Pete Wargent blogspot


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Monday, 14 October 2019

HK capital flight

Hong Kong flight


And it will be capital as well as people.

Source: YouGov

Brisbane jackhammers


It's all happening in Brisbane CBD...there's not too much downing of tools or time for smoko around here at the moment!

The 30-second video below should give you the gist:

So while residential construction is now slowing towards multi-year lows, there's plenty happening in the commercial and infrastructure space. 

One of the major broadsheets reported this week on its front page that traffic controllers on the Queen's Wharf project are set to earn more than $194,000 per annum, including 10 hours per week of paid overtime.

Meanwhile, including overtime carpenters are expected to earn around $240,000 per year for a 46-hour week. 

All of which will feed itself back into Brisbane's economy over the next few years.

We looked at some of the major projects and what they might mean for Brisbane at our buyer's agency website here

Underemployment refuses to come down

Employment holding up

Roy Morgan reported that employment growth was still surprisingly strong over the year to September 2019 (+470,000), and mainly driven by full-time jobs. 

This could be another indicator of an upside surprise for this week's ABS employment print (alongside the impact of sample rotation)? 

However, Roy Morgan too has found that the size of the labour force is expanding very rapidly.

While unemployment as measured by Roy Morgan has improved to 8.7 per cent, there are still more than 2 million Aussies seeking work or more work, and this dynamic has now persisted for four consecutive years (inflation has been under target throughout that period too). 

Lowest Sydney vacancies in a year (but...)

Vacancies rate down

The first sign of Sydney's rental market turning the corner, with the REINSW reporting the lowest vacancy rate since October 2018 for the month of September.

The decreased vacancy rate for Sydney to the lowest level in 12 months was driven by decreases in the middle ring (-0.9 per cent), the outer ring (-0.8 per cent), and then the inner ring (-0.3 per cent). 

Demand for rentals tends to be higher in the warmer months, and the REINSW sees the improvement as being sustained for the rest of the year.

A look at the smoothed 6mMA vacancy rates by region below, however, shows that there is still quite a glut of rental stock to be worked through. 

Moreover, there's still another blast of unit completions to come in parts of Sydney before this construction cycle tails off in earnest.

Elsewhere, the vacancy rate in the Hunter Valley tumbled to the lowest level in years at just 1 per cent, while Newcastle wasn't far behind at only 1.2 per cent. 

Across the Illawarra region the vacancy rate declined in September, but with Wollongong still somewhat elevated at 2.7 per cent. 

Auctions solid

Clearance Clarence

Preliminary auction clearance rates this weekend were a solid 77.35 per cent.

Source: Corelogic

The prior year figure was only 47 per cent.

The solid result was mainly driven by Sydney (82.31 per cent).

Sunday, 13 October 2019

Transport & walkability


I've always believed that transport connections for the Central Business District and walkability will be two of the key determinants of property investment success as the capital cities become more mature. 

At the macro level factors in the economy, labour market, construction sector, and policy settings will drive median prices.

But at the micro level, a premium will be paid for the most desirable locations as the cities continue to densify rapidly. 

Here's another cautionary tale from Tarneit, where land has been released at a fearsome pace out on Melbourne's fringe, via the ABC:

Things are moving very quickly in this direction in Greater Melbourne and Sydney in particular. 


The week ahead

There may be a positive start for the Aussie stock market this week on trade war hopes.

The main data dump this week will be the Labour Force figures for September 2019, due for release on Thursday morning. 

All of the leading indicators now appear to point to a slowdown in hiring.

In saying that, the outgoing sample this week month has a lower employment-to-population ratio than the sample overall, so there may well be an upside surprise for total employment driven by sample rotation. 

Better measures of labour market slack to consider may include the underemployment rate (which rose from 8.4 per cent to 8.6 per cent in August), and the unemployment rate (which was up from 5.2 per cent to 5.3 per cent in August). 

Epic contortionism

Recovery is solid

All manner of contortions from commentators trying to argue that the housing market hasn't bounced, despite the price indexes showing increases, which have gathered some speed since the election. 

In reality, mortgage sizes are increasing, lending volumes are increasing, mortgage rates are falling, and stock levels are tightening.

Some of the popular narratives over the past year have included record mortgage stress, a mad rush for the exits, and a swathe of forced sales due to the interest-only cliff.

