Pete Wargent blogspot


'Must-read, must-follow, one of the best analysts in Australia' - Stephen Koukoulas, ex-Senior Economics Adviser to Prime Minister Gillard.

'One of Australia's brightest financial minds, must-follow for accurate & in-depth analysis' - David Scutt, Markets & Economics Editor, Sydney Morning Herald.

'I've been investing 40 years & still learn new concepts from Pete; one of the best commentators...and not just a theorist!' - Michael Yardney, Amazon #1 bestseller.

Monday 30 April 2018

Deficit in best nick for 9 years

Budget ammunition

Some startling Budget news in recent weeks, with the latest monthly statistics showing the balance blazing ahead of expectations. 

As noted here previously there have been several drivers of this, including a revised record high employment growth of +431,000 over the year to January 2018, a timely surge in export prices, and an associated huge surge in company tax revenue. 

Fairfax's Peter Martin reported that the rolling annual deficit had dropped to just A$14 billion, the lowest absolute level in about 9 years.

For some perspective, at the current rate of improvement - albeit that's not expected to continue, even by the most optimistic of observers - the Budget would be back to surplus within a year from now.

An extraordinary improvement.

Why is this important? 

Well, the improving tax take and budget balance are important in their own right, of course, but more immediately because this dynamic may have created leeway for Treasurer Morrison to woo the electorate with income tax cuts.

And after a string of gloomy Newspoll results the Coalition needs all the support it can get right now ahead of a looming Federal election.

Jobs, jobs, jobs

The more granular and generally ignored detailed labour force figures released at the back end of last week showed how the rebound of the Queensland economy has been one of the surprise drivers of employment growth over the past 12 months, helping to pump personal tax revenues higher. 

One of my favourite bellwethers for 'real' regional Queensland is to chat to folks in Townsville and Mackay about how their respective economies are travelling.

More fluoro vests at the airport tends to be another good sign, and the crunch and steady recovery is evident in the employment numbers.

Conditions are clearly far better than they were, but a long way from boom, it would be fair to say.

Unemployment down...marginally

Improved hiring has the twin benefit of reducing the number of unemployed persons, which is also a handy Budget saving. 

Progress here hasn't been amazing by any stretch of the imagination, but it has at least been progress of sorts. 

Employment trends have also been rather mixed across the country.

Greater Sydney's rolling annual unemployment rate continues to decline to 4½ per cent, the lowest in about a decade, which is great to see. 

And after spiralling worryingly to 7½ per cent, the annual average unemployment rate in Greater Adelaide is also now improving fast, which is heartening indeed. 

Elsewhere, there is plenty of labour force slack in most markets, and wages growth remains accordingly benign.

Searching high & low...

For whatever reason, very few people seem to care much about the detailed labour force numbers, but the evidence of a modest tightening in the labour force is there, for those who care to look, including a trend decline in underutilisation when assessed in volume measures.

Underutilisation volume measures take into account how many more hours of work unemployed and underemployed people are looking for. 

In other words, plenty of Aussies want more work, but the amount of extra work they want is lower than it was in 2015.

Figures relating to the median duration of job search have only recorded a modest improvement to date, partly because more people are coming back into the labour force as the outlook brightened.

The figures at the city level can be skewed by factors such as a mismatch of available skills, but generally show that the average jobseeker is faring best in Sydney and then Melbourne.

In Perth, on the other hand, the median duration of job search has increased substantially from effectively nada in 2008, and this is being reflected in higher 90 days past due home loan delinquency rates in Western Australia, as reported by ANZ earlier this morning.

You can see this has happened why clearly enough - the labour market in Perth is seasonal, but through the year it can take much longer than 90 days on average to find a new job.

Sunday 29 April 2018

Chemical Change (Special Report)

Chemical change for Australian lending

'Many people are sticking their heads in the sand, not accepting reality, and hoping this all goes away. ASIC & APRA APG 223 is a chemical change. It's not going away. Those that fail to plan and move with the winds of change will lose.' - Rolf Latham, ASAP Financial Services.

Indeed. I've found that those at the cutting edge of residential mortgage lending tend to be far ahead of the commentariat when it comes to issues related to the tightening of lending standards.

Are you a fund manager trying to get to grips with what changes to Australian lending practices will mean for banks, other lenders, mortgage arrears, construction, developers, and household consumption?

Over the past 18 months there has been a wide range of measures undertaken to tackle residential mortgage lending in Australia from interest-only mortgage caps, monitoring of loan to value ratios (LVR), and arbitrary caps on investment loan books, to more recently an increasing scrutiny of household expenses.

I've seen a spike in recent demand for consulting engagements to discuss the latest trends, and with good reason: they're significant.

