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Tuesday 30 April 2019

Time to release the brakes

Credit squeeze continued through March

Housing credit growth slowed to just 3.99 per cent in March 2019.

Word from bank economists is that housing finance was softer through March (before picking up again in April) and this view is supported by the latest Reserve Bank figures. 

For a country at the tail-end of a construction boom and with a ballooning population in the prime homebuying age brackets this is a remarkably low figure.

In fact, it's the lowest housing credit growth on record. 

Investor credit growth also slowed to the lowest level on record in March 2019, at 0.7 per cent over the year. 

Three of the four major banks reported zero growth in housing investment loan exposures over the year to March 2019, and ANZ was at negative 5 per cent.

If you were looking for positives the housing credit impulse impulse has flattened out, albeit still in negative territory, although this model can be distorted by factors such as foreign capital. 

Capital city house price declines have slowed, suggesting that a market turnaround may be imminent.

Furthermore growth in term deposits is flying, and there are no issues with the cost of funding; the challenges are all around banks willingness or ability to lend, and the confidence of some buyers given all the recent disruption. 

The wrap

The housing downturn has deflated the most expensive markets effectively.

But as always there's a cost, and the impact has been brutal for new housing sales, construction and real estate agency employment, mortgage brokerages, and so on. 

Home loan arrears have also increased through February 2019 as borrowers find it harder to roll over interest-only loans.

The increases in arrears have mainly been seen in Western Australia and the Northern Territory to date.

Given the high minimum floor assessment rates it'd be nice if lenders now felt they could write loans without having to ask insanely pedantic questions about the previous year's expenditure.

Stamp duty rollover as mobility crashes

Stamp rollover

Stamp duty held up at $21.7 billion in 2017-18 up from only $12.8 billion five years earlier, according to the latest ABS statistics on Taxation Revenue. 

This was mainly thanks to Victoria, where transactions were still firing through 2017-18 on booming population growth. 

Melbourne came to its property downturn later than Sydney, which was already well into its decline by 2017-18. 

Since that time housing market transactions have been in freefall, and so too have stamp duty receipts, especially in New South Wales. 

Victoria's state budget will also take material write-downs on stamp duty.

Stamp duty is an impediment to social and labour force mobility, but at least it's only levied once instead of every year. 

Land taxes and rates are levied each and every year and are often based upon arbitrary valuations, which miraculously seem to rise every year regardless of market conditions. 

Land taxes and municipal rates continued to mushroom to $30.3 billion, to be up by 39 per cent from five years earlier.

The taxes raised from property will never be 'enough', though, which does leave property investors exposed to tax grabs. 

Don't forget land values are a stock; the $30 billion in taxes and rates is a flow, which is levied every year (and apparently always rises). 

Turnover collapses

It's hard to get an accurate real-time reading on transaction volumes in the housing market.

But based upon all available indicators the established housing market annual turnover has sunk as low as we've ever seen it, now tracking at about 4 per cent.

There is spirited support of macroprudential tools such as larger deposit requirements, forced amortisation of loans, and especially the high minimum floor assessment rates on loans. 

Each of these measures has, after all, been supremely effective in removing the speculative heat from the market, if not too effective.

Distortions and resilience to shocks

There's another side to the story, though, which is becoming increasingly apparent as the Australian economy has essentially stalled over the past 9 months. 

International experience, including in Sweden, suggests that macroprudential measures can also create other distortions.

These include reduced consumption due to over-saving for deposits (or amortisation of loans), reduced construction activity, and locking out low income earners from purchasing property entirely.

Moreover, the reduced turnover in the established housing market consequently stunts social and labour force mobility, which has adverse implications for productivity. 

There can also be a lack of diversification as high deposit requirements and forced amortisation tie up all of an individual's savings into illiquid housing equity.

Perversely, therefore, tighter lending standards can reduce the resilience of mortgagors to shocks for many years to come, even if there are benefits initially. 

No-one disputes how effective the tighter lending standards have been, but now we have a range of markedly different mortgage lending rates across a range of different products, and arguably we're now seeing elements of all these distortions in Australia too.

An interest rate buffer of 250 basis points would be a better way to go. 

Monday 29 April 2019

Hey Siri, get me a comical Brexit analogy


h/t @BBCsport @LondonMarathon

How the cash rate might've bottomed (funding costs CRUSHED)

End of the line

While the debate has shifted to how many interest rate cuts will be delivered by the Reserve Bank, here's the counter-argument. 

The RBA has been explicit that employment matters for its interest rate trajectory.

Growth in the economy and progress towards the inflation target matter too, but the central bank is keen to exhibit patience and to look through one-off factors such as fuel prices, tax cuts, or stock market moves, rather than engaging in fine-tuning. 

