Pete Wargent blogspot

PERSONAL/BUSINESS COACH | PROPERTY BUYER | ANALYST

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Monday, 5 December 2022

What’s happening in Australian property

Get Invested

I joined Bushy Martin on the Get Invested podcast here (or click on the image below):

Sunday, 4 December 2022

Inflation forecasts tumbling

Inflation is easing

The used car price bubble is bursting in the US, with prices down 13 per cent from the highs.

Lumber prices have plunged 64 per cent so far this year, and are back to pre-COVID levels.

Meanwhile shipping container costs are down around 80 per cent and also back to pre-pandemic levels. 

Chris Weston of Pepperstone shows how markets are now expected inflation to return to 3 per cent quite fast from here. 

Source: Chris Weston, Pepperstone

In just three weeks US 30-year mortgage rates have eased from 7.1 per cent to around 6.5 per cent as markets price in the rapidly changing environment. 

Concerns in the US are likely to shift now from inflation to a lack of growth. 

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Alex Joiner of IFM Investors shows how Australia's labour force supply is lifting fast with the borders open and migrants arriving.

Saturday, 3 December 2022

Realty Talk: the Federal Budget and housing supply

Realty Talk

Some great guests on Realty Talk with Bushy Martin this week. 

I was talking Federal Budget and the housing supply challenges ahead. 

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

Tech layoffs turn parabolic

Payrolls still holding up

US nonfarm payrolls came in better than expected at +263,000 versus market expectations of +200,000.

Revisions trimmed back -23,000 from previous months, but it was a positive headline result. 


Hiring momentum has clearly lost pace since 2021, but the labo(u)r supply hasn't come back online in full.

The participation rate ticked down again to 62.1 per cent in November, to remain well below pre-pandemic levels.


The US unemployment rate appears to have bottomed for the cycle at 3.5 per cent in July, but held steady at 3.7 per cent in November. 


Looking forward, the indicators are considerably weaker, with tech layoffs beginning to gather a serious head of steam. 


The number of long-term unemployed persons is also now increasing. 

Perhaps most importantly, however, average hourly earnings increased by 0.5 per cent, to be 5.1 per cent higher over the year, well ahead of market expectations year-on-year. 

Thus while the Federal Reserve might look to slow the pace of interest rate increases, there is still too much upwards pressure on employee earnings, and the Funds rate is still likely to head towards 5 per cent.

There was some questioning of survey response rates - and the wide discrepancy between surveys - and there's very little doubt that the economy and hiring is going to soften significantly over the year ahead. 

But overall, nothing much to support a pivot here. 

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Australia faces some similar challenges, but the participation rate Down Under has actually been grinding higher - recently to all-time highs - driven by record levels of female participation in the labour force.


Source: ABS

Australia has also seen the immigration tap turned back on at a very brisk pace, which should work to keep downwards pressure on wage price growth.

Indeed at the last count, the wage price index was only a notch above 3 per cent over the year to September. 

Almost all of the forward-looking indicators in Australia are easing or falling fast, negating the need for much further monetary tightening.

Friday, 2 December 2022

Stop hiking rates! (HIA)

New home sales crash

The HIA has warned on multiple occasions that Australia is heading for a catastrophic housing shortage.

New home sales have been obliterated over recent months to sit at levels even lower than the worst of the pandemic lows.

Today's lending indicators data from the ABS added to the growing sense of alarm.

Chief Economist Tim Reardon warned today that lending for new housing has dropped to multi-year lows, just as immigration begins to ramp up: 


Source: HIA

Most economists still believe that the Reserve Bank will hike in December anyway, although Gareth Aird of CBA believes that will be the final hike of the cycle.

Aird argues that the Reserve Bank is "flying blind" because the last few rate hikes haven't yet begun to hit home given the lag between rate hikes and increases in schedule mortgage payments. 

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Bond yields are moving in that direction.

Australia's 3-year bond yield dropped to under 3 per cent today, having been at 3.8 per cent in September. 

