Supply side responds (rates to fall again, again...)

Capacity increases

A quick look at the regional labour force figures, often overlooked by the commentariat, although to be fair Commsec always provides a very neat summary report. 

Across the May quarter there was yet further strong jobs growth (+133,400), driven by a bounce-back in the atrophying manufacturing sector (+43,000), taking total employment up a record high of 12.7 million. 

Even now some 1.18 million Aussies remain directly employed in construction, though this pales compared to healthcare and social assistance at 1.68 million or 13 per cent of total employment.

Employment in Greater Sydney has increased by a thunderous +111,000 over the past year to a record high of 2.84 million.

And yet the annual average unemployment rate in Sydney is no longer falling, now stubbornly sitting at 4.2 per cent, having even lifted a little. 

In Melbourne the annual average unemployment rate has continued to decline, now down to 4.8 per cent (much improved from 5.8 per cent a year earlier). 

Elsewhere, though, there remains oodles of slack.

What gives?

When I last did the Business Insider Devils & Details podcast (sadly now departed!) in the first half of 2018, I riffed my belief that we were "a long, long way from full employment, and, in my opinion, policy has been too tight".

If you listen back to the podcast I explained my rationale (and personal bias, hailing from a resources region crippled by unemployment), but noted that I get paid for what I think will happen, not what I think should happen.

My observation at the time was that there wasn't much appetite for interest rates falling any lower than they already were, so the base case was rates on hold as far as the eye could see. 

Flexible labour force

So, what changed?

One of the surprises, well explained by RBA Governor Lowe yesterday, has been that the supply of labour has increased considerably in response to the stronger demand for workers.

Employment has increased by a massive +360,000 or +2.9 per cent over the year to May 2019, as I explored here. 

But although there's been steady progress in reducing the number of unemployed persons over recent years, for a range of reasons the capacity of the labour market has increased, and even now full employment or NAIRU appears to be as far away as ever. 

This is reflected in a record high participation rate of 66 per cent, and perhaps in a structural shift towards more part-time or contract employment. 

With inflation still far below target and sinking, the implications of this for policy could be profound. 

Financial markets certainly think so. 

Lowe noted that annual private sector wages growth has at least increased from a ghastly +1.9 per cent to +2.4 per cent. 

But depending on where NAIRU proves to be, there could be tens or even hundreds of thousands of Aussies needlessly unemployed, with the economy trundling along at stall speed. 

For this reason markets are pricing for another interest rate cut in July, with more to follow before the year is out, while bonds have rocketed.

You can make your own assessment, but to me July sounds like a lock - why wait? - with further easing quite likely to follow:

Source: RBA

Finally for today, the median duration of job search in May was 17 weeks, unchanged from the prior year, though there's been some modest improvement in the trend over time.

The mildly positive trend has mainly been due to Melbourne, and a bit of an improvement in Brisbane. 

Interest-only potential for growth

IO loans to rebound

The stock of interest-only loans fell to just 23 per cent of residential term loans by value in the March 2019 quarter.

That's the lowest since forever, and miles lower than the 39 per cent seen only two years earlier.

The figure will soon be approaching just 20 per cent. 

The quarterly flow of new IO loans by value was also under 15 per cent, with Q1 being the midst of the banking Royal Commission.

This was also the lowest in forever, and from a much lower total volume of loans too.

So it's by a huge margin the lowest volume of IO loans we've seen. 

Overall, the moves to clamp down on IO lending have been lethally effective - arguably even too effective - to the extent that with the regulatory caps now removed there is finally some upside potential for new interest-only lending to investors. 

IO loans with a mortgage offset facility make perfect sense for investor buyers from a taxation and cashflow management perspective. 

And with total household debt to income caps effectively now in place there's no logical reason why banks shouldn't return to writing more IO loans going forward. 

Population growth accelerated in 2018

Demographic boom

Net overseas migration into Australia picked up right across the board in 2018, but especially into Queensland and New South Wales.

This was driven by fewer overseas departures rather than more arrivals. 

Annual overseas migration has temporarily been higher than this before, in 2008-9, but nevertheless it was a thumping rate of growth for calendar year 2018 at +248,400.  

Queensland continued to pick up interstate migrants last year too (+24,000), although the exodus from New South Wales might have moved beyond its cyclical peak. 

Western Australia and South Australia continue to lose headcount to Victoria and elsewhere, but this trend is also slowing.  

There was a bit of a kink in the figures for natural population increase (births minus deaths), but overall it picked up to +156,300 last year, while net overseas migration accelerated to +248,400, taking total population growth back up to a pumping +404,800 or 1.6 per cent. 

Victoria continues to experience rampant population growth (+139,400 or +2.2 per cent), while there was a fresh pick-up in New South Wales (+123,800), and Queensland (+89,900).