As for the jobs figures?

Well, annual employment growth accelerated last month to a very strong +2.44 per cent, and full-time jobs jumped by more than 48,000 for the month of March. 

Although leading indicators such as business surveys and job advertisements have weakened, to date no increase in the trend unemployment rate has been observed.

On that basis alone, the cash rate can and possibly will be left on hold in May.

There may instead be some tweaking of the statement wording to keep the punters happy. 

Funding costs crushed

In the meantime, short term funding costs have been crushed in Australia, while the bank bill swap rate has been tracking at around record lows. 

Both 3-month and term are where Aussie banks hedge, fund, and borrow, while deposit flows have been huge. 

The word on the street from bank economists is that housing finance may have been a little softer in March post-Royal Commission, but mortgage activity and volumes are now beginning to pick up again in April.

And as more banks continue to slash their fixed rates mortgage activity can begin to build up a head of steam, especially as housing market investors rush to beat the 1 January 2020 cut-off for tax benefits, as proposed by Labor.

The housing downturn may thus be over soon. 

In the meantime, if inflation is truly flat, as some are arguing, then real wages must have received a timely boost as nominal wages growth rises back to 2½ per cent. 

Don't bank on a May rate cut, then.

And a lot can happen over the coming months which means that 1.50 per cent is the bottom for the cash rate. 

Sunday 28 April 2019

Does monetary policy still work?

Pushing on a string?

Some interesting debate on social media this week about whether lower interest rates still 'work' in terms of stimulating inflation and the economy.

So the argument goes, there's little point in cutting rates because, well, people will just pay down more debt and there will be no benefit to the real economy. 

I don't believe that.

For starters Aussies still have some $404,227,000,000 in interest-only mortgages for which the borrowers would very much enjoy lower interest rates, while there would be a confidence boost for owner-occupier households, and probably a boost for new housing investment too (in fact, the housing downturn would almost certainly be over). 

But even if the contention was true - and I don't believe it is - mortgages and the housing cashflow channel is only one of the ways in which monetary policy is effective. 

And here are the others courtesy of the Reserve Bank itself:

Source: RBA

Lower interest rates boost asset prices, change inflation expectations, and encourage less saving and more spending.

Households have hoarded an unprecedented war chest totalling well over $1 trillion of cash and deposits through this cycle, some of which can be prised out. 

Lower rates also reduce the cost of business funding and, at the margin, encourage business investment decisions.

By rights we shouldn't even be having this conversation when the cash rate is still well above the zero lower bound. 

With inflation tracking close to record lows the real cash rate is no longer negative, so something is too tight, be it monetary policy or the supply of credit.

Exchange rate channel

An often overlooked mechanism is the lower dollar that would result from rate cuts or unconventional measures such as quantitative easing.

Let's look at one very simple example for Australia.

Before the resources boom we'd always had many more people visiting these shores than there were Aussies jetting off to spend their hard-earned dollars in Bali or Tokyo. 

But as the dollar soared and Australians built up unprecedented household wealth towards $10 trillion and beyond, off we went to explore the world...and fair enough too.

This trends is gradually turning around with the dollar at 70 US cents.

But if you push the dollar down towards the 50-60 cent range or lower suddenly we'd be holidaying and spending at home again, and tourists would be lining up to come here and spend too.

More broadly the exchange rate is one of the simplest and most effective channels for monetary policy...and it still works. 

A lower dollar for Australia also boost foreign investment and our export income.

Whatever it takes

As for recent evidence of monetary policy working over time, check out unemployment rates in the US where the unemployment rate has fallen as low as 3.8 per cent.

Or closer to home (for me anyway), look at Britain, where the unemployment rate has fallen to a 44-year low at under 4 per cent, and wages are now rising at 3½ per cent. 

Some commentators have argued that central banks have become unconsciously biased towards tighter policy and building monetary firepower so as to maintain their relevance. 

Others have suggested that Australia's central bankers may even be fĂȘted at global conferences, or lauded for never having been driven to the zero lower bound or quantitative easing through the financial crisis, and as such as reluctant to go lower.

I wouldn't know about any of that, but although it takes commitment and credibility the answer to whether lower rates still work must surely be an emphatic 'yes'.

Saturday 27 April 2019

Running on empty

Stocks soar

Another record high for US stocks overnight, with the S&P 500 up by a rip-snorting 17 per cent so far this year in notching the best start to a calendar year in more than three decades. 

The Dow Jones and NASDAQ indices are also back to record highs.

Wild times. 

These have certainly been interesting moves, with valuations often running very high for tech companies in particular. 

