Sydney unit prices & rents accelerate

Rents & prices rise

Sydney's median house price rose by +1.6 per cent to a record high of $1,178,417 in the June 2017 quarter, according to Domain Group's latest release.

Apartment prices rose much faster, up by a ripping +3.2 per cent to a fresh record high of $757,991, as affordability bites on the detached housing market.

The median apartment price has increased from $359,853 in March 2007. 

Unit rents also jumped from $530/week to $550/week, to now match the median rental for a house in the harbour city.

Over the same period house rents have only increased by +10 per cent to $550/week.

Although this may seem illogical, generally speaking more units are located close to the city than houses. 

Sydney's apartment rents have surged +22 per cent higher from $450/week in March 2012. 

There's a rather different dynamic underway in Brisbane's new apartment market, as I discussed with Domain here (or click image below). 

Full-time employment growth returns

Employment growth picks up

Seasonally adjusted employment increased by +14,000 in June according to the ABS, with full-time employment soaring by an outlandish +62,000. 

Rather noisy monthly figures, of course, but full-time employment has now increased by +187,000 since September 2016, which represents a marked improvement.

Total employment now sits at its highest ever level at 12,166,900. 

Annually total employment was up by +240,200 or +2.0 per cent, which is quite a way ahead of the rate required to absorb population growth. 

The unemployment rate was 5.6 per cent, with the number of unemployed persons up a notch to 728,100.  

Perhaps the most sanguine measure of how the labour force is travelling is to look at the annual change in the number of hours worked, which has increased by 3+.3 per cent over the past year, or +2.4 per cent on the smoother trend series. 

In short, there has been a steady improvement since November 2016, following a period of apparent stagnation. 

NSW approaches full employment

At the state level Victoria continues to add the most jobs on an annualised basis at +97,800 - as it needs to, given record population growth - with Queensland next up, adding +44,600.

Western Australia saw a net increase in employment of +29,500, which should in turn see the unemployment rate falling as net interstate migration has seen thousands returning to the eastern states. 

After hitting an apparent plateau, employment in New South Wales is off and running again with total employment rising by +42,800 over the past quarter sending the trend unemployment rate to its lowest level since 2008 at just 4.75 per cent. 

Small wonder that mortgage arrears are so low and still declining in Sydney.

At the other end of the spectrum, employment has now been trending down in the Northern Territory for four months, and the resident population may also be following this trend into decline.

South Australia has the highest trend unemployment rate at 7 per cent.

The wrap

Overall, and looking through the monthly noise, it was a pretty good result, consistent with gradually improving conditions. 

ABC Lateline: Modelling the downturn

Modelling downturns

Housing market modelling shows that a more responsive supply of property to rising prices tends to generate dynamics that can ultimately lead to financial distress.

In Sydney's now-record construction boom this is most likely to mean markets on the city fringe where land is abundant, and the high-rise apartment sector of the market where the sky is almost literally the limit to the response in supply.

The overhang

Why is this so?

The short explanation is that in supply responsive markets large volumes of property are built during the boom period, thus creating a larger overhang of excess dwellings when the market turns down.

This alone can amplify the downturn in prices.

And since by definition more people will have bought near the peak of the market cycle, then more of the loan book is accounted for by borrowers that are liable to experience negative equity, magnifying market risks. 

Time-to-build lags add to risks

Where time-to-build lags are longer in highly responsive markets the impact on loan performance can be exacerbated.

That is, where supply is highly responsive to rising prices but production delivers new housing supply over a longer period. 

This implies that some of the greatest risks are likely to be in the new apartment market, particularly in inner city Brisbane.

Characteristics of loan contracts

In Sydney's case, there is a further concern that if homebuyers are borrowing up to $1 million to buy new homes on the city fringe, then rising interest rates could eventually cause financial distress.

Housing market models unanimously show that the trajectory of interest rates during the downturn is likely to be pivotal in determining the extent of negative equity. 

Note that in Australia many investors have used interest only loans to fund purchases, which due to APRA's new regulatory measures may now be flipped into principal and interest loans at the end of the initial interest only period. 

I discussed this in a summarised fashion on ABC Lateline last night (click image to view video). 

Obviously this is a short excerpt from a considerably longer interview.

The statistical analysis sitting behind our views of the risks broken down to the LGA level can be found in our market reports. 

Bankruptices fall; personal insolvencies also fall

Easing conditions

The annual number of bankruptices fell in the June 2017 quarter to the lowest level since the quarterly data series began according to ASFA's latest figures. 

There were annual declines across every state and territory except for one (the Northern Territory, which recorded a miniscule increase comprising half a dozen bankruptices in the June quarter). 

