,000) expected.

There were downward revisions of -107,000, so the 3-month average gain remained flat. 

Average hourly earnings were unchanged at 5.2 per cent year-on-year growth, slightly below market expectations.

The participation rate jumped from 62.1 per cent to 62.4 per cent, and the unemployment rate increased from 3.5 per cent to 3.7 per cent, which was the highest unemployment rate since February. 

Inflation peak

Probably the biggest story in global markets at the moment is whether or not inflation has peaked, and if so how quickly will it come back down.

Some surveys suggest that there could be another monthly report of zero inflation ahead, but we've heard a lot of reports about transitory inflation over the past year which, to be fair, haven't always worked out quite so well! 

Still, the ISM gauge suggests inflation will fall back from here, and perhaps quite quickly:

Freight delays - until recently a scourge - are a thing no longer. 

And, perhaps most importantly, 1-year ahead inflation expectations have fallen back to 2 per cent, which is the lowest level since all the way back in January 2021. 

Here's hoping!

Mortgage arrears are...still low

Mortgage arrears decline further

I haven't done of these posts for a few years, but got so tired of reading about record mortgage stress in the media every month I thought it may be time to update a few graphs of actual arrears rates.

In FY2022 Australia's Prime SPIN 30+ day mortgage arrears fell to just 0.77 per cent (down from 1.12 per cent a year earlier). 

The improvement was mainly driven by Western Australia, with most of the other states recording similarly low mortgage arrears rates. 

There are some low-doc arrears as ever, but overall non-conforming arrears are at all-time lows. 

And finally, investment loans continued to record materially lower arrears rates than homebuyer mortgages, as has generally been the case over the past dozen years. 

Overall, arrears have been exceptionally low - all of which makes sense when you think through what's been going on over the past year or two. 

Now the real test comes as the Reserve Bank is delivering the fastest pace of monetary tightening since 1994 - with more set to come - and a rush of fixed mortgage periods resetting over the 18 months ahead.

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Time for a pause?

Housing finance fell back -8.5 per cent last month (investment loans were down 11.2 per cent), and private new capex missed to the downside by delivering another negative quarterly result, although future investment plans remained solid.  

Over the past couple of weeks the retail figures were surprisingly strong (perhaps in part driven by overseas arrivals), but almost everything else has been softer (credit growth), weak or contracting (manufacturing gauge), outright poor (decline construction work done), or very poor (building approvals). 

Inflation is above target at the moment - and even though inflation expectations have been falling, interest rate hikes are the order of the day to increase unemployment and slow demand in the economy.

But given the inflation has been largely driven by global supply chain and energy factors, it's questionable how much additional benefit will be derived from further interest rate hikes beyond next month's expected hike. 

Property investors cooling their jets

Credit impulse dampened further

More evidence of housing market activity slowing as prospective buyers wait to see how far the rate hiking cycle will go. 

Housing credit growth has been down over the past few months, according to RBA figures. 

The housing credit impulse confirms that year-on-year prices across the capital cities will inevitably be negative in the second half of this year. 

Overall credit growth and broad money growth are rolling over, with a softer result in July.

The slowdown in the property market has mainly been driven by homebuyers, but investors are also becoming more cautious. 

CoreLogic released its monthly housing price index, which showed property prices as being down -3.4 per cent from their peak. 

The downturn has been largely driven by detached houses in Sydney which have recorded a decline of -6.7 per cent over the past quarter. 

Brisbane recorded a decline in house prices, but unit prices have been increasing (which we have seen first hand on the ground, driven by relative affordability). 

Rents continued to rise, up by another 0.8 per cent in August, which have helped gross rental yields across the capital cities to increase from record lows of 2.96 per cent to 3.29 per cent to date. 

Biggest homebuilding crunch since 2000

Construction stopped in its tracks

Work done on new houses plunged 14 per cent in Q2, which was by far the biggest quarterly contraction since the shock in Q2 2000. 

The figures only run from April to June, so activity will be much lower now in September. 

There was a particularly sharp drop in Victoria, mirroring several builder insolvencies last quarter.

By contracts, attached dwelling construction continued at a similar level (though unit approvals have now collapsed to decade lows). 

Supply continues to tighten, with a further rate hike expected on September 6. 

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AiG's Performance of Manufacturing Index also slumped into contraction territory in August. 

Porsche cruises towards IPO

Winning together: Porsche set to float

Apropos of nothing in particular, it seems that Porsche, one of the great brands, may be heading for a sooner-than-expected IPO in September:

Porsche Holding - which has zero debt and is all equity - holds more than a 50 per cent voting stake in perpetually hated and significantly undervalued Volkswagen (with a market cap of just EUR 86 billion), which itself has a tremendous brand portfolio, including 668,000 employees, revenues of a smidgen over EUR 250 billion...and indeed a 100 per cent ownership of the outstanding Porsche brand. 

One might expect any Porsche spin-off to realise a value far in excess of the EUR 12 billion at which Volkswagen has had it valued, while moreover the clamour for widespread media coverage appears likely draw attention to the true value of the group. 

Related article from Barrons here (or click on the image below), or Arab News here: 

Apartment approvals crash to decade lows

Approvals crash

Building approvals for attached dwellings crashed 44 per cent lower in July to just 3,349, which is the lowest level in a decade.

And this comes just as immigration starts to ramp up. 

Total attached dwelling approvals haven't been lower than this on a monthly basis since the global financial crisis in 2009. 

Of course, the monthly data for unit approvals is lumpy, and always will be.

Looking instead at a rolling 12 month graph shows that the decline has been driven by Greater Sydney, where there were only 863 units approved in July, down from 1,987 a year earlier (and a thumping 5,109 back in July 2016, just before the surcharges on foreign purchasers kicked in). 

House approvals were flat in July, to be 18 per cent lower year-on-year.

Approvals are trending lower across the board for detached homes. 

The value of non-residential building approved fell 23 per cent in July, though the annual figures remain solid, and there is still a high volume of work in the pipeline for the time being.

The approvals figures are becoming a little less indicative at the moment, with so many projects being scrapped and developers going bust. 

Rental shortage

SQM's weekly for rent listings have continued to decline to series lows, despite the population of Australia increasing by 4 million between the 2011 and 2021 Censuses. 

Source: SQM Research

Australia appears to be sleep-walking towards a rental crisis.

It was reported earlier this month that excessive taxation and regulation has led to there being only around 700 rental properties available across Ireland, with regular reports of long queues outside the few remaining properties being made available for rent. 

Australia isn't in this kind of crisis mode just yet, but things seem to be grinding inevitably in that direction, with more landlords looking to sell up. 

We already had the restrictions on depreciation benefits deductibility post May-2017, and now the Queensland government is planning changes to land tax levies...even for properties located outside the state. 

And with major reforms to no-eviction laws and minimum property standards (including, for example, the sustainability of appliance energy use in Canberra), many landlords will choose to sell their rentals to move into asset classes where the goalposts aren't continually shifting from beneath their feet.

With foreign investors also effectively taxed out of the market by stamp duty surcharges, the new unit supply is drying up just as immigration resumes into the busy summer months, while the Airbnb phenomenon may have also had a role to play in the rentals shortage.

There's also the small matter of the enormous 300 basis points lending assessment buffer put in place by regulators, while a rapid series of interest rate increases also tends to shift the buy versus rent equation towards the renting side of the ledger.

There’s no easy fix here, but a useful start would be bringing the serviceability buffer back down from 300 basis points in September.  

After the next interest rate hike the lending assessment buffer in place will be effectively stress testing for a scenario which financial markets see as remote.