Tesla lacking charge

In recent years increasingly wide-eyed observers have noted the swings and arrows of outrageous fortune experienced by cash furnaces such as Netflix (NFLX) with its enormous debt pile yet an outlandish market cap of US$164 billion. 

There's been no story quite as entertaining as Tesla (TSLA), though, with its pot-smoking CEO duelling it out with the sceptics in real time on social media; truly a stock market story for our times. 

Although the gap has closed Tesla had run its total net income from negative US$78 billion in 2007 all the way to nearly negative US$2 billion by 2017, a cash furnace nonpareil.

The stock price has been volatile some time now but things finally appear to be unravelling, with TSLA sinking below $235 today, to now be down 38 per cent since its most recent peak in December. 

Markets at last appear to be wearying of the grandiose promises, flamboyant claims, and dire 'earnings' reports. 

Even after the crash the market is still valuing Tesla at around US$40 billion, which is pretty darned optimistic given the parlous state of its cashflows.

Last year Tesla sold 200,000 vehicles, versus 2.5 million for Ford.

Even after the 38 per cent correction the market is valuing both companies at a similar market cap. 

Recent moves in bond markets appear to suggest that a Tesla capital raising may be in the pipeline for the not-too-distant future, so the shorts may have had their fun for now, even after accounting for a potentially material dilution.

Never a dull moment here.

What a yarn!

Must see articles of the week

Weekend reads

Interesting mix of news this week, from a looming jobs market deterioration to possible rate cuts.

All summarised for you here at Property Update (or click on the image below):

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You can find the details for this year's Wealth Retreat at Gold Coast here.

Friday 26 April 2019

Shorten hauled over the coals

Election looms

An interesting election coming up. 

You pretty much know what you're getting with the Coalition, which is to say more of the same.

The government has brought the Federal Budget all the way back from a thumping deficit into a looming surplus, aided much by buoyant commodity prices, an unexpected stroke of fortune.

The unemployment rate has been brought down from almost 6½ per cent to about 5 per cent, although the housing downturn stopped the improvement in its tracks. 

Labor is pledging a spectrum of higher taxes, and broadly speaking a campaign calling for greater fairness and equality. 

Export prices surging

Today's trade price indexes showed further improvement in the terms of trade, with export prices surging +15.3 per cent higher year-on-year, to be up by more than +50 per cent over the past 3 years. 

Import prices ticked down -0.5 per cent in the March quarter. 

The anti-mining movement had an apparently strong case for no further coal mining investment as prices fell sharply until the middle of 2016.

But then, to almost everyone's surprise, coal prices have ripped higher for both thermal and coking coal (export prices are up +123 per cent from the nadir on the below index, which is astonishing). 

Aside from a brief spike when China poured stimulus into its economy during the financial crisis our bulk commodity export prices have never been as favourable for national income as they are now. 

All of which brings the Adani Carmichael coal mega-project into focus for the election.

The Prime Minister's position is clear enough: he's the guy that brought a lump of coal into parliament, after all, so there's no ambiguity there.


Opposition leader Shorten has a much trickier path to tread, since he simultaneously has to appear to be against the project to maintain the official line for environmental activists, yet at the same time supportive of the project to keep the mining union onside (though McManus refuses to back the project).

It's an unenviable and all but impossible task, leaving evasive or ambiguous answers as the only available option.

Some interesting debates to follow, if Shorten agrees to go on the national free-to-air channels.

Who'd be a pollie?

Thursday 25 April 2019

Where are rates heading?

Highway to hell

Gosh, so much conjecture over where interest rates are heading!

Bond yields have basically collapsed to record lows since the banking Royal Commission got its teeth into the lending market, with fresh lows for the 2 year and 3 year yesterday. 

UBS, Market Economics, Westpac, and others have already been calling for repeat rate cuts for ages.

AMP have also been calling for cuts.

Yesterday, Citigroup and normally upbeat ANZ joined the calls for easing.

Today it transpired that JP Morgan have now called cuts for May and June.

Once the major banks are forecasting cuts they normally do follow.

Market measures

Still, whenever in doubt look to the markets.

Futures markets are now flirting with the possibility of three interest rate cuts, with the implied yield curve inverted all the way out into H2 2020. 

Cost of funding plunges too

Meanwhile funding costs continued to fall this week to break down to multi-year lows, so regardless of monetary policy moves we should see more lenders cutting their fixed rates over the coming weeks. 

Moreover, banks should pass on any rate cuts that are delivered, thus aiding the transmission of monetary policy.

Will we see mortgage rates with a low 3-handle soon? 

Quite possibly.

That would certainly shore up confidence in the housing market by improving affordability for existing mortgages. 

A remaining concern is at that lenders are still running serviceability calculations at 7¼ per cent, which is too large a buffer now that the glut of interest-only loans has been so decisively tackled. 

