Pete Wargent blogspot


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Monday 31 December 2018

Faster, higher, longer at Olympic Park

Olympic Dam

Sydney's housing market made international news this Christmas, but for different reasons this time: it was all about a new apartment tower which moved by two millimetres!

Yep, instead of soaring prices, the main story over the past week related to possible building defects in a 38-storey tower in Olympic Park, leading to an evacuation of residents and some predictably wild internet extrapolation (who knew Australia had so many budding structural engineers? And every one of them posts on Reddit!). 

I only go to Olympic Park biennially on average to watch the Chooks or rock bands, so if you came here looking for dramatic on-the-ground insights I'm afraid you'll go away disappointed. 

Instead, here are a few thoughts on the unique construction cycle that we've just experienced. 

Chinese investment boom

Whenever there are stories about potential losses on new apartments I find myself involuntarily drawn to my database to browse through the sales and transaction data, invariably arriving at the same conclusion: it's hard to overstate the influence of Chinese capital on this construction cycle. So many Chinese surnames!

A derived and secondary point is that many of the new skyscraper blocks are largely funded by sales to landlords, which can bring its own challenges in terms of ongoing maintenance and liveability (it also contradicts the argument that investors only buy established properties). 

For years Australia struggled to build enough dwellings due to a range of factors, but since 2012 a unique combination of very low interest rates, rising unit prices, and an unexpected wave of interest from mainland Chinese capital saw an unprecedented burst of foreign real estate investment. 

And the increase in the number of proposals (if not the value) was all about the residential market.

More specifically, there were lots and lots - and lots! - of new apartments built and purchased.

Queensland featured prominently, particularly so for new apartment towers in inner-city Brisbane, but overall this boom was mainly experienced in Melbourne and Sydney.

Most interestingly, the increase in activity was overwhelmingly a Chinese phenomenon.

As is quite clear from all of the available figures, since FY2017 the numbers in the residential sector have dropped off dramatically, with Chinese investors sawn off at the knees by punitive taxes and surcharges. 

Some commentary initially argued that the decline in residential approvals was due to process and rule changes, which was partly true but also hasn't been borne out by experience, with new apartment sales now having slowed to a crawl, in turn heralding an abrupt end to the cycle.

Some observations

Australia's population growth lifted very strongly through the mining boom, these days tracking at about 400,000 per annum at the last count.

Construction lifted too since 2012, and the record growth in this cycle has been all about higher-density apartment projects. 

New dwelling supply looks set to slow sharply now, and although Sydney is still working through its pipeline it looks as though residential vacancy rates ex-Sydney could be at multi-year lows by the end of Q1 2019. 

While we shouldn't generalise too much, on average new apartments in tower blocks haven't been great investments - the land value of each apartment tends to comprise just a few per cent of the total value per unit, and almost by definition there isn't much scarcity in the product.

When buying apartments in the big cities, I've been drawn to the boutique developments: more attractive to owner-occupiers, higher land value content, more scarcity, and more difficult to replace n landlocked suburbs. 

It's true that the capital cities are maturing and are populated more by Asian migrants, perhaps more comfortable with the notion of high-rise living, but it does raise the question of who will buy new high-rise units and sustain supply if the surcharges for foreign investors remain in place.

Labor thinks that limiting negative gearing to new dwellings will do the trick, but this does create a two-tier market and makes the viability of buying a new investment for capital growth questionable.

Pie in the sky

A valid question to ask is whether recent events in Sydney and London might also curtail demand for living high up in a tower block more generally (I've never particularly liked the idea, all the more so since becoming a parent; and I confess I wasn't sad to see the end of a recent stay at Christchurch's only vertical hotel). 

There has been a tonne of speculation about build quality this week, which I won't add to here. 

At the end of the day I'm a Chartered Accountant not an engineer, but my experience has been that the apparent construction quality of new developments varies from very high to very ordinary, and it's hard to think of a pithy quote to cover what is, after all, a diverse market. 

What is clear is that new apartment construction is now contracting at a remarkable speed. 

Annual approvals for new units of four or more storeys have fallen from 76,300 at the 2016 peak to 61,800 in late 2018, but every other indicator shows activity slowing much more sharply and a shrinking pipeline. 


The Reserve Bank will release its monthly Financial Aggregates figures later today, which will provide a more timely reading on the housing credit impulse. 