Thursday, 1 December 2022

Commodities begin to unwind

Commodity crash begins

Commodities are beginning their great unwind, declining another -5 per cent, after a revised drop of -6.8 per cent in November. 


In Aussie dollar terms the monthly drop was -6.8 per cent.

Big headwinds for growth next year, pulling down national income and nominal GDP.

Australia already flirting with recession

CapEx also falling

Oh dear.

The manufacturing index slumping to a deeply contractionary reading of 44.7 was immediately followed by a negative result for CapEx.

Private new capital expenditure slumped by -0.6 per cent in Q3, well behind market expectations.

Notably equipment spend, which was expected to rebound handsomely, fell by -1.9 per cent.

This has implications for real GDP, which seems increasingly likely be poor as consumption volumes shrink.

The underlying details of the report were weak, according to the great analyst James Foster, who noted that the only supporting factor for investment was non-mining construction. 

While private new capital expenditure was up by 9 per cent over the year in New South Wales, Western Australia saw investment shrink by -5 per cent.


At the sector level. retail investment was weak as the consumption outlook sours. 

Investment plans for 2022/3 were broadly as expected at around $155 billion, but overall this was another a string of weaker than expected reports on the state of the economy.

It's worth noting that these figures relate to the period before the interest rate hikes in October and November, so the outlook is only likely to soften from here.  

High commodity prices

With inflation already having peaked according to the monthly inflation figures, there's little need for monetary policy to be tightened further.

Australia is likely to face headwinds enough as the commodity price index mean reverts from all-time high reading towards the long-run average.


Sky-high commodity prices possibly in part account for why Australia's stock market index isn't too far below its recent highs. 

Commonwealth Bank's Gareth Aird sees one more interest rate hike to a terminal cash rate target of 3.10 per cent, but some other analysts are calling for several more hikes. 

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Back to the city

Louis Christopher of SQM Research and Catherine Cashmore of Cashmore & Co. property discussed on a recent podcast the demographics of the return to the city, and the rising risks for illiquid housing markets.



Source: SQM Research

Dwelling prices -7pc below their peak

Housing prices down

Dwelling prices declined a further -1 per cent in November to be -7 per cent below their peak, according to CoreLogic:


Source: CoreLogic

Some other indices are recording flat prices (or are even rising, in the case of asking prices), but CoreLogic continues to record declines, albeit at a somewhat slower pace since September.


Total listings are now well below their 5-year average, as fewer vendors look to list into the soft selling environment. 


Source: CoreLogic

We're also heading for a chronic shortage of housing in Australia, accounting for why the downturn has been orderly - in most cases - rather than messy. 

Rental markets remain "extremely tight" according to CoreLogic, with shrinking rental supply now met by a strong rebound in immigration, leading to a rapid rise in rents around the country.


Source: CoreLogic

I discussed in The New Daily here how the biggest price declines have often been seen in the areas which had the biggest pandemic booms. 

Bad news is good news

The Aussie dollar romped back up to 68 US cents overnight, as the US Federal Reserve hinted at a slower pace of tightening ahead.

Australia's manufacturing PMI gauge slumped another -4.9 points to a reading of 44.7, which is significantly contractionary territory. 

It doesn't feel like the Aussie economy needs more hikes, given how much the real time and forward-looking indicators are slowing already, though we'll probably get them anyway. 

Australia's 3-year bond yield continued to plunge overnight, down to a fresh low of 3.08 per cent. 

Greg Jericho explores whether inflation has peaked and the related implications in today's Guardian here

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In the US, futures markets are pricing for the Fed to keep hiking until February, before pausing, with rate cuts now priced in for late 2023 and through 2024.

Equities markets are enjoying this potential reprieve, and the S&P 500 recorded an increase of more than 5 per cent for the month of November (5.4 per cent), while the NASDAQ climbed 4.4 per cent overnight, have suffered some pounding losses through 2022.