Sydney rental market: binfire

Rents burning up

Unit asking rents in Sydney rose another +7.5 per cent in March, to be +37.6 per cent higher over the year:

Source: My Housing Market

There's more pain to come here for renters as migration back to the capital cities intensifies. 

Has Australian property bottomed?

Australian Property Podcast

This week on the Australian Property Podcast, Chris Bates and I discuss whether the market has bottomed.

Tune in here (or click on the image below):

You can tune in at Apple podcasts, Spotify, and elsewhere as usual. 

There's also a video version on Youtube here:

Global food prices falling

Food prices decline globally

The Spectator reported that world food prices declining for a 12th consecutive month in March. 

The index fell -2.1 per cent in March - to be down by -20.5 per cent from a year earlier - driven by declines in cereal, sugar, dairy, and vegetable oil prices. 

Source: FAO

Like many commodities and goods, world food prices spiked alarmingly after global shipping routes and supply chains were disrupted.

But now things are starting to normalise. 

With oil prices well down from their highs, and shipping container costs falling -87 per cent from their peak, there's growing real-time evidence that global inflation has been replaced by disinflation. 

Wen deflation?

The natural response to The Spectator's Tweet is to note that we haven't seen food prices fall at Woolies in Australia. 

As far as I can tell, food prices in Australia have remained high, although at least they aren't rising any more.

At least part of this would be due to a lag, with Australia keeping on and on and on with international border restrictions, long after the rest of the world had abandoned such restrictions and moved on.

Base effects

As Governor Lowe has previously pointed out, when prices stop rising then eventually inflation falls back to zero on a year-on-year basis. 

By way of an example, this week I paid 173.9 cents for a litre of Unleaded fuel on the Sunshine Coast.

Some are still paying nearer to $2 in the capital cities, and we're still higher than the pre-pandemic level of closer to $1.50/litre, but on recent evidence it won't be too long before the year-on-year price change drops back to nil. 

Housing construction costs experienced double-digit growth in Australia last year, but sky-high trades and materials prices will begin to decline here as activity fades and the supply of materials increases, while the retail sector is now arguably in a recession too. 

Looking further ahead, some of these tailwinds for inflation will start to become headwinds, and it won't be too far down the road that interest rate cuts are back on the table to stimulate slowing economies. 

More of the same for rentals

Domain Rent Report

Domain released its rental market report for the March 2023 quarter.

Rents continued to accelerate, led by Sydney units, where rental prices rose +6.9 per cent over the quarter, and +24 per cent over the year:

Source: Domain

This trend is likely to continue in 2023 with migrants, international students, and tourists all heading to Sydney, and some interstate movers now being called back into the offices in the capital cities. 

One interesting snippet was that although vacancy rates remain extraordinarily tight at just 0.8 per cent in the capital cities, the vacancy rate in regional Australia increased by just a notch to 0.9 per cent, which was the highest since December 2020. 

The full rental report can be found here. 

---

Global freight costs are now down -87 per cent from their highs, and lower than they were in early 2020:

Good news, which suggests that lower inflation surely lies ahead. 

What does "investment grade" property actually mean?

Australian Property Podcast

People often discuss the concept of a quality asset, or an investment grade property.

But what does that actually mean?

We discussed it here on the Australian Property Podcast (or click on the image below):

You can also tune in at Apple Podcasts, Spotify, and elsewhere.

And, of course, you can watch the video at Youtube here:

Consumption goods imports crashing?

Consumption slows

Consumption goods imports suddenly nosedived -20 per cent in February, according to the Australian Bureau of Statistics. 

Zooming out a bit, this was the lowest level since January 2022, and a major 'driver' of the decline was quite likely bottlenecks in new vehicle sales.

Overall, imports were pretty weak though, in total down -9 per cent for the month for the biggest monthly drop since 1984. 

Commodity prices have been very strong for Australia, but export values are now rolling over for coal, natural gas, and iron ore. 

Looking ahead a bright spot for our economy will be tourism, which is exploding back to life (and international students too).  

February was the strongest month for Australian tourism services since January 2020, and I'd say we'll be back at record highs later this year as visitors stream back into the country. 