Friday 28 December 2018

Back on the Property Couch

Property Couch return

I mostly fly Virgin when headed interstate, but when I fly Qantas I always make sure to jump straight onto Q-Streaming to take in a Property Couch podcast. 

In an industry often known for its colourful characters these fellas have shone through with such generous and high-quality content over the past few years that their podcast is the most downloaded in the genre (at well over 4 million downloads the last time I checked).

A brief scroll through the back-catalogue shows the calibre of the guests they've had on, from Paul Clitheroe to Alan Kohler, and from Nerida Consibee to NBA Superstar Andrew Bogut. 

It's not a bad roll call, to be fair!

So when I was invited back onto the couch for my second appearance it was a no-brainer for me to get down to Melbourne quick-smart. 

Once you get past the hyped introduction (thoroughly undeserved) and a droll observation about my haircut (admittedly, deserved), it was a ripper episode and here are some of the key themes we covered this time around. 

Super-grateful for the opportunity to share some thoughts - you can tune in here to listen (or click through on the image below).

Clearly we got the memo about checkered shirts. 


Thursday 27 December 2018

New themes for 2019

New year's revolutions

Some new themes for 2019?

Here's one: wages growth returning, finally. 

Wages growth is already off the lows and with the unemployment rate now trending down to 7-year lows there is likely to be some further improvement in 2019.

In Sydney the unemployment rate at 3½ per cent is the lowest across the entire data series, so unless someone has reinvented the laws of supply and demand there should be some upwards pressure on wages here. 

ANZ's latest report on the 2019 outlook is worth a read - see here at Property Update - with leading indicators pointing to further declines in the unemployment rate.

There will be a further boost to exports, with the world's largest floating LNG platform (Prelude) now starting up production, and a lower Aussie dollar set to send export values to record levels. 

This housing market cycle has been unusual in that it wasn't curtailed by interest rates hikes (rather a credit squeeze), so people should still have plenty of dough to spend into the consumption economy, should they feel so inclined (and they're borrowing less to boot). 

ANZ's house search index leading indicator has burst back into positive territory, and the time to buy a dwelling index has also powered back into the black.

It seems that nothing cures lower prices quite like lower prices.

As ANZ has pointed out, when wages rise and prices decline - as they have in Sydney and Melbourne - then affordability tends to improve quickly. 

The unknowns still remain, however: namely the conclusions of the Royal Commission, with the final report due on 1 February, and then Federal election uncertainty (including a potential overhaul for the way investment housing is taxed).  

Tuesday 25 December 2018

Season's greetings

Have a good one!

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Monday 24 December 2018

Labour market tightens further

Tightening labour force

Lots of people would like more work, which probably isn't that surprising given the ongoing casualisation of the workforce. 

But the volume of underutilisation is clearly falling, as at November 2018 down to the lowest level since the ABS began reporting this in its surveys at 7 per cent. 

The improvement has been driven by New South Wales (6.3 per cent) and Victoria (6.5 per cent), where the jobs markets have now picked up to levels consistent with stronger wages growth. 

Total construction employment has declined to a still-elevated 1.15 million, which is the lowest level in 15 months, albeit still 9 per cent of the total number of employed Aussies. 

This figure will likely fall further given that about three-quarters of construction employment relates to the residential sector. 

On the other hand mining employment has picked up sharply to the highest level in four years. 

Sunday 23 December 2018

2018 in review (& what's in store for 2019)

Flashback time

A lot of time is spent on this blog looking at the finer details of the Aussie economy and markets, and less time these days is spent writing about what I've been up to. 

The year is rapidly drawing to a close, so here's a quick look at what's been going down...

Stock indicators flashing red

A calendar year is quite a meaningless thing to measure in one sense, but still it's been a year to forget for the Aussie stock market.

At the beginning of the year there were all the usual confident forecasts of 11 to 14 per cent returns.

As it happens returns may well be in that range...but with a minus sign in front of them!

I bought some strong dividend-paying companies when the market fell, which, paid some strong dividends, but not a whole lot else. 

With US stocks tumbling again the ASX 200 is eyeing an open of just 5,400 on Monday, and with the major market players packed off for their Xmas hols it could be an ugly stretch ahead for equities markets. 

The news hasn't been much better over in the UK, with the FTSE copping a significant correction this year. 

