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Monday 31 October 2022

Housing credit decelerates (data dump)

Data dump

Lots of data out today, which we'll parse here in a succinct manner. 

Housing credit growth decelerated to 0.47 per cent in September, which roughly equalled the slowest pace of growth since November last year, according to the Reserve Bank's Financial Aggregates figures. 

Year-on-year the pace of housing credit growth continued to slow to 7.3 per cent.

Having previously rebounded, property investor credit is now also being curtailed by stringent lending conditions and reduced borrowing capacity, increasing by just 0.32 per cent in September for the slowest month of growth since May 2021.

This reversal likely points to tight rental markets over the next couple of years.

Interestingly, although credit growth is decelerating for housing, for now the housing credit impulse doesn't appear to imply further any price declines from the current levels. 

It was another very solid month for business credit, but broad money growth slowed from 0.2 per cent in August to 0.1 per cent in September. 

Overall, housing credit is still likely to slow further due to reduced borrowing capacity, and very tough lending assessment restrictions. 

Housing prices well off the highs

Further to the above, housing prices at the 5-capital city level are now -6.7 per cent below their high watermark, driven mainly by detached house prices in Sydney initially - especially at the more expensive end of the market - and more recently house prices Brisbane. 

In saying that, the pace of decline at the capital city level has moderated in recent weeks. 

In regional Queensland, we've seen some brutal repricing lower (for e.g. hinterland escapes, and for some coastal property), with expectations of the high sales prices from last year dashed by the more pessimistic outlook. 

The AFR reported similar tales from the Mornington Peninsula down in Victoria. 


Different this time?

The housing credit impulse indicator has been a pretty good predictor of housing prices over the past 15 years.

But this time 'may be different', in part because there's an enormous fixed rate mortgage cliff looming.

Normally fixed rate mortgages only account for a small share of the flow of housing lending in Australia.

But during the pandemic there were six consecutive quarters of  extraordinarily high levels of fixed rate lending (from the September 2020 quarter through to the quarter ended December 2021).

Since the most common tenor of fixed rate mortgages in Australia is two years, this means that mortgages are just beginning to reset in earnest right now. 

While we still have full employment and incomes are now rising - at least in nominal terms - a fixed rate mortgage resetting from 2 per cent to 6 per cent is bound to hurt.

Meanwhile many borrowers are trapped in a "mortgage prison" and unable to refinance due to the extraordinary 300 basis points lending assessment buffer, which has been built into lending serviceability expectations since October 2021. 


The dwelling stock increased by only 1.4 per cent over the financial year to June 2022, which was the slowest rate of increase in many a year.

Source: ABS

While there were approximately 174,100 additions to the Aussie dwelling stock, there were also more than 27,200 demolitions and removals. 

This took the total number of dwellings to 10.9 million. 

Still, some of the rapid rates of housing construction in the distant outer suburbs of the larger capital cities are leading to chronic traffic congestion in those areas. 

As as 30 June 2022 there were a record number of dwellings still under construction, with some projects delayed due to the price or availability of materials, so we should still see a strong number of detached housing completions over the coming few months. 

Household goods retail cooling

Retail turnover was less convincing in September, rising by 0.6 per cent, with a mini-boost for food retailing and outlets.

There was a national day of mourning and an extra public holiday in the month, somewhat boosting expenditure on eating out.

But the monthly result was overwhelmingly accounted for by stronger prices rather than rising retail volumes, and sales of household goods barely budged in the September quarter. 

Year-on-year growth retail turnover is now in decline, and this is set to continue over the next 18 months as rising interest rates since May, falling real wages, and the fixed rate mortgage cliff begin to bite.

The monthly inflation gauge from the Melbourne Institute also slowed to 0.4 per cent from 0.5 per cent last month.

The trimmed mean reading increased by only 0.3 per cent in September, presumably locking in tomorrow's interest rate decision at a more sedate 25 basis points. 

Friday 28 October 2022

Population estimates look underdone

Population clock

Australia's population clock today stands at around 26,063,000...or thereabouts. 