If you're interested in what all this means for the lending market, my latest 50-page report for investment funds is available to order now.

Of course, the report runs through all the key data points, which explain the potential timing and impact of these shifts on lending volumes, by purpose, buyer type, lender, and location. 

Where our reports have a key differentiation - and the reason they have tended to be popular - is that they also look more closely at what's happening on the ground and 'at the coalface', and then look to anticipate secondary impacts from rule changes well in advance. 

If you're a fund manager looking for leading indicators, this report is for you.

We'll begin to experience the impacts of certain lending standard shifts immediately.

Email for report samples and an order form.

Yield ≠ income

Yield trap

The yield trap refers to how stocks with high dividend yields can often be, erm, a trap, since the high yield is often reflective of weak share price performance or an unsustainable dividend.

It's tempting to gun for the apparent promise of a high dividend, but often misguided.

Yield is a spot figure calculated at any given point in time; but it's not the same thing as income over the life of an investment.

Rental yield & risk

The same holds true for most asset classes, not least real estate.

Recall the 15-20 per cent high-yielding mining town 'investments' of 2012 being spruiked by opportunists (Gladstone, Port Hedland, South Hedland, Moranbah etc). 

The dividend or rental income wasn't sustainable as supply responded, and these markets utterly imploded. 

In a similar vein, let's take a look at apparently everyone's favourite topic du jour, Sydney housing.

Rewind to the day I was allegedly born, and a 3-bedroom cottage in Paddo would have set you back about $40,000.

Higher-yielding investments were always available in the form of 2-bedroom apartments, for a purchase price set about 20 per cent lower. 

The higher yield partly reflected that units were often more modern - as well as the cheaper purchase price - but also less scarcity value.

It's no secret that land and house prices have always appreciated fastest in Sydney's inner ring, ahead of apartment prices and blocks on the outer - the Valuer General dutifully reported as such in typed font for years in its famed 'Blue Book' annual compendium.

AHURI and the Reserve Bank of Australia periodically note the same thing.

Roll forward to today and with a bit of a refurb your 3-bedroom cottage in Paddo rents for about $1750/week ($91,000p.a.) while the 2-bed unit would be doing pretty well if it generated just 40 per cent of that amount. 

Meanwhile the cottage costs at least double what the apartment does, probably more, so house prices have continued to outperform too.

Immutable laws of supply & demand

Conventional housing market economics suggests that as prices increase supply should respond, but in the case of inner Sydney land this obviously cannot be so, at least until some brainbox decides to build out on to the harbour. 

In fact, the Census figures appeared to show that the number of houses in Sydney's inner ring is actually in decline as they make way for more and more, and more...and more apartments (in some areas more than others, 'tis true).

Yield is important for serviceability, but it's by no means the same thing as income over the life of an investment. 

Inner city apartments still generate a higher percentage yield in Sydney than houses. Maybe they always will. 

And don't get me wrong, my portfolio has several apartments in inner ring Sydney.

But still I know what I'd rather own! 

Does negative gearing impact rents?

It's nearly Budget time, can't wait for this debate to crank up again!

As for who uses negative gearing, the latest statistics were released on Friday.

Let the torture begin!

Friday 27 April 2018

Weekend reads - must see articles of the week

Oh yes, here they are!

It's not all that long now until this year's Wealth Retreat, for those wanting to achieve more.


Have a great weekend all.

ATO releases negative gearing stats

Data dump...

Data released by the Australian Taxation Office (ATO) showed that just shy of 2.1 million Australians declared an interest in a rental property for the 2016 financial year. 

The number declaring a net rental loss to the tax office has declined over the past four years of available figures, mainly due to lower mortgage rates. 

Note that under Australian taxation law it is quite possible for an investor to declare a net rental loss to the tax office yet be in a positive cashflow position, in part due to depreciation and capital works deductions. 

Property investment in Australia is mainly the purview of the Mum and Dad investor, with more than 90 per cent of investors owning just one or two rentals. 

71.3 per cent of landlords owned a solitary investment property. 

Who uses negative gearing? A broad range of people, including just over 796,000 with a taxable income of under $80,000, and about 495,200 with a taxable income of above $80,000. 

As you might expect, wealthier negatively geared households tend to borrow more and incur greater net rental losses, at least initially. 

The beneficiaries of negative gearing are often in the younger cohorts, with the net rental profits tending to swell later in life. 

Similarly, the size of net rental profits typically increases for the older cohorts as they move into their retirement years. 

Budget repair happening anyway

In terms of Federal Budget repair, the ATO recorded only a very small change in net rental losses from the $3.6 billion notched in the preceding tax year.