Overall, the imports figures weren't quite as bad as they looked in February, but clearly the overall trend is for spending slowing and the stalling of domestic demand (which actually happened from Q4 last year). 

James Foster analysed the figures in more detail here, showing that lower input prices should now help to see lower prices of goods...which will be a welcome relief. 

Are rate hikes done?

US activity slows

In the US, interest rate hikes have pretty much frozen up activity in the housing market, but have been less effective at cooling the economy overall...at least so far.

This week it was reported that the keenly-watched ISM gauge fell from a reading of 55.1 to just 51.2 in March (which was far worse that the market median expected figure of 54.4).

Ex-pandemic, this is getting close to the lowest reading we have seen since the global financial crisis. 

Notably the services price index component fell to the lowest level since June 2020, the business activity gauge slowed, and inventories rose to a 2-year high.

In summary, much weaker that expected, with softness apparent across the board.

Employment figures have remained resolutely strong to date in the US, but markets increasingly seem to be of the view that with inflation have peaked way back in June 2022, the interest rate hikes are almost done.

2-year Treasury yields are trading at around 3.8 per cent, so lower interest rates ahead may well soon be order of the day.

Down Under

What about in Australia?

RBA Governor Lowe this week explained why the interest rate hikes here have been more effective and with greater speed (largely due to us having mostly variable rate mortgages, and, furthermore, we don't have a high level of wages growth to contend with either).

This week new orders nosedived by 28.1 points to -19.8 on AIG's Australian industry index (see my Twitter feed for details), an alarming drop which likely mirrors the sharp drop in spending which is anticipated for March. 

If you were to interrogate financial markets, they'd say that interest rate hikes here in Australia are basically over and done with for this cycle:

Sydney homebuyers have apparently decided it is so, pushing housing prices back up over the past quarter - although it's not necessarily been the same property types which fared well through the pandemic restrictions.

This rebound for Sydney housing reflects extremely tight rental markets, low stock levels, and rapidly increased immigration.

Looking ahead

Next week we'll get employment figures for March, with markets expecting only a modest uptick in the unemployment rate at this stage to 3.6 per cent, although immigration is gathering a real head of steam now.

The deciding figures will be the inflation data for the first quarter of 2023, which are due to be released on 26 April.

If they're still running hot then it's possible that we do still see another 'virtue signaling' interest rate hike to a cash rate target of 3.85 per cent, but you only have to look at the leading indicators such as new home sales or the activity gauges to know that we're more or less done with the hiking cycle now.

 

Although we got our fair share of the global spike in inflation over the past year - mainly caused by lockdowns and border closures - we are likely in time to see travel, airfare, and tourism prices falling, lower prices for building materials and housing construction costs, and then cheaper, food, fuel prices, and energy costs. 

Certainly markets have just about seen enough to conclude as such, with construction insolvencies now rising to the highest level in a decade. 

---

Australia's 3-year bond yield closed out the week at 2.79 per cent, so we'll see plenty of lenders continuing to cut their fixed rate mortgage offerings at the present time.

---

Have a super Easter weekend...especially if you're up in Noosa, as most of the east coast of Australia seems to be! 

RBA explains rates peak

Lowe speaks on interest rates

The RBA Governor unveiled tidy speech in Sydney today, explaining why interest rates are on pause (and why rates will likely peak at a lower level in Australia than in some other countries).

Domestic demand has already been hammered by the rate hikes delivered to date.

Meanwhile good prices are set to fall in Australia as shipping rates revert lower. 

Governor Lowe pointed out that wages growth is not 5-6 per cent in Australia as in some other countries, it's only a meagre 3½ per cent.

And, importantly, because most mortgages are on variable rates (or short-term fixed rates) the reaction function is totally different.

Mortgage rates for households have lifted more quickly, and consumer sentiment has been absolutely battered already. 

The proliferation of variable rate debt is actually a very useful feature of Australia's economy, allowing policy to be adjusted more effectively. 

As such, markets are pricing no further interest rate hikes (and indeed steady declines over the next few years).

The one area which is expected to see ongoing inflation is in rents, due to a massive housing shortage in the large capital cities. 

However, interest rate hikes would not help here - actually the opposite - and household sizes may well increase again over time. 

Very few people wanted to utilize share housing during the lockdowns, but this trend may now have passed.