A quick look at the Budget papers shows projected net overseas migration of 940,000 over the next four financial years. 

Source: Budget papers

Adding in the natural growth of the population, this leads the government to forecast an estimated resident population of 27,421,000 by June 2026, or an increase of about 1.4 million from today. 

Source: Budget papers

Of course, nobody can say for sure what will happen over the next four years, but these numbers look well undercooked to me, even based on today's natural population growth. 

But mostly it's the rebound in temporary visa holders which looks underdone. 

As international students, working holidaymakers, and other temporary visa holders flood back into the country, wouldn't be at all surprising if net overseas migration proves to be at least 1.4 million over the next four years, leading to population growth of nearer 1.8 million over four years.

Whatever, seen in the above context, the pledge to build one million homes over the five years to 2029 is in any case a nothing burger. 

It's more likely that we'll need to build well in excess of that number of dwellings to keep pace with the rebound in population growth.


Producer price index growth was 6.4 per cent over the year to September, which was slower than consumer price inflation.

PPI was still being driven by heavy construction costs, with timber prices still 21 per cent higher than a year earlier, and other metal products up 16 per cent.

Steel prices are up by more than 25 per cent over the year, but the growth in prices here is clearly now fading, which is great to see.  

On the plus side, year-on-year growth in input prices for housing construction have slowed from 17.3 per cent to 16 per cent.

Source: ABS

This is far better articulated by James Foster below:

And it's clear from what's happening in the industry in real time that input price growth is heading to zero over the next year, with yet another significant developer insolvency in Queensland notched up this week. 


Bond yields are taking quite a tumble lower now, as the outlook for consumer spending sours. 

Economy hits the buffers

Mortgage prisons

One of the leaders in the mortgage broking and lending space, Ben Kingsley (PICA Chairman, and CEO of Empower Wealth), makes a point about the 300 basis points lending buffer I've been making myself.

The 300 basis points lending assessment buffer made sense when interest rates were glued to zero, but now it's trapping borrowers on awful deals as the fixed rate cliff begins to gather pace.

It's not doing a whole lot of good for rental supply either, to be frank. 

Needs a rethink.


Not happy times at Facebook as the heavy investment Metaverse struggles to gain traction or capture the imagination, with the stock price down nearly 70 per cent over the past year.

Amazon also reported its 3Q results after hours, and the stock promptly dropped  by more than -20 per cent, as recession risks become more evident in the results and consumer spending outlook.

Source: FT

Credit Suisse continues to attract attention as it restructures to lay off 9,000 staff, with another huge drop in the stock price of -19 per cent overnight. 

The group reported a net loss of CHF4 billion after write-downs, eight times the expected loss of CHF500 million.

Source: (David Ingles/Bloomberg)

The group is planning to raise billions to shore up the balance sheet.

Somewhat worrying for the global outlook, you'd think. It's probably nothing! 

Thursday 27 October 2022

Recruitment difficulty falls 9ppts in capitals

Labour market loosens

More signs that supply and demand in the labour force are coming back into balance. 

The difficulty rate for recruiting staff fell 9 percentage points in the capital cities in a month in September. 

Source: Aus Gov, Labour Market Insights

The staffing outlook has also cooled substantially.

Source: Aus Gov, Labour Market Insights

Recruitment activity was fairly flat over the month, reflective of there having been no net employment growth since June. 


Australia's terms of trade began to fall in Q3, as export prices decline.

History suggests strong odds of bulk commodity prices getting creamed from here, leading to a nasty income shock.

It's not hard to see from the index figures that a very significant bulk of Australia's inflation has been imported, with the import price index up 3 per cent in Q3, and a punishing 19.3 per cent over the past year. 

This painful pace of increase should face from here as global recession risks rise and supply chains are freed up. 

Rental listings down 9pc in September

Rental vacancies at record lo

PropTrack released its latest rental report this morning.

Rental listings in the capital cities fell another -8.6 per cent in the month of September, to be down by more than -25 per cent over the past year. 

Rental vacancy rates at the capital city level are now at historic lows.