There isn't much evidence of any of this in aggregate, though: Sydney listings, for example, are now down 21 per cent from a year earlier:

Source: Corelogic

Auction volumes this weekend were actually higher this year than a year earlier, for the first time (albeit much lower than in 2017), and clearance rates remained solid.

There's also a lot of cash on the sidelines, which presumably will find its way into equities or real estate in 2020.

Granted, it's up to you whether you believe all the bluster, but on the ground market conditions have moved on, and there's plenty more competition now in popular locations.

One thing I do agree with is the two-speed nature of the recovery, with the new apartment sector facing a world of bother and uncertainty, at least until there are stock shortages again in 2021. 

Saturday, 12 October 2019

On finding gentrifying suburbs


A look at this popular topic here (or click on the image below):

Bank shorts ease back

Bank shorts

An orgy of short positions on the big 4 Aussie banks reached a crescendo in the first quarter of 2019.

At that time there were more than $7 billion in total dollars shorted as the financial services Royal Commission handed down its verdict. 

Since then, short positions have declined considerably, now down to under $3 billion in early October. 

Source: ShortMan

Generally speaking banks have rebounded solidly.

But that's been nothing compared to the bonanza for mortgage aggregators, as the threats to break up the broking industry have receded. 

Mortgage Choice (ASX: MOC) has recovered from 73 cents to $1.25, while AFR has soared from a low of 97 cents to a record $2.40 as quarterly lodgements broke their previous strongest result.

Friday, 11 October 2019

Weekend reads

Must see reads

This week a look at housing supply, the potential advent of 'QE', and why a perfect storm means that Sydney and Melbourne housing prices will be at fresh highs sooner than you think.

See here for more, or click the image below:

You can subscribe for the free podcast HERE!

Why trees don't grow to the sky

Reversion to the mean

Here's why (or click the image below):

Average loan size increases

Mortgag sizes up

The interaction between two interest rate cuts and changes to serviceability assessments increased the propensity of some individuals to borrow in August.

This adds some weight to Grattan's arguments, which admittedly I railed against a bit the other day.

Mea culpa.  

Excluding refinancing, the average loan size increased to $414,007 in August 2019, up from $399,898 a year earlier. 

When it comes to mortgages some of the commentariat seems to have lost its collective mind, in the mad charge to demonise debt.

In reality, though, economies need a flow of credit to thrive, interest serviceability has improved by more than a third, mortgage arrears are very low ex-Western Australia, and Australia's median household wealth is now the highest in the world. 

My good pal Stephen 'The Kouk' Koukoulas of Market Economics explored some of these ideas yesterday at Yahoo here

It's important to note that although mortgage sizes have increased a little, transaction volumes are still low.

Popular narratives this year have included a rush for the exits, or a swathe of forced property sales due to the interest-only reset.

But the truth is new listings have never previously been as low as they are today for this time of year (at least since accurate records began):

Source: CoreLogic

Detailed figures from SQM Research showed that there has been a dramatic fall in the stock on market in Sydney since peaking in October 2018.



Australian Finance Group (ASX: AFG) also released its latest mortgage index for the September 2019 quarter.

And it too recorded a leap in the average mortgage size over the most recent 3-month period.

The jump was driven by a surge in New South Wales, though record average mortgage sizes were actually recorded everywhere except for the Northern Territory.

AFG recorded only an 18 per cent market share for interest-only loans, with the rebound being driven by homebuyers, and only 26 per cent of loans going to investors.

First homebuyers saw their highest market share since 2013, while major banks captured their lowest market share since all the way back in 2007.

Overall, there were record lodgements totalling $15.7 billion over the September quarter, up 21 per cent from the prior quarter, and up 11 per cent from the same period a year earlier.

Thursday, 10 October 2019

Personality goes a long becoming a better investor

The 9 types

And here's why (you can also click on the image below):

First homebuyers surge as credit flows post-election

Housing finance flows

It looks as though credit is beginning to flow again, with owner-occupier commitment up 11.9 per cent over the 3 months to August, and investor commitments up by 11.6 per cent.

There was only a modest 0.7 per cent increase in the number of owner-occupier commitments excluding refinancing in August, missing expectations.

However, the value of investor commitments was up by 5.7 per cent, mainly driven by Victoria, followed by Queensland and New South Wales. 

Volumes are still well down on a year earlier, however.

Interestingly, the number of first homebuyers in the market is now rising strongly even ahead of the planned deposit scheme (which isn't effective until January 2020). 

If sustained, in absolute we'll very soon have the largest number of first homebuyers in the market for any period outside the Rudd stimulus. 