As net buyers with a lazy cost averaging strategy (both for ourselves and for the kids' ISAs) this shouldn't bother us unduly, but nevertheless it's hard to smear lipstick on what's been a pig of a year for FTSE. 

While tightening policy in the US has been a worry, financial markets have shifted quite quickly from 'one hike then done' rising bank funding costs might not get quite as much airtime next year.

Real estate: illiquidity

It's been a much slower year in Aussie property too, with transaction levels for established properties dropping off precipitously in the face of tighter lending practices. 

There are always opportunities for those of sound credit quality, but since we maxed out our borrowing capacity last year, this year's highlight for us was a renovation on our place at New Farm in Brisbane. 

The best performing property asset we have in Australia was regional, in Geelong, which is a mark of how much market conditions have changed. 

Like everyone else that owns properties in Sydney I read a lot of scary headlines, but a recent portfolio review served as a timely reminder that you can never own 'the housing market', you can only own individual properties, and I breathed a lot more easily after that. 

Sydney's economy has held up pretty well to date, with enormous employment and population growth, the unemployment rate now at a record low, and nascent signs of wages growth.

And new property listings have slowed through the year suggesting that most owners are holding on as the market chews its way through the end of a record construction boom.

Still, the outlook for both housing and the economy will mainly be determined by how bank lending plays out early in 2019. 

We bought land in the UK this year as Brexit jitters and tweaks to tax legislation brought prices into the reasonably attractive range for the first time in a while, a cash purchase being by far the easiest way to actually get things bought in the prevailing climate. 

The UK political situation is an absolute quagmire at the moment, with apparently little hope of that improving any time soon. 

The UK 20 Cities Index eked out only moderate housing market gains this year - following on from years of far stronger increases - although annual wages growth jumped to 3.3 per cent, taking real wages growth to the highest level in a decade.

Onwards and upwards. 

Live events & reinvigoration

I did a fair amount of media and spoke at quite a few events in 2018. 

Business Insider's Devils and Details Live and Unplugged event in Sydney was a highlight, including sitting on a panel with Bill Evans of Westpac, which was a great privilege (Kouk doesn't look too impressed; I was probably dissing the ALP's proposed franking credits policy at this point). 

As well as the Sky News Real Estate segment, I was very excited to appear on the revamped Your Money show on Channel 9 and Sky News with the axis of awesome that is Chris Kohler and Brooke Corte.

Happily, this also resulted in a green room catch up with the CIO of the Motley Fool, Scott Phillips. 

But by far the most significant event of the year for me proved to be presenting at my 4th consecutive annual Wealth Retreat event at Gold Coast. 

I've found that good things always seem to happen when you mix with positive and like-minded people for a week - this alone is a reason that you should come along to the Wealth Retreat next year - and the 2018 event was no exception.

As it transpired it was some personal mentoring and business advice from Mark Creedon of Red Monkey and Metropole that inspired me to relaunch my coaching program product, and this helped to rekindle my enthusiasm for delivering elite quality personal coaching.

Enormous energy has ensued, thanks Mark!

Looking ahead

You might have noticed from a rare online foray into relationship matters - my better half hates social media with an impressive passion - that today was our 10th wedding anniversary.

Strangely that solitary post got more traction across social media channels than any of my financial analysis ever has, which probably says something, though I can't understand it myself. 

Penultimately, watch out for my new book which will be out in the first quarter of the new year.

And finally, after four fabulous years in Brisbane, we're taking a bit of a seachange in 2019, relocating up to Sunshine Beach in Noosa (my office will still be in Brisbane, but with any luck I'll be spending a bit more time in the surf with the kids). 

Cheers for reading my blog this year, and to all my Twitter followers - well, most of you😃 - by the time year's done it will be the biggest calendar year to date, with page views tracking at about 45,000 per month, taking the cumulative total to well over 2 million. Nice one, thanks!


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Friday 21 December 2018

Sydney unemployment rate hits record low

Record low unemployment

Greater Sydney's economy continued to add jobs at a remarkable, thunderous pace throughout 2018, with total employment up by a rip-roaring 100,000 over the year to November. 

That's more than a third of all new jobs created in Australia on a net basis over that time. 

The media is all about traffic congestion, light rail delays, and falling house prices in the harbour city, but meanwhile the unemployment rate quietly fell to just 3½ per cent in November 2018 (not reported anywhere, as far as I could tell!). <Edit: M. Pascoe at The New Daily covered it>. 