Rents are now in turn rising, especially in the big cities.

PropTrack's full report is here

Wen pivot?

It was heartening to see the Bank of Canada pivoting towards a slower pace of rate hikes overnight, against market expectations.

The pace of tightening globally has been blistering, but it's increasingly evident that we'll be heading for recessions all over the place if things continue as such. 

Australia's 3-year bond yield has declined to 3.4 per cent. 

Immigration ramp up

The ALP is going to go very hard on increasing Australia's headcount, while also easing work restrictions for international students, and providing funding to accelerate visa processing, including for parents, partners, and children.

SBS News summarises here:

Source: SBS

It looks to me like Australia's population growth will soar to record highs over the next year or two, and this will go a long way to solving labour force capacity constraints. 

Wednesday 26 October 2022

Core inflation cresting at 5½ per cent

Inflation at 32-year high

Inflation topped expectations, increasing by 1.8 per cent in Q3, following on from a similar increase in the June quarter. 

Over the year, consumer price inflation increased to 7.3 per cent. 

The trimmed mean figure came in hotter than expected at 1.8 per cent for the quarter (albeit the weighted median figure of 1.4 per cent wasn't quite so bad). 

Overall, then, underlying inflation picked up to 5½ per cent over the year, which wasn't far off the expected figure.

The trimmed mean figure was 6.1 per cent, and that figure does attract more attention these days.

Drivers of inflation

Inflation has largely been imported and driven by global supply issues - which are now improving - rather than being domestically generated.

This was reflected in tradables inflation rising to 8.7 per cent over the year to September. 

James Foster shows that more than three-quarters of inflation has been driven by the price of goods and pandemic-related factors, rather than inflation in services, in this clever graph.

The main contributions this quarter came from the tail end of the HomeBuilder stimulus pumping up the price of new dwellings (which will fall going forward as demand for new housing softens dramatically), gas, and furniture. 

Food prices also jumped, following the brutal weather damage to crops. 

Rental price inflation is also now increasing, as expected. 

The ABS series is bound to lag asking rents, which are up by more than 20 per cent over the past year.

CoreLogic's data series for September shows that actual unit rents are soaring as immigration returns with a vengeance. 

Unit rents increased 1.1 per cent in the month of September, and are now recording double-digit annual gains in the three most populous capital cities, plus Adelaide. 

Source: CoreLogic

Unit vacancy rates also continue to plunge to record lows, at just 1.1 per cent nationally. 

Source: CoreLogic

This is helping to underpin unit prices, while house prices are being squeezed lower by reduced borrowing capacity. 

With massive immigration to ramp up over the next two years, this trend towards rising unit rents appears likely to continue.

Meanwhile prospective investors are finding it increasingly difficult to deliver a rental supply response, with a 300 basis points lending assessment buffer making it impossible for many to borrow. 

The wrap

There was the usual initial consternation as headline inflation came in above expectations. 

It's worth pointing out, though, that the Reserve Bank has already aggressively lifted interest rates by 250 basis points, between May and October, and of course none of that tightening is reflected in the inflation figures over the June and September quarters. 

A more sober analysis suggests that the core inflation rate won't be too much different by the end of the year than had been previously expected by the Reserve Bank. 

The monthly inflation data also shows that inflation has stabilised (at a high level), while the most timely indicators such as business surveys and activity gauges all suggest that price pressures are now easing. 

Having shifted down to 25 basis point increments, monetary policy is likely to continue with further tightening in 25 basis point moves, rather than panicking, according to market expectations. 

Australia's 3-year bond yield is now trading at under 3½ per cent, some way below the 3.8 per cent we saw not so long ago. 

Budget wrap

A calm and controlled Budget

There weren't too many major surprises in the Federal Budget.

It was a relatively calm, controlled, and conservative affair. 

The pledge to deliver 1 million homes between 2024 and 2029 attracted the media headlines, and even a burst of applause as the Budget was delivered.

As noted, however, this would be a relative step down from previous rates of dwelling completion.

Between December 2014 and 2019, well over 1 million dwellings were completed, for example.