Lending is picking up, then, suggesting that the housing market recovery will continue. 

There has been a modest increase in the number of homebuyer commitments, but overall transaction levels remain quite subdued. 

Overall the numbers looked most favourable for Melbourne, Sydney, and Brisbane, in that order.

Wednesday, 9 October 2019

QLD housing starts lowest since 2012

Supply dries up

It's been a bit of a rocky ride for landlords in Brisbane trying to find tenants in recent years, following a record stretch of high-rise apartment over-building. 

That's all but ended now, though.

New dwelling starts fell to the lowest level since 2012 in the June quarter at just over 7,000.

Attached dwelling starts were especially anaemic at only just over 2,000. 

Attached commencements were running at more than thrice that level back in 2016.

We can thus expect the rental market to continue tightening over the next few years, driving up rents and in turn housing prices as interstate migration continues to pull migrants northwards from Sydney. 

I was quoted accordingly in this Newscorp/Courier Mail piece here.

8 timeless investment principles (for any asset class)

Timeless investment principles

These are they (or click the image below):

Housing supply to dwindle

Dwelling starts tumble in FY2019

Building activity is one of those complex data series with many moving parts, and it probably deserves more than one blog post.

That's not going to happen, though, so let's take a brief look at the death of the construction boom in two short parts.

Part 1 - Housing starts fall 24pc

New dwelling starts seemed to stabilise at a more sustainable but lower level in the June 2019 quarter, down 24 per cent from a year earlier on a trend basis (and down by some 36 per cent for attached dwellings). 

That's potentially a lot of construction employment that will need to replaced across the coming couple of years, suggesting that full employment is likely to remain elusive. 

Since steep foreign buyer surcharges were introduced, it's been a similar story across the board over the past two financial years, with far fewer apartment projects attracting a green tick (although of course there have been other factors too). 

Part 2 - The pipeline

By the end of the 2019 financial year the number of new dwellings under construction was down to 207,269 (from a peak of 231,416 as at March 2018), with further steep declines likely to be in the post. 

Queensland has already worked through the bulk of its construction slowdown, with New South Wales now the main drag.

Over a period of 18 months the number of attached dwellings under construction in NSW has consistently declined from 68,772 in the December 2017 quarter to 57,842 by the end of June 2019.

Given we're now in October the figure is probably quite a lot lower today, too.  

The number of dwellings approved but not yet commenced declined to just over 32,000 at the end of FY2019, with 46 per cent of those being located in NSW.  

FY2019 was the biggest ever financial year for dwelling supply in NSW, with a grand total of more than 75,000 completions. 

The below chart helps to explain vacancy rates running as high as 3.4 per cent in Sydney by August 2019, as higher-density apartment completions continued to rain in. 

The wrap

The ABS reported a modest increase in abandonments to 5,280 dwelling units across the financial year, and overall the pipeline is now shrinking quite rapidly.

Certain regions of Sydney are still working through a high volume of apartment completions, but the challenge for the broader economy in Australia will be how to plug the gap that is left as the record levels of residential employment fall away.

Economists are now openly debating the prospect of QE in Australia to reduce interest rates and hold down the level of the Aussie dollar. 

Tuesday, 8 October 2019

(Some) emerging markets showing value

High valuations

Not much news today, so instead here's a brief glimpse into what I've been investing in recently outside of property (no advice here: I don't know your personal situation, and even if I did, a weblog is no place to go for personal investment advice!). 

A while back I attended a seminar in Brisbane where the presenter highlighted that although the US stock market was up by about 250 per cent through this cycle so far, there was 'still time to get in' before the peak, especially because some previous cycles have delivered even greater returns.  

Of course, there then followed the obligatory pitch to invest in their US stocks fund. 

The problem with this flawed line of thinking is that everyone apparently thinks they will get out before the crunch comes; but by definition this cannot be so, and instead they're left as a bagholder. 

Now, a lot of people talk about value investing, but in reality they're often circling the same few stocks as everyone else, effectively in a game of pass the parcel.

But what's really changed over the past couple of decades is that these days you can invest globally relatively easily, and you can invest in diversified products such as index funds or ETFs that can sometimes help to reduce risk. 

How is it possible to be genuinely contrarian, and actually invest for value, at a stage in the cycle when most developed markets aren't cheap?

One place to look is at emerging markets, while also holding back some cash for when the US finally experiences a significant correction, bringing down the Australian market and others with it. 