Note that any potential Budget savings from negative gearing rule changes would relate to tax-effected rental losses (as opposed to net rental losses), negative gearing deductions being a timing difference in principle. 

Moreover, Treasurer Morrison has already made sweeping changes to plant and equipment depreciation deductions under division 40, which will begin to take effect from the 2018 tax year, while landlord travel expenses will also be disallowed (to the likely dismay of errant politicians). 

The supposed savings from changing negative gearing rules have always been questionable to my mind, especially after lower taxable bank profits, higher public housing costs, and a raft of other factors are taken into account. 

Landlord-bashing has become a popular sport in recent years, yet at the same time the average superannuation balance suggests that millions of Australians are basing their financial futures upon drawing the Age Pension. 

The Budget balance has improved significantly regardless of late, thanks to a record +431,000 surge in employment over the year to January 2018 combined with a timely boost in export prices.

Meanwhile at the national level the housing market has cooled and investor activity has been comfortably subdued by macroprudential measures. 

With thanks to Cameron Kusher of CoreLogic for expertly dicing up some of the above data points by age cohort at lightning speed. 

Thursday 26 April 2018

Dwelling starts easing back

Supply and demand charts

One of the unexpected outcomes of this record construction cycle has been that Melbourne's assumed structural oversupply of dwellings never really arrived, except for high-rise apartments in some isolated pockets.

Why were the forecasts and forecasters wrong?

Partly because of the weakness of the respective economies or Perth, Darwin, and Adelaide, Melbourne began to attract migrants from interstate as well as overseas.

The population growth in the city accelerated ahead of even the record levels of construction. 

The headline numbers for New South Wales don't look too far out of whack, with about 61,600 dwellings completed in 2017, while dwelling starts are now easing.

But Sydney did still have a record number of apartments under construction at the last count, so there is a big pool of stock yet to be absorbed, despite record high population growth

Queensland's developers didn't anticipate the post-resources boom employment and population slowdown, and thousands of planned apartment builds have now been scrapped.

I've heard the figure of 10,000 proposed Brisbane apartments being cancelled bandied around - though I haven't substantiated it, so that's one for you to research, dear reader. 

Brisbane's population growth is up by +30 per cent over the past two financial years to about 48,000 - and it's rising fast - so at the headline level the market is now quite quickly swinging back into equilibrium. 

Stand by for tax cuts?

Bag of tricks

The Coalition has famously lost 30 Newspolls in a row.

But might Turnbull and Treasurer ScoMo have a trick or two up their sleeve yet?

They might. 

Australia's labour force participation rate has blazed to an all-time high - in part thanks to immigration - while over the year to January 2018 employment screamed higher by +431,000 persons, a truly monster result. 

There's never been a 12-month period like it for employment growth, and in turn that's delivered a very welcome boost to the federal budget.

Better yet, figures out today showed the export price index jumped by +4.9 per cent, having already increased by +2.9 per cent in the preceding quarter. 

The boost was delivered by metal ores, and coal and coke.

It'll be interesting to see what the Coalition comes up with to win votes from a tax perspective.

They haven't got the time to wait for wages to increase, so it'll have to be a case of sooner rather than later. 

Learn as you go

Here's how.

Brekkie with Brisbane

Thanks to everyone that came along to see me present this morning, where I discussed changes to the lending landscape in Australia, among other macro shifts. 

More to come in the next two parts of this mini-seminar series, stay tuned for details.

French breakfast, so good...

Wednesday 25 April 2018

How are we growing?

Components of population growth

81 per cent of the growth Australia's estimated resident population in FY2017 was experienced in the capital cities.

And more than 70 per cent of it was in Sydney, Melbourne, and Brisbane alone. 

Melbourne had the highest population growth in the national at just over +125,400.

The chart below shows how Sydney's annual population growth increased to a record high for the harbour city of +101,600, despite losing -18,100 to other pastures. 

The reason, was very high net overseas migration into Sydney at +87,400.

You can click the image below to enlarge it. 

Internal migrants depart Sydney

Some of those internal migrants are heading away from Sydney to regional New South Wales, and some to Melbourne.

But as you can see via the orange bars in the graphic above, the city that is attracting the most internal migrants on a net basis is now Brisbane. 

Only two financial years earlier, Brisbane's annual population growth had slowed to around +37,000, broadly representing a cyclical nadir for the Queensland capital.

But population growth has accelerated by some +30 per cent over the past two financial years, and is set to continue increasing further as more migrants arrive from interstate.

Many will be bringing equity north from Sydney. 

Tuesday 24 April 2018

Grandpa didn't talk much

Lt Victor Wargent (Eighth Army)

Victor Charles Wargent, known as ‘Vic’ to friends or simply ‘Grandpa’ to us, didn’t talk much.

