Pete Wargent blogspot


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Monday 30 September 2019

Credit growth slumps to 2.9pc

Credit slowdown

Two of the stronger leading indicators of economic activity are money growth and building approvals.

Building approvals are now down 29 per cent year-in-year, and looking at the latest credit growth figures isn't going to inspire too much confidence either!

Housing credit growth was just 0.2 per cent in August as low transaction volumes and the interest-only reset continued to drag, and this followed on from 0.2 per cent in July, according to the Reserve Bank's Financial Aggregates.

This took annual housing credit growth down to 3.1 per cent, which is the lowest annual pace since records began in 1977. 

This is partly due to the interest-only mortgages reset, as well as more borrowers taking advantage of low mortgage rates to pay down debt. 

Credit growth to investors again declined in August, while annual credit growth pertaining to investors was zero.

Personal credit growth fell to a potentially alarming negative -3.4 per cent for the year to August, although one wonders whether the data series has fully captured the shift away from credit cards towards e.g Afterpay. 

The small business credit crunch is also biting, with business credit growth of just 0.2 per cent in both July and August respectively, taking annual business credit growth down to 3.4 per cent.

Total credit growth over the year to August was just 2.9 per cent - down from 4.5 per cent a year earlier - which for an Aussie population growing at about 400,000 per annum is anaemic to say the least. 

Housing prices remain a mixed picture since the election, with prices now rising in Sydney and Melbourne, but not so much elsewhere (in fact prices in Perth, Darwin, and Adelaide are all a bit lower). 

The credit impulse suggests that the market may be stabilising somewhat at the national level. 

In other news, the TD-MI monthly inflation gauge came in at just 0.1 per cent for the month and 1.5 per cent for the year, and inflation expectations are at risk of becoming anchored lower. 

Financial markets are pricing a rate cut tomorrow as an 80 per cent likelihood, with credit growth approaching recessionary levels, inflation having drifted further below target in 2019, and unemployment rising. 

Governor Lowe noted in a speech last week that there's been no growth in household consumption per person over the past year, and the household cashflow channel of monetary policy is believed to remain effective. 

Saturday 28 September 2019

Weekend reading

Must see articles

The key articles from this week, summarised for you at Property Update.

This week, a look at what's going in the spring markets - click here to read (or on the image below).

By the way, you can subscribe for the free weekly podcast here.

Brissie's time to shine as yield gap becomes a chasm

Bottoming out

Sentiment in Queensland has generally been consistently downbeat in recent years, and it's not been especially hard to see why, with mining investment falling by about two-thirds from the peak.

When things have been a certain way for some time - whether that be good or bad - human nature dictates that people begin to expect them to stay that way forever. 

As the Reserve Bank Governor highlighted in his speech this week, however, mining investment is now finally lifting, which means brighter news for Queensland.

And mining investment is forecast to continuing lifting over the coming years as depleted reserves need to be replenished through renewed exploration and drilling, and as as new resources projects are constructed. 

It's become quite fashionable to be all negative about - well, pretty much everything, to be honest - but the leading indicators already suggest that things are gradually picking up in the Sunshine State. 

This week's figures showed that the state's job vacancies at about 40,000 are now some 73 per cent higher than they were at the horrible 2016 nadir, so hiring is set to lift steadily from here. 

Inner Brisbane is also undergoing a huge infrastructure-driven facelift, as you can see in this short video here, with stage one of the multi-billion-dollar Queen's Wharf project due for completion by 2022. 

Yield gap opens up

For the housing market, affordability as measured by mortgage serviceability can seldom have been higher, with the more competitive mortgage rates set to fall towards just 3 per cent over the coming six months.

Proving that housing affordability will never be out of the headlines regardless of what happens, nominal asking prices for units are now roughly the same as they were almost a dozen years ago, when standard variable mortgage rates were running between 8 and 9½ per cent! 

Excellent work by Louis Christopher of SQM Research has shown there typically to be a strong relationship between rental yields and mortgage rates, yet the credit squeeze, soft apartment prices, and the now-receded threat of a Labor government have seen Brisbane's yield gap open up remarkably since 2014.

Source: SQM Research

We'll stay tuned in for more detailed analysis on this key point via Louis Christopher at SQM.

Meanwhile, interstate migration from the southern states has helped push annual population growth in Queensland back up from under 60,000 to about 90,000. 

And in real time we can clearly see that the rate of apartment dwelling construction is now collapsing, following a record burst of inner city high-rise, even if the official statistics don't yet fully reflect this. 