Diamond dogs

You might recall one of the market 'dogs' we invested in last year was Turkey (see, for example, here and here) following the country's high-profile currency and debt crisis. 

The contrarian approach involves being able to separate the noise (daily crisis reporting!) from the signal (entire market on sale!). 

The Turkey ETF has rebounded pretty nicely from $18 to $25, so that's performed well as expected.

Pakistan has been another investment we've been into more recently. 

As interest rates were hiked from 8 per cent to above 13 per cent the local bourse in Pakistan has experienced an enormous drawdown, which is not totally irrational (after all, why bother to invest in stocks when cash is paying such handsome returns?).

The market dogs strategy doesn't spend too much time trying to predict how or why the stock market will recover, just that when you are buying with a PE ratio of 7 or 8 and with a dividend yield of 9 to 10 per cent, the market will probably recover some time fairly soon. 

And indeed, the Pakistan ETF (PAK) has rebounded nicely enough from $5.50 to $6.60 so far, despite remaining cheap. 

When you back-test this approach across developed markets, emerging markets, asset classes, and sectors, you'll find that the worst performers most often (though not always) rebound within 12 to 24 months (though of course you can afford to be reasonably patient when you're getting dividend returns of 9½ per cent). 

Risk management

There are a couple of common criticisms of this approach, including one's ability or otherwise to time the market, and the volatility and risks inherent in emerging markets. 

Firstly, it is a truism to say that you can't time the market. 

You can never pick the exact bottom of the market, that's undoubtedly true.

But by staging your entry to a position you can get near enough to the bottom to capture most of the upside and expected future returns, and then simply allow mean reversion to do its thing. 

Now I've long been interested in buying ETFs at good prices, but I should say here that it wasn't me that helped to codify this idea into a systematic investment approach, it was my colleague Stephen Moriarty that brought it all together into a timeless and repeatable strategy.  

And there are a number of ways in which Steve taught me to manage risk.

Diversification is one of the 8 key investment principles, for example: you should only have a certain portion of your capital in any one investment, you can invest in products such as ETFs that are themselves diversified, you can diversify over time by staging your entry into an investment.

You should also rebalance your portfolio quarterly or annually to ensure that you don't become too much exposed to any one position.

Academic papers tends to define risk as volatility, but that's quite a narrow definition and just one of the risks to be managed.

After all, while emerging markets might be more volatile, I've never once heard of anyone complaining about volatility when the market is on the way up. 

And if you want diversification to reduce volatility, one of the emerging markets ETFs I invest in via Vanguard has more than 1,350 stocks in it (and since emerging markets tend not to like trade wars, it's offering reasonable value too). 

In the meantime, it's a good time to exhibit patience and wait for more attractive valuations in the developed world, which will come around again in time, as they always do.

There's a lot of peace in mind in this approach, too: when the media is screeching about the end of the world and the 'horror' of stock markets crashing (getting cheaper), you'll have plenty of dry powder to mop up all of the best opportunities, just when everyone else is panicking and getting out. 


Post-election bounce

There's a stack of absorbing information due out tomorrow on building and construction activity.

And we'll get a broad-ranging data dump to analyse where housing starts are still happening, how many apartments are still under construction, where they're located, and much more. 

Today, on the other hand, there's no interesting news.

Unless, that is, you count the first homebuyer deposit scheme being set to pass through the Senate, which is mildly noteworthy. 

Instead for today, just a solitary chart of housing prices post-election, according to CoreLogic's daily index. 

The 5 capital city aggregate is up by 2½ per cent, driven by a 4¼ per cent increase in Sydney.

The apparent recovery has been mixed, though, with Melbourne also reportedly up strongly, but Adelaide flat, and Perth still sliding.

Much more interesting news tomorrow!


Edit: OK, well I forgot the NAB survey was out today.

But it wasn't when I wrote the blog post, hey.

The ANZ job ads figures, meanwhile, were down for the quarter, and -10.4 per cent from a year earlier.

Monday, 7 October 2019

Contraction inaction sees construction constriction

Apartment work dries up

Dear, oh dear.

All construction sectors in contraction, and jobs are set to be slashed.

Unsurprisingly, apartment construction is slowing most of all, although house building isn't faring too much better. 

A few of the gory details, via the AiG indices:


At this rate of progress the government will get its hallowed Budget surplus to coincide almost perfectly with a recession (or, more likely, a continuation of the 'per capita recession'). 

You can't teach it!