He was brought up and schooled with the ideals of the British Empire, combined with a good old-fashioned Methodist sense of duty.

Like many others, as soon as World War II broke out he volunteered - alongside his best mate Fred - hoping that they might be posted together, though it was not to be.

Then he had second thoughts. There were the cautionary tales of 18 million dead from the Great War, and he had a new-born daughter to think of.

A quickfire change of plan was called for! Vic got himself sent to a huge tyre depot in Derby in England’s industrial midlands, and tried to make himself indispensable.

He did well. Too well, it turned out, as he very quickly had an inspection from a General who called him up: 'Good show, lad. Must be officer material!'.

Vic was immediately sent for officer training in Palestine.

The Eighth Army was not exactly what Vic had in mind, but off it would be to the desert war, initially in North Africa.

From his army maps, photos, and other records, I can see that Vic was posted to Cairo.

The names of those desperate campaigns roll off the tongue from high school history: Tobruk, the Gazala Line, and one of WWII’s two key turning points, El Alamein.

Vic was in the Royal Army Ordnance Corps which dealt with all types of military stores, but also extremely dangerous jobs taking munitions to front lines.

That meant just a thin plywood screen between you in the front of truck and an immense potential explosion about 6 inches from the back of your head, which would certainly focus the mind.

You can sense why a bland tyre factory back in Blighty might have appealed.

After years of toil and thousands of lives lost, Rommel was eventually defeated in the decisive second battle of El Alamein.

For the Eighth Army and for Vic, immediately onwards to the Italian campaign.

No leave

In 1944, five punishing years in to the War, Vic was at last granted his first leave, when he finally hoped to see his daughter again.

Excruciatingly, he arrived moments late and missed his troopship in Italy, so the leave was never to materialise.

Then in a bizarre twist of fate the troopship was blown up and destroyed before it had even left harbour. One plane, one bomb, directly into the troopship’s funnel.

Just another escape of outrageous fortune for one family, and senseless tragedy for hundreds of others.

After that near miss, Vic never got any leave to see his daughter in over half a decade at war.

The Eighth Army reached Rome by the summer of 1944.

Low-ranked officer

The 2nd pip on the arm denotes the low officer rank of Lieutenant, which Vic held throughout the War.

Vic didn’t keep all that much from the War, though he retained his pay books. Scant compensation, you might say.

Vic didn't talk a lot, and I know my Dad regrets hugely not speaking to him more when he was older.

As young kids we were thrilled by his blood-stained army knife, and always hoped for exciting War stories, but none were ever forthcoming.

When he was in his 70s, Vic merely referred to the War as ‘those lost years'.

Vic was a quiet man, always well-dressed, polite, reserved, and as far as I know or can remember, universally liked.

He liked golf and played football for a Kidderminster club, after an unsuccessful trial at Aston Villa. 

He was one of the lucky ones, and his mate Fred lived through the War too. Vic didn’t see a hospital bed until one week after WWII ended, ostensibly for food poisoning, of all things!

But what little was understood then about the mental scars of war. What little is understood now?

Spirit of the ANZACs

The Eighth Army consisted of British, Australian, and New Zealander troops.

But while it was ANZAC Day that inspired this miniature memoir, the troops of Eighth Army also hailed from all over the Commonwealth, from Africa, Rhodesia, British India, and Canada, as well as from European countries such as Poland and Greece.

And if we’ve learned anything from WWII - and at least 50 million dead from that one war alone - it’s that commemoration shouldn’t dwell unduly on nations, race, or borders.

Just one small tale among tens of millions. Remembering them today. 

Come and see me speak on Thursday morning (Brisbane)

Book here, or just turn up on the day and pay there.

Click image for event details.

Sydney's population growth climbs to all-time high

Sydney 5.1 million

The ABS reported that Sydney's population increased by more than +100,000 in FY2017 for the first time ever, in doing so rising to an estimated 5.1 million.

More than 70 per cent of Australia's population growth was accounted for by Sydney, Melbourne, and Brisbane.

Sydney's population growth climbed dramatically to +101,600 (+2 per cent), while Melbourne remained extremely strong at +125,400 (+2.7 per cent).

Melbourne's population has increased by well over ¼ million in only two financial years to hit 4.9 million. 

Population growth in Brisbane also picked up strongly to +48,000 or +2 per cent, driven partly by interstate migration. 

Gold Coast, Sunshine Coast, and Geelong recorded some fair population growth in absolute terms, and the ACT also increased by an estimated +6,833 persons. 

But generally speaking population growth was considerably weaker around regional Australia.

Darwin (+696), Adelaide (+9,648), and Perth (+21,094) also recorded population growth rates of 1 per cent or less.