Interestingly, that's now the lowest monthly unemployment rate figure on record for Sydney, a dynamic which can happen at the tail-end of a monster construction boom. 

On an annual average basis, Sydney's unemployment rate is now down to only 4.3 per cent, while Melbourne has been the biggest improver of recent times, and Adelaide has recovered nicely from a sticky patch. 

At the other end of the spectrum, the equivalent figure for Perth remains elevated at 6.3 per cent.

These are backwards-looking indicators, of course, but still those are some healthy results in the two largest capital cities.

As the labour force grows there will be more unemployed persons in absolute terms over time; but the latest ABS figures showed that some inroads have been made here. 

In fact the trend rate of unemployment is at the lowest level in 7 years at 5.1 per cent, with the total number of unemployed persons down by -34,000 over the year to November 2018, overwhelmingly driven by Victoria (-41,000), and New South Wales (-9,000), offset by some mild increases elsewhere.

Awesome analysis by Justin Smirk of Westpac has shown how underutilisation rates have tightened in the two most populous states, to levels which in the past have resulted in private sector wages growth of at least 3 per cent (and quite possibly nearer 3½ per cent). 

With the labour market on a strong run in towards the end of the calendar year the latest available monthly figures show that seasonally adjusted underutilisation rates have been as low as 12 per cent in New South Wales, implying that wages growth might even be aiming towards the higher end of that range next year.

If this scenario plays out then household debt to disposable income ratios will decline pleasingly in the new lending environment (fewer interest-only loans, lower average loan sizes, and slower volumes).

Mortgage serviceability, perhaps surprisingly, could feasibly hit its best level in three decades in Sydney as dwelling prices fall, though saving a deposit hasn't gotten any easier.

But banks must keep credit flowing at a reasonable level for these improvements to continue, a point that Frydenberg seems to be raising in increasingly shrill tones. 

Some investors are getting behind the 8-ball

Investor arrears rise

S&P Prime SPIN mortgage arrears ticked up to 1.35 per cent in October 2018.

This was a notch higher than September, but also lower than in March, April, May, June, July, or August (just for a grain of perspective). 

Note, however, that October is normally a benign month for mortgage arrears, which then can rise after the lengthy Xmas break. 

Prime SPIN arrears remained low in New South Wales (1.12 per cent) and elevated in Western Australia (2.58 per cent). 

30 plus day arrears are tracking some way higher here than a year earlier, when arrears were just 1.04 per cent. 

At the state level New South Wales is now routinely creeping higher as the housing market softens, accounting for most of the year-on-year increase. 

The New South Wales arrears, in my best estimate, likely relate to vacant high-density apartments (e.g. Chatswood, Epping, Ryde, Hills District) and over-leveraged households on the city fringe. 

More pertinently, the increase in arrears largely relates to interest-only mortgage resets, with 30 plus day investor arrears up to 1.25 per cent in October from just 0.86 per cent two years earlier. 

Would you like some QE with that?

Incidentally, herein lies another unintended consequence of Labor's proposed negative gearing and capital gains tax policies. 

The Reserve Bank successfully negotiated the resources investment cliff by teeing off what has been by far the greatest high-rise apartment construction boom Australia has ever seen.

High-rise apartments are, in the main, bought off-the-plan by investors, and the ALP policy proposes to clobber the resale market by erasing two of the three major tax benefits that made new units just about attractive enough for investors to buy in the first place.

ScoMo has already wiped out the third one, being plant and equipment depreciation under Division 40. 

Statistically speaking new high-rise apartments already carry a worryingly high risk of loss at resale for investors, but under the proposed changes that percentage will be runnin' sky-high. 

How high you ask? 

Very high!

Insane timing, but apparently it's all going to wash through just fine.

Population growth remains strong (but internal trends shift)

Population growth still strong

The June quarter tends to be a quiet one for population increase, but over the course of FY2018 estimated population growth remained strong at 391,000 or +1.6 per cent, despite a moderate slowing of visa processing and net overseas migration.

Total births increased by 7,000 over the 2018 financial year, mainly due to a jump in New South Wales, although there have been processing lags and blips before.

In time this will set Australia up for its next property cycle as apartment construction slows dramatically over the next few years, but at the moment it's all about mortgage processing delays and mechanical minutiae.

