Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - & author of Things That Make You Go Hmmm...one of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Friday, 30 May 2014

Multiplier

Activity in NSW

It's been no secret over the last couple of years that I've been building my case for why I believe New South Wales is the state with the best long term prospects as Sydney models itself as the new major Asian financial hub.

The state has been adding more jobs over the years than its counterparts (although Queensland has been the true out-performer of the last 10 years), Sydney has extremely strong population growth and the data is finally beginning to reflect what I have been repeating constantly for the last few years - economic and building activity is really going some (click chart):


Retail turnover is always a slightly tricky measure to predict, but over the past 12 months turnover has really been starting to take off in New South Wales and Sydney in particular (click chart):


The latest round of data to demonstrate great strength has been that of building work done in NSW, which has jumped back up by more than 40% in only two years since March 2012 (click chart):


Most reporting tends to focus on activity on a national basis, which is understandable enough, but you only have to spend an few hours in Sydney to get a feel for what is going on, and that is now a near-record level of building activity.

As noted in my blog the other day, here are just a few of the projects which have been completed, are underway or will soon be commenced:

  • Barangaroo - $6 billion - the T1 commercial tower will be Australia's largest ever
  • Darling Square redevelopment $2.5 billion
  • Barangaroo Hotel - estimated $2 billion (final approval not yet received).
  • The Star Entertainment Centre & Hotel ($860 million)
  • Sydney Cricket Ground revamp ($186 million)
  • The multi-stage Central Park ($2 billion development)
  • Circular Quay's Overseas Passenger Terminal, ferry wharves upgrade and 36 other government projects ($430 million) and corresponding private sector investment ($1.2 billion)
  • Randwick Racecourse upgrade ($150 million)
  • Sydney Showground works
  • International Convention Centre (due for completion by 2016) 
  • UTS upgrade
  • Dockside Pavilion
  • Hotel works: Shangri-La Hotel redevelopment, Four Points ($160 million), and Park Royal Hotels ($20 million)
  • 33km Connex Link motorway from Parramatta to Alexandria to be constructed 2015-2019 (cost: $11.5 billion), the Dulwich Hill Light Rail extension is now complete ($176 million), with the Light Rail line due to be extended from the CBD to the south east also at an estimated cost of $1.6 billion"

Multiplier

Property market analysts spend a lot of time talking about infrastructure, and for a good reason.

While new projects are important because they improve the standard of living for the inhabitants of a region or city, the long term benefits on a local economy can be lasting and dramatic.

The reason for that is due to the multiplier effect.

Explained

Let's say the government injects $15 billion of expenditure for new light rail and motorway projects.

This $15 billion becomes revenue for construction companies who then also spend heavily on sourcing construction materials in turn creating income for building materials companies.

The construction firms redistribute a percentage of the project revenue on wages, increasing employee income and purchasing power (of which some will be saved and some spent, thus increasing retail trade). 

Meanwhile, the government should recoup some of the funds in corporation taxes on the construction profits and in GST which can later be redeployed elsewhere.

The key point is that each time there is an injection of new demand into the local economy, the extra income leads to more spending, which in turn becomes more income, and so on and so forth.

This is known as the multiplier effect. 

Each dollar spent can ultimately be reflected in several or many dollars of income (the actual multiplier is determined by the marginal propensity to consume - the extent to which households are inclined to save as compared to their propensity for consumption).

Summary

In short, while states such as Victoria are struggling with higher unemployment rates than they have been used to seeing over a very prosperous decade, New South Wales (and Sydney in particular) is becoming an economic powerhouse, almost by stealth.

As noted above, it doesn't seem to be often reported that way with most data reported on a national basis, but with the population of Greater Sydney increasing at around 80,000 per annum, jobs being added consistently over the long run, a large proportion of immigrants favouring the harbour city and a fantastical level of infrastructure spending underway, the benefits for Sydney are rippling through its economy.

The harbour city is thriving and that's good to see.