Total personal insolvencies also declined from 7,900 to 7,616 over the three months to June 2017.

This improved result was also 3.5 per cent lower than the 7,893 insolvencies recorded in the June 2016 quarter. 

There has been a bit of an increase in insolvencies since the lows of 2015 - pretty much what you'd expect through a soft patch for the economy, particularly across resources regions - but the trend is now softening again with the unemployment rate generally trending down across the past 31 months. 

The declines continue to be led by New South Wales and Victoria, but with Western Australia now tracking at a higher level than through the resources boom.

S&P reported that home loan arrears were stable in May at 1.21 per cent, below the decade average of 1.30 per cent. 

There were increases in Western Australia to 2.37 per cent, and in the Northern Territory where arrears were up from 1.70 per cent to 1.91 per cent.

These were offset by declines in New South Wales and Victoria. 

England house prices rise 5pc

Price growth continues

The average UK house price increased by £1,000 in May 2017, to be $10,000 or +4.7 per cent higher than a year ago at £221,000. 

The gains were driven by housing in England, where the average price rose by 5 per cent over the year to £238,000. 

London continues to be the most expensive market, with an average price of $481,000, while the cheapest housing is to be found in North East at an average price of £127,000. 

The East of England has recorded the strongest price growth at 7.5 per cent.

Price growth in London slowed to 3 per cent on an annual basis, with the gains largely driven by the lowest deciles of the market. 

Total recall

Total return

A neat post from Scott Phillips of the Motley Fool.

When people say that Aussie stocks haven't gone anywhere for a decade, they are only presenting half a story (almost literally since 2012). 

Include the dividends and the total returns over the past five years have been strong at a shade under 75 per cent. 

Source: Scott Phillips, Motley Fool

Dividend yields on the ASX 200 have been broadly tracking in a range of 4 to 5 per cent over the past half decade, which is considerably higher than the MSCI World index excluding Australia.  

Since Australia has compulsory superannuation, the studious recovery in Aussie stocks has been a strong driver of record household net worth, particularly since 2012. 

Recent returns have been bolstered by a bounce in the resources index. 

Perth & Darwin rents still falling

Mining malaise

My housing supply dashboard showed how dwelling completions have been tracking well ahead of population growth in Western Australia. 

And now SQM Research has reported that vacancy rates in Perth rose again to 5 per cent in June, in turn suggesting that Perth's property downturn still has a way to run.

Indeed, vacancy rates edged higher in most cities in June, Adelaide and Darwin excepted.

The below chart smooths vacancy rates on a 6mMA basis. 

While not a true reflection of 'trend', since it doesn't account for the higher vacancy rates typically experienced over the Christmas period, it does show that Perth and Darwin have experienced consistently elevated vacancies since the peak of the resources construction boom. 

Asking rents for houses in Perth have declined by 6 per cent over the past year, while in Darwin the equivalent figure is as high as 11 per cent. 

Record apartment completions have taken some heat out of asking rents in Sydney and Melbourne -with Melbourne vacancy rates bouncing off 7-year lows - though apartment rents remain higher year-on-year in both of the most populous capital cities by 3 per cent and 6 per cent respectively.

The average asking rent for a 3-bedroom house in Sydney is now $725/week, and for units the figure is $522/week.

Vacancy rates remain tight in Canberra at 1.2 per cent, and extremely tight in Hobart at 0.7 per cent, leading to soaring rents for houses in the Tasmanian capital.

New car sales break records

Two-speed

Moody's reported that mortgage arrears fell in the eastern states, but increased further in Western Australia.

And we're seeing similarly divergent trends in most data right now, with the national economy generally improving, driven forward by Sydney and Melbourne. 

New motor vehicle sales blazed to their highest ever level in June, with a seasonally adjusted 102,275 units shifted. 

An enormous result! 

The result was driven by yet another surge in Sports Utility sales, with a record 40,395 sales recorded in the month of June. 

At the state level the boom was initially driven by a combination of tax breaks on asset purchases and a thriving Sydney economy, with annual sales in New South Wales surging. 

Lately, the boom has been driven by Victoria, following an explosion in population growth. 

On the flip side, production volumes continue to drop, with annual production down by 39 per cent over the past five years as the assembly industry wastes away. 

The wrap

Overall, this was a colossal month for new motor vehicle sales, suggesting that talk of widespread household financial stress is wide of the mark. 

The Reserve Bank's Minutes released today talked of a broad based improvement in the economy, and a new "neutral" cash rate setting being 3.5 per cent.

Aussie dollar to the moon!