Queensland's population growth is now running at the fastest level since the mining boom days of 2012 at +1.8 per cent. 

Population growth is also now rising off the mat in Western Australia and South Australia, while Tasmania's population growth rate of 1.2 per cent was the highest in nearly three decades, although it's low in absolute terms. 

The wrap

Australia needs to build about 200,000 new homes per year over the next decade, which we were managing for some time thanks to Chinese investment in new apartments, but this is now falling away fast (all the more so now that some states are loading in higher surcharges for non-residents). 

A rental shortage will thus again become an issue in time, once the off-the-plan glut washes through, probably with Melbourne first off the rank.

But with population growth so heavily focused on three areas the bigger immediate issue facing housing markets is congestion, which is gradually but surely redistributing demand for housing into suburbs within a 10-15 minute commute from the heart of employment, and especially into areas with direct train links. 

Queensland Gov picks its winners

Brisbane City CapEx

More of the always-excellent analysis from Gene Tunny at Queensland Economy Watch shows the disproportionate benefits from the Queensland Budget heading for Brisbane's inner city. 

See here for more:

Source: Queensland Economy Watch

Also see my related post here: why you won't recognise Brisbane 5 years from now.

The Cross River Rail, Gabba Precinct, and Queen's Wharf will all be welcome inner-Brisbane additions to the Howard Smith Wharves development.

I was interested to note the scope of works already underway at Brisbane Airport this week, with a new runway under construction. 

No reason for the RBA to wait

Glynn's take

I've very much enjoyed reading James Glynn in my Wall Street Journal app this year, as one of the most informed commentators on Aussie monetary policy.

Always straight to the point and almost unerringly accurate. 

Yesterday in Glynn's take he argued that there's no point in the Reserve Bank delaying action, calling for another rate cut in July to an official cash rate of 1 per cent, followed by a possible further salvo of cuts towards the end of the year. 

Today's skilled job advertisements figures did little to dispel the notion, with another decline in May taking the trend year-on-year decline out to 6 per cent. 

There were year-on-year declines across each of the three main states, and in 7 of the 8 major occupational groups. 

There's been some growth in white collar and professionals vacancies, but tellingly the construction and trades ads have dropped away sharply. 

Thus the strong jobs recovery rather looks set to die on its, erm, feet.

---

As the Aussie dollar scrabbles around at decade lows, benchmark iron ore spot prices have ballooned to multi-year highs across all the major grades.

I wanna see the receipts!

$FMG $RIO $BHP $GRR

ASX close to 12-year highs

Aussie stocks rally hard

Aussie stocks have continued a strong of late on all the talk of lower interest rates, taking the ASX 200 close to 12-year highs. 

The bank rally was a natural precursor to the housing market recovery, and perhaps the clearest signal came a few months ago with a broad-based rally in consumer discretionary stocks. 

Handy returns indeed for existing Aussie stock market investors and super fund balances.

To get better than average returns going forward it's likely that investors will need to go international to find more attractive valuations.

Stay tuned for an extended interview on this subject: I'll put it live in the next couple of weeks or so.  

Fewest new listings in years

Stock shortage

New listings in Sydney are tracking at the lowest level in years by far, according to CoreLogic's latest figures.

It's something that anyone searching right now would know from first-hand experience. 

Buyer enquiries have lifted sharply since the election too. 

The RBA noted today that uncertainty surrounding Labor's proposed taxation levies had impacted the housing market before the election, but those uncertainties have now been lifted.  

Mortgage arrears creep higher

Arrears rising

30 plus day mortgage arrears increased moderately to 1.53 per cent in April 2019, up 17 basis points from a year earlier, according to S&P Global. 

90 plus day arrears were 0.8 per cent, up from 0.7 per cent a year earlier, with only the ACT bucking the trend towards longer and more troubling 90 plus day delinquencies. 

Around the traps, 30 plus day arrears were low in Victoria (1.43 per cent), and very low in New South Wales (1.28 per cent), Tasmania (1.15 per cent), and the ACT (1.06 per cent). 

Job vacancy rates are tracking at record highs according to the NSW Budget, so there's comparatively little risk of a serious deterioration in Sydney. 

On the other hand, mortgage arrears climbed to 3.10 per cent in Western Australia and 3.33 per cent in the Northern Territory. 

Although investor arrears (1.52 per cent) were lower than owner-occupier arrears (1.76 per cent) there is some evidence to suggest that a fair chunk of the recent stress relates to investor loans being reset from interest-only mortgages. 

The Reserve Bank's head of financial stability spoke at length on mortgage arrears today, and unsurprisingly sees no risks posed to FS at these levels. 

However, the RBA can do something for household cashflows and flagged further rate cuts this year in its Minutes, in turn taking in the Aussie dollar down to decade lows.