Pete Wargent blogspot


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Tuesday, 19 February 2019

Record arrivals in 2018

Rush of new arrivals

It's only a matter of time now before the stories begin emerging about a lack of suitable rentals around the country, with investor credit never having been more difficult to obtain.

It's already happening for houses in parts of Melbourne, Canberra, and Hobart, but I expect this will become a more widespread issue in 2019. 

In 2018 permanent and long-term arrivals ripped to 832,560, just as the supply pipeline is shrinking.

That's an increase of 17 per cent from three years earlier. 

Investors in established housing have also dried up significantly on tighter mortgage regulation. 

There was also a comfortable record high for short term arrivals in 2018, at 9¼ million, despite a bit of a slowdown in the pace of growth.

Visitors are becoming less keen on identifying themselves as tourists, and more keen on advising that they're 'visiting friends or relatives'. 

One big happy Aussie family!


All-important wages figures are due out tomorrow morning. 

Analysis to follow then. 

Chinese investment crippled

Foreign investor collapse

Can we summarise the FIRB Annual Report in 60 seconds? Sure, why not?

The number of residential approvals to foreign buyers has been crippled over the past two years, from about 40,000 to 10,000. 

Now, there has been a methodology change for the approvals process for the purchase of new properties, and the prior year figure was revised so significantly as to make the current year figures somewhat questionable.

But, anyway, the reported value of proposed residential housing investment is off by well over 80 per cent in two years, as Chinese investors are discouraged by punitive surcharges and taxes, as well as considerably tighter Chinese capital controls. 

New dwelling exemptions were revised up significantly for FY2017, and there could therefore a revision could follow in FY2018.

But anyway you look at it foreign investors in new property in Australia have by and large gone away, and this was one of the factors which helped to fuel the resi construction cycle. 

At the state level New South Wales (35 per cent), Victoria (41 per cent) and Queensland (10 per cent) continued to account for the bulk of residential approvals by value. 

For all real estate, including commercial, there remains a fair level of interest from China, the US, and Singapore.

The wrap

The collateral damage from turning away Chinese investors through punitive taxes in new residential housing has already been notable, with the construction cycle set to shrivel. 

The FIRB underscored the point that most foreign investment has been in new dwellings, thereby materially adding to the supply of dwellings.

A handful of breaches were identified by community grassing, but more were picked up through data matching and self-identification, and a small number of infringement notices were served. A very small number of fines and enforced sales ensued. 

As well as the drop in real estate there's also been a marked fall in Chinese investment in manufacturing, services, mineral exploration and development, and electricity and gas, but there's been a different driver for this, being tightened Chinese capital controls. 

Overall, expect new residential construction to slow to a crawl over the next few years. 

Monday, 18 February 2019

Commodities come the tax cuts

Shock and ore

A few choppy trades for iron ore after Lunar New Year, but what a bonus for company profits, tax receipts, and the Federal Budget!

This gives a marginally resurgent Coalition ample headroom for income tax cuts to be announced ahead of the looming Federal election (which will largely boil down to tax policies and the ubiquitous 'boats' question) when the Budget is handed down six weeks from now. 

The RBA's index of commodity prices is up by a thumping 16 per cent in Aussie dollar terms over the past year, and it's not all been driven by iron ore.

In fact in SDR terms LNG has been the main driver of the year-on-year gains, followed by iron ore, and then alumina.

Ore producer Fortescue (ASX: FMG) is boisterously powering towards fresh highs, closing out today's trade all the way up at $6.37.  

Analysts are busily upgrading profit forecasts for BHP Billiton, Fortescue Metals Group, Rio Tinto, and the rest, with Rio trading at a post-crisis high of $92.60 today, and the newly-structured BHP (with South 32 demerged) flying high at $37. 

While iron ore prices shouldn't be expected to stay at these levels over the medium term - a supply disruption due to Vale's tailings dam disaster has been a factor - the overall strength in commodity prices could drive a boost to resources investment, following on from some years of under-investment.

Exploration spend has already surged, especially in Western Australia, while further drilling will be required as existing bulk commodity projects see their reserves run down. 

Financial markets are now fully pricing in a rate cut over the coming 18 months, but a surge in national income and nominal GDP - which normally results in stronger wages growth - is a factor that stands against this outcome.

Which way things go will likely depend to some extent on the housing market, with the volume of new lending in 2018 falling by a crunching 20 per cent thanks to layer upon layer of mortgage regulation. 

Bushy Martin - Get Invested podcast

Get Invested podcast

It was a real privilege to be invited on Bushy Martin's extended podcast.

It's not often you get to speak more in-depth these days.

Tune in here, or click the image below.

Sunday, 17 February 2019

When bad news is good news (and vice-versa)

Good or bad?

Have you ever seen financial markets weaken on good news?

Or improve on bad news?

Confusing, huh.

Here are 3 considerations.

Hammer time

Sentiment picks up

The highest preliminary auction clearance rate for 9 months in Sydney, according to CoreLogic, being the provider the most comprehensive results.

I saw higher results elsewhere, but I'd trust CoreLogic more, tbh:

Source: CoreLogic

A change in interest rate expectations is one possible factor.

It can't be stressed enough that these numbers should be taken with caution, as while some parts of the Sydney market have picked up - such as in some parts of the eastern suburbs - others really have not.

I haven't looked at the sub-regional figures, but just from browsing the results it's quite clear what's selling and what's not.  

Another thing: there were only 521 auctions in Sydney this week, and there'll be more next week.

The AFR lead article ran with 'Huge sentiment shift', which itself probably adds to the feedback loop.

A missing piece of the housing market puzzle is banks that will actually write timely loans, but that might fall into place as 2019 rolls on.


The most interesting release this week will be wage price indices.

I expect that annual wages growth will continue drifting higher towards 2½ per cent, driven by improving private sector wages growth in Victoria.

Chunky minimum wage increases will also help a little.

I'll post the key charts here during the week. 

Saturday, 16 February 2019

Weekend must reads!

Must read articles of the week

Here you go, comin' atcha from Property Update:

Some great reads there on the Royal Commission and what's coming next for housing markets.

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If eternity should fail

Never taking a backwards step

Australia has famously gone 27 years without a recession.

But what if that doesn't continue?

Here are 7 reasons we'll be OK over the medium term.