As such, rental vacancy rates have been easing back down to earth in Brisbane over the past few years. 

Some areas still have elevated vacancy rates, it's true, but the more popular and supply-constrained locations are now finally tightening (the chart below is for New Farm and Teneriffe):

Source: SQM Research

Time to shine

Overall, record low mortgage rates are set to give Brisbane's housing market a welcome lift, yet the usual caveats still apply. 

If the budget allows, try to look for a high land-to-asset ratio, plus locations and property types where demand has consistently outstripped supply historically. 

If you're interested in buying a home or investment in Brisbane you can download our free buying guide here

Friday 27 September 2019

Interest repayments continue to get easier

Repayments easier

It's like deja vu all over again!

The historic ratio of household debt to disposable income was once again revised down, but the trajectory remained up. 

And in the end, we ended up back in the same old place, with an Aussie household debt ratio still at 1.9x disposable income. 

Note that the impact of tax and rate cuts has yet to flow through fully to these figures, so behavioural patterns could change going forward. 

The 'record high' headlines will naturally follow in due course, although the ratio was ostensibly about 200 per cent a couple of years ago - before previous revisions were pushed through - and the growth in housing credit has since been crunched lower (to record lows for housing investors, at zero growth). 

The bulk of Australia's household debt remains concentrated in the upper two income quintiles, while net of a huge surge in prepayments the debt-to-income ratio is pretty much unchanged since 2006. 

Treasurer Frydenberg was also lightning quick off the mark to highlight that the value of assets was 5x that of the debt. 

Meanwhile the ratio of household interest payments to disposable income continued to fall and sow sits well under 9 per cent.

This ratio is now some 33 per cent lower than at the 2008 peak, and trending lower (it was also higher in the late 1980s than it is today):

Interest rates have since fallen further in the September quarter, so further declines are in the post.

There has been some mortgage stress, even in spite of the household interest payments ratio being down by a third, mainly experienced in Western Australia and largely related to the forced interest-only mortgage reset.

That said, S&P expects arrears to fall as repayments have become easier. 

Construction companies collapsing at a record rate?

Construction collapse

Given that I've written a lot about the construction downturn over the past couple of years, this was a headline from the ABC which really grabbed my attention:

You couldn't really help but notice it, to be fair, given that it was immediately reproduced virtually all over the entire internet. 

I thought I'd run the numbers as a bit of a sense check (or fact check, if you will!).

And here's what we got:

So, yeah, I'm not seeing a record rate of collapse here, and the data series only goes back to September 2013 in any case.

Let's rip out the numbers by state to see the trend for New South Wales construction companies: 

Trending higher as expected, but actually the number has been higher previously, even since the financial crisis:

Ralan collapse

Now it is true that there's an issue with phoenix activity, while crucially the actual number of company insolvencies is far less important than their materiality.

And then it's the flow-on impact to tradies and subbies that can really cripple an economy when the multiplier goes into reverse. 

The recent collapse of the giant developer the Ralan Group will have serious ramifications, not least because it might leave group creditors up poo creek up the tune of $500 million. 

It's remarkable how many people - or maybe it's just the people who message me - are hoping for a full blown collapse and recession, and many remain adamant that a banking crisis is unavoidable as apartment construction implodes.

I sincerely they will be wrong, yet they may be proven right. 

Generally speaking, I'm an optimist, and do believe that a banking crisis can be averted provided banks are willing and able to lend to people that want to borrow (and my direct industry experience tells me there are many that want to borrow but aren't able to), including to developers.

It all seems to be hanging rather on a thread, though, as lenders seem to have developed a weird and unhealthy obsession with scrutinising how much people spend on coffee, Uber Eats, or subscription services, as though this somehow correlates with default risk. 

Strange times!

The outlook: less building & a retail recession!

Retail recession...

...and lower interest rates.

An updated outlook from Bill Evans of Westpac.

The property outlook is kind of interesting - the ‘two-tier’ market implies that some ex-high rise property types will much better than the averages.

Image supplied via the shadowed hand of Chris Bates at Wealthful:

Source: Westpac

Thursday 26 September 2019

Labour market tightening no longer

Private sector vacancies tumble

The Reserve Bank often refers to the ABS job vacancies data series, and thus it's well worth spending a little bit of time on today's release to see what we can deduce. 

Starting at the national level, jobs vacancies have now clearly rolled over, declining by -1.3 per cent over the three months to August 2019 to 236,400. 

Historically speaking this is still a high number.