Australia's household debt pile is now being paid down, and finally there is clear daylight between wages growth and inflation, meaning that real incomes are rising. 

A range of other factors are aligning to help take the real or imagined pressure off household debt ratios prospectively.

Perversely, however, lower mortgage rates can actually reduce borrowing capacity for incumbent housing market investors, due to the way in which negative gearing add-backs are calculated.

This is patently nonsensical, but an irritating and ultimately self-defeating reality of the prevailing lending environment.

Sydney & Melbourne unemployment falls

A tale of two...

The annual average unemployment rate in Sydney continues to fall to fresh cycle lows.

Greater Sydney has added about 85,000 to net employment over the past year, which is still very strong jobs growth. 

And Greater Melbourne has added more than 100,000 which is massive.

But the rate of hiring does look set to slow in the big cities, and it's already slow elsewhere. 

Melbourne's record building boom, meanwhile, also keeps its very promising unemployment rate trend intact.

Elsewhere there is a lot of slack persisting in the labour force, with most capital cities tracking at around 6 per cent or higher.

It seems fair to say that the NAIRU in Australia is presently closer to 4½ per cent (or at least lower than was previously thought). 

Get set for four interest rate cuts this year

RBA primed to go big on rate cuts

A choice quote or two from respected Reserve Bank observer James Glynn of the Wall Street Journal:

"The RBA could roll out as many as four interest rates by year end."

"Don't expect the RBA to be timid about the next leg down in interest rates."

"The RBA is going to go big.

Frankly it would be silly for the RBA to cut once, and wait."

"The coming cuts will take the cash rate to well below 1 per cent...".

Cuts should be passed on in full by mortgage lenders, argues Glynn, given plunging funding costs.

Full article in The Australian (paywall):


A brief mini-memoir I wrote for ANZAC Day last year.

Lest we forget.

Wednesday 24 April 2019

Banks shaking off the Royal Commission blues

Banks bounce

Australia's major banks are showing some signs of life having previously been whacked by the Royal Commission.

Commonwealth Bank (ASX: CBA) has recovered nicely to hit an intraday high of $75.34. 

That's the highest price since August 2018 when the public hearings really began to hit their straps.

Another signal here that credit is just starting to ease up.

Macquarie Bank (ASX: MQG) is trading at $135.77, a record high.

Rate cuts are on the way

Long slow march to zero (redux)

It's been quite a while since we've done a 'long slow march to zero' post (is this part XIX now? I've totally lost count!).

But it looks to be only a matter of time before the cash rate goes lower in this environment.

While both the government and opposition bicker about the race back to a Federal Budget surplus the economy has been starved of credit, and it all has all but completely stalled.

Inflation came in at precisely zero for the March 2019 quarter, despite some drought-driven increases in the price of veg.

More pertinently core annual inflation has seized up too, with the trimmed mean reading down to 1.60 per cent and the weighted median measure tracking at a remarkably low 1.24 per cent.

Although fuel was a drag on this quarter's figures it'll be hard to construct a credible argument that inflation is heading back to target on these numbers.  

The narrative and forecasts on both growth and inflation have been rather rudely disrupted.

In fact, underlying inflation is now the lowest on record. 

Tradables inflation in the economy was already low; but non-tradables is now slowing again too.

Whether rates are cut in May, or whether an easing bias is introduced in May with cuts potentially to follow, I'll leave that to the experts to observe. 

Personally? I reckon after the most recent jobs figures again beat expectations there will be no cuts just yet and the central bank will hope for things to turn around. 

Rental CPI lowest since 1993

A quick look at rents while we're here.

Rental price growth of 0.4 per cent was the lowest since Meat Loaf was #1 in September 1993.

In Perth the rental price index is now down 22 per cent since 2014 (although Darwin is looking much worse). 

Indeed, in Darwin the economy appears to have sunk into outright deflation.

The wrap

There's a curious paradox here.

And that's with inflation only flat, real wages have received quite a nice little boost.

Mortgage rates have also been falling too for new borrowers. 

From where I'm sitting I can hear a television where Bill Shorten is simultaneously arguing at a presser that the election is a referendum on the spiralling cost of living, and yet zero inflation is a "massive problem which shows the economy is going down and down and down."

Of course a zero increase in consumer prices actually is, factually speaking, an improvement in the cost of living, so he's talking codswallop. 

Bizarre stuff, but as far as I could tell nobody seemed to call him out on the weird double-speak.

Unfortunately, the skilled job vacancies report for February was revised down to a nasty negative, and this was followed by more of the same in March.

With the government dithering, hiring set to slow, and the banks still making it ridiculously hard to get a loan, interest rates will probably have to fall in H2 2019.