Not too surprisingly, real GDP growth is expected to slow to 1½ per cent over the coming financial year.

No recession is forecast for Australia, but if we experience the 'downside' forecast scenario it might feel like recessionary conditions, as we'd potentially be going backwards in per capita terms.

Indeed, the Budget paper confirmed that the government will be running a very large migration programme, with net overseas migration of +470,000 expected over the next two years alone.

Add in the natural growth of the population (fertility rates rebounded last year) and the recent boom in international students (now tracking at around 45,000 applications per month) and we could comfortably see population growth of more than 800,000 over the next couple of years.

This puts the plan to deliver 20,000 to 30,000 affordable dwellings by the end of the decade into a somewhat different perspective. 

The good news is that although power prices are expected to surge there wasn't too much in the Budget that's likely to contribute further fuel to already-high rates of inflation. 

It was interesting to note that the cash rate target is forecast to increase to 3.35 per cent by mid-2023, which would equate to three further interest rate hikes of 25 basis points each if delivered. 


Inflation figures for the September quarter are due out this morning. 

Tuesday 25 October 2022

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What next for Queensland?

Property Pod

I was joined by property expert Alastair Lias to discuss what comes next after the shelving of the controversial new land tax.

Tune in here (or click on the image below):

You can also tune in at Apple podcasts, Spotify, and other podcast outlets.

And, also you can look at Youtube here:

Budget night ("one million new homes")

Budget live comments

Join us tonight for a discussion on the 2022/3 Federal Budget and what it all means for property.

MCG will be on Facebook and LinkedIn live from 7pm:

In this week's episode of the Property Pod, we discuss what comes next for Queensland now that the controversial land tax proposals have been shelved.

The episode will be out tonight.


1 million new homes

The 2022/3 Federal Budget is expected to announce a plan to build one million new homes.

We'll have to see what the details reveal, but it's surely likely to involve tax concessions for superannuation funds to build affordable housing.

In any case, Australia is set to build around two million new homes over the coming decade, so the real question is how many additional dwellings will be added by the Budget proposals. 

At the moment, the government is committing to only 30,000 new public housing dwellings over five years, which barely touches the sides of what is likely to be required.

It's somewhat reminiscent of the Coalition's pledge to add "one million jobs over five years", which was basically the speed at which the economy was adding jobs anyway. 

KiwiBuild abject failure

Not so long ago Jacinda Ardern was elected on a 2017 election pledge to build 100,000 affordable homes under the KiwiBuild scheme.

To date the scheme has been an abject failure, delivering a grand total of 1,366 homes after four years - or around 300 or so per annum - while the state housing waiting list has ballooned from 5,000 to 25,000.

The New Zealand Government claims credit for building more state housing, but neglects to mention that it's demolished more homes than it's actually built. 

193 government homes have been built this year to date, but over 200 homes have also been demolished since January, reported The Australian a month ago.

Australia's challenge

Realistically, Australia's super funds exist to generate the best possible risk-adjusted returns, which stands directly at odds with the provision of affordable housing.

So although the government will be looking at "creative" ways to provide new homes through institutional investors, I wouldn't be holding my breath for anything which actually moves the needle on housing supply.

Meanwhile, the number of student applications (and soon grants) is running at aroun~45,000 per month, or close to half a million per annum.

Source: Westpac

The Million Programme

Have there been any examples of governments providing affordable housing on a grand scale?

One springs to mind. 

Sweden managed it with its remarkable Million Programme between 1965 and 1974, committing to building one million new dwellings at a time when the Swedish population was only around 8 million.

Unfortunately the outcomes weren't always great, with so-termed vulnerable areas being created, and many tenants looking to move out of the monotonous tower blocks as soon as they could afford to do so, to escape the escalating gang crime and poverty. 

Still, it does show what can be achieved with a focus, albeit at a substantial cost to the government. 

In any case, the Australian government itself launching a major building programme would require very heavy borrowing, which almost certainly isn't on the agenda for Australia...especially after what's happened to UK gilts over the recent past.