But the -1.8 per cent in decline in private sector vacancies was less promising, especially given that - as pointed out by Felicity Emmett of ANZ - over the year to August almost all of the jobs created on a net basis were in the public sector, which is not sustainable.

Here's the headline data:

Moreover, the labour force has unexpectedly exploded over the past couple of years from 13 million to 13.6 million as participation has hit record highs, which makes a significant difference to spare capacity. 

Even still, job vacancies as a share of the labour force have implied a lower unemployment rate than we've got, at least based upon historical trends. 

The previously held relationship appears to have become rather decoupled, though.  

A different angle from which to view how tight the market is involves looking at the number of unemployed persons per job vacancy, and this is now back above 3 and trending higher (if you were to include underemployed persons then the ratio is more like 8:1).

The environment and momentum now generally seem to suggest a slow upwards drift in unemployment. 

At the industry level, mining job vacancies are at their highest levels since 2013, and this is positive news for Western Australia and Queensland.

Indeed, in Queensland jobs vacancies are up by a promising 13 per cent year-on-year, and are now up by nearly 50 per cent since bottoming out five years ago.

Western Australia is following a very similar pattern. 

On the other hand, the twin construction booms of Sydney and Melbourne are now unwinding from outlandish highs. 

As such, there's decent evidence to suggest that the labour markets are no longer tightening in New South Wales and Victoria. 

There are multiple different ways to look at this, granted. 

For example, the volatile monthly detailed labour force figures for August 2019 released today showed an unemployment rate for Greater Sydney at just 3.97 per cent, while the unemployment rate for Greater Adelaide ran as high as 7.3 per cent.

The smoothed annual averages show a somewhat different picture again; but any way you choose to look at this there is still oodles of slack at the national level, and it's not really improving any more.  

The wrap

Overall, jobs vacancies are still pretty solid as a share of the labour force, but the ratio of unemployed persons per job vacancy is rising, and at the headline level the forward-looking indicators are almost unanimously negative. 

Mining investment is at last set to pick up from here, but there's going to be a huge hole to plug as apartment building seems to be imploding. 

Wednesday 25 September 2019

Engineering construction dives

Jobs ads falling

The Reserve Bank's Lowe noted this week that mining investment is expected to increase over the next year. 

It needs to.

Engineering construction activity plunged -15 per cent in FY 2019 as the infrastructure boom lost some momentum.

Activity in the NT has fallen by nearly three-quarters over the financial year, as Ichthys no longer pumps up the figures. 

In other - though not unrelated - new, Internet Vacancies Index fell for an 8th consecutive month to be 6 per cent lower than a year earlier. 

Source: Department of Employment

The slowdown in the economy may have come as a surprise, but it's real.

The unemployment rate has lifted from 4.9 per cent to 5.3 per cent, so far, which is a long way the the assumed rate for full employment at 4½ per cent. 

Rates to be cut

Down we go

I read Reserve Bank Governor Lowe's 8.05pm speech at Armidale, which I thought sounded fairly balanced, and the Aussie dollar ticked up a little on its release. 

I didn't tune in for the Q&A session, however, and the people watching these things more closely than me reckon that another rate cut in October is a done deal. 

Maybe I just wasn't reading closely enough...

For housing market twitchers, Lowe noted in the Q&A that there's no particular concern about rising house prices, while credit growth remains low. 

In related news, the latest figures from Revenue NSW showed stamps and transfer duties paid down by a further 15 per cent over the past year, with transaction levels down by a further 16 per cent. 

The Oz and the Fin Review both made up their respective minds too.

In more arresting news, the calls for Trump to be impeached may be coming to a head.

Interesting times ahead for stock markets, you’d think.

Tuesday 24 September 2019

Did APRA ignite the housing market?

Turned on a dime?

The Grattan Institute indulged in a bit of gentle chartsplaining this week to claim that the post-election rebound in housing prices was largely unrelated to the election result, or to ongoing cuts to mortgage rates, but instead 'rocketing' house prices were sparked by the prudential regulator APRA and its loosening serviceability criteria.

There is some background here.

Grattan had previously argued that Labor's election policies would have an immaterial impact on housing prices (contrasting with RiskWise's detailed modelling, which suggested a 9 per cent adverse impact nationwide).

Grattan's latest argument is that since CoreLogic's now-revered daily home value index didn't lift significantly until August 12th the impact of the election was minimal - causing only a 0.14 per cent 'jump' in prices - while the impacts of the interest rate cuts in June and July wouldn't be seen in full for a couple of years.