New migrants from overseas are now dominated by young arrivals from China (83,000 in FY2018), India (67,000), and other Asian countries, and less so by permanent migrants from New Zealand, Britain, or other parts of Europe.  

Of the 553,000 migrant arrivals in FY2018? Overwhelmingly they still headed for Greater Sydney (179,000), Melbourne (151,000), Brisbane (56,000), and Perth (48,000) respectively, with other parts of south-east Queensland capturing a fair chunk of the remainder.

The bulk of new migrants lie within the 18 to 34 years cohort, and some 85.4 per cent now opt to reside in the capital cities, and especially so Sydney (32.4 per cent) and Melbourne (27.3 per cent).

Internal shiftology

There have, however, been some internal migration shifts over FY2018. 

Interstate migration to Queensland increased to the highest level in a dozen years as incumbent Aussie residents moved away from the crowded capitals for the more affordable Sunshine State.

I'm hiding in that maroon line myself somewhere, albeit at the nadir of the cycle some years back. 

And while Melbourne is still capturing interstate migrants from South and Western Australia, this brain drain trend is now moderating from last year's unprecedented heights. 

Totting that all up, then, the estimated growth in the respective resident populations of New South Wales (119,000) and Victoria (138,000 or 2.2 per cent) was still very high historically, but the extreme rates of growth seen in the preceding year have eased thanks to the factors noted above. 

At 85,000 Queensland's population growth was at the highest level since 2013, while seasonally adjusted dwelling commencements in the state dropped sharply from 11,400 to 9,900 in the June 2018 quarter.

This signals a conclusive end to the record high rates of apartment construction that have dogged Brisbane landlords for the past few years. 

Indeed apartment construction is now slowing so sharply in Brisbane that trend vacancy rates in the city have been tightening steadily through most of 2018. 

The wrap

There have been a few noises coming out of Canberra about tinkering with population policy, but by and large both main parties seemingly remain committed to so-termed 'Big Australia' levels of migration.

The estimated resident population of Australia passed 25 million just after the end of the 2018 financial year, and by the end of the calendar year that figure will be close to 200,000 higher, which gives some perspective on the absolute pace of population growth. 

People evidently still want to live in Australia despite the weakening outlook.

Stock markets can't quite bring themselves to believe that we could be heading for a self-inflicted recession driven by the Royal Commission. 

And yet with the ASX 200 having pulled back from 6,350 at the end of August to about 5,500 today, they are tentatively beginning to price themselves in that direction.

Thursday 20 December 2018

SEQ the drawcard

Beautiful one day...

...interstate migrants the next.

Annual interstate migration to Queensland is still rising, now up to +25,000.

That's the highest since the mining boom days of 2006.

Total population growth in the state rose to +85,000, which is the highest since the peak of the resources investment boom in 2013, albeit with slightly different drivers this time around. 

Annual population growth in FY2018 was strong nationally at nearly 400,000, driven largely by net overseas migration and young migrants from China, India, and other parts of Asia.

I'll look at the figures around the traps in more detail next up. 

NSW unemployment rate hits 40-year low

Unemployment keeps declining

Stacks of interest in today's employment report - so much, in fact, that the ABS website crashed again.

Funding required, to use a hackneyed Muskism.

The composition swung back to part-time, but the economy added another +37,000 jobs in November 2018 on a seasonally adjusted basis to 12.7 million, led by firing Victoria at +30,900. 

Looking through the noise the economy added an impressive +295,700 to total employment year-on-year, for a growth rate of 2.4 per cent. 

On a cyclically positive note the trend participation rate hit the highest level on record.

And in spite of this the trend unemployment rate continued to decline to 5.12 per cent, the lowest since all the way back in July 2011. 

Victoria has been the great improver of late, but New South Wales saw its unemployment rate fall to a 40-year low of just 4.4 per cent.

The annual growth in hours worked was still very modest at under 2 per cent, which is hardly a ringing endorsement of strength. 

The wrap

Another solid headline result, with employment growth continuing at a good pace through 2018 to date.

Excruciatingly all of this good work risks being undone as some bankers have practically gone on strike in protest at the Royal Commission. 

Overall, lagging indicators very good, leading indicators increasingly dicey (this isn't only my opinion, by the way, it's also the opinion of bond and futures markets).