In other words, the rebound was pretty much all about APRA. 

I've recreated the below chart from CoreLogic's daily index, rebased to 19 May 2019, which does indeed show a sudden increase from mid-August, although truthfully the rebound looks a lot less dramatic when you use a sensible y-axis and take into account the declines over the preceding couple of years. 

There are a few problems with Grattan's arguments, though.

Firstly, there's no logical reason why a falling interest rates should take two years to be fully reflected in housing sentiment. 

Secondly, Grattan's arguments fail to explain why open homes and auctions in Sydney and Melbourne were increasingly packed out through June, a far cry from the twitchy pre-election buyer sentiment, and well in advance of any flagged or actual changes to serviceability buffers.

My reading of the market, as we discussed on the Property Couch podcast at the time, was that there was a wall of pent-up demand piling up pre-election due to to chronic uncertainty surrounding Labor's policies, which was suddenly unleashed when the election dam burst.

Lo and behold, house price expectations lifted by 'a spectacular 23 per cent' (Westpac) immediately after the election result was called. 

House price expectations then continued to lift sharply further into July and beyond, so one can hardly pin the rebound solely on the actions of the prudential regulator.

We could go on to cite any number of 'the phones was ringing off the hook, guv' anecdotes here, but let's not do that.

Thirdly, and importantly, a significant portion of the data feeding into the daily home value index from the Valuer General or state equivalent must surely be lagged in any case.

Moreover, a daily home value index doesn't simply turn on a dime due to one-off factors, and it shouldn't be taken so literally in real time, not least because the index has experienced unexplained spikes and seasonality issues and in the past. 

Combination of factors

The answer to the blog title, then, is 'no' (or nah!) and in fact bank lending policies generally remain very tight even now.

Alongside other factors the credit squeeze helped to push the housing turnover rate down to the lowest level in more than 20 years (a dearth of transactions is another reason to be cautious about over-reliance on a few days of data).

Housing market sentiment and prices in Sydney and Melbourne have turned due to a range of factors, including the election result, lower mortgage rates, expected further monetary easing, and changes to serviceability.

A chronically low level of listings of desirable stock, driven by a cobweb effect, has been a key factor too. 

Even now - we're nearly in October - stock listings remain way down on a year earlier:

Source: CoreLogic

Naturally, it would be very interesting to hear CoreLogic's take on this! 

Monday 23 September 2019

Major reduces serviceability floor

Through the floor

Westpac announced via broker channels today that it will reduce its serviceability floor rate for mortgages by 40 basis points from 5.75 per cent to 5.35 per cent, effective September 30. 

The bank was losing market share versus the other three major banks due to lower borrowing capacity, and as such this move is designed to recapture some business for Westpac (along with its subsidiaries of St. George, Bank of Melbourne, and BankSA). 

Where loan applications in the pipeline have not yet been formally approved, the new floor rate will apply, noted Westpac in its communication to brokers. 

Commonwealth Bank presently has a floor rate of 5¾ per cent, NAB and ANZ have respective floor rates of 5½ per cent, while Macquarie sits a little lower at 5.30 per cent. 

As you can see in the stylised graphic below, this potentially increases borrowing capacity on some loans, but it's the way in which the new serviceability floor could interact with further interest rate cuts which is of note.

The floor giveth...

A few caveats, though.

With a flat buffer of 250 basis points applied to the mortgage rate, rising interest rates will one day constrain borrowing.

Moreover, lenders have often been giving with one hand and taking away with the other, such as through making offsetting tweaks to assessments of living expenses, property expenses, and rental income.

My best guess is that this will win some business for Westpac and provide support to homebuyer activity, but any flow-through to the investor cohort will only be modest. 

For investors with a stock of existing interest-only debt, it's unlikely there will be a meaningful change in borrowing capacity any time soon.

Overall, this is a somewhat positive move for homebuyer activity, which should help to lift stock turnover away from 20-year lows. 

Auctions steady

Steady as she goes

I used to diligently keep a detailed data series of property auctions and median prices for houses and units, but it hardly seems worth it these days.

Shane Oliver of AMP rolls out a series of charts every Saturday night within hours of the results being reported (I'd like to say I'm normally out doing something more interesting, but that would be a fib). 

Auction results were steadier this week, with a decline in Sydney's preliminary clearance rate, although Melbourne recorded strong results.

Source: Shane Oliver, AMP

Volumes are still low and transaction levels are very muted, so it wouldn't be a surprise if the annual growth in hosing credit plumbs new record lows.