How to Gain Financial Independence and Create a Life of Freedom

New book

Book launch from an old buddy of mine, Dave Gow. 

You can order a copy here (or click on the image below):

Get around it! 

Housing, the bezzle, and illusory wealth

The bezzle

In the 1950s economist John Galbraith coined the concept of the ‘bezzle’, defined as the inventory of undiscovered embezzlements in the economy.

The bezzle increases during periods of irrational exuberance in the markets and before the victims become aware of the fraud. 

In good times, funds are plentiful and investors too trusting, but in recessionary times these dynamics are reversed.

The creation of the undisclosed bezzle can be doubly powerful in stimulating spending in the economy as wealth and leverage increases. 

But ultimately the reversal and destruction of fictional wealth will have an equivalently strong impact via the negative wealth effect.

Recent periods of zero interest rates unleashed speculative excesses on an epic scale, but much of the perceived increase in wealth is proving to be illusory. 

As central bankers dial interest rates back up from the zero lower bound, consumers are becoming increasingly alert to the shrinking of the bezzle.

The cryptocurrencies and digital assets space has been attracting many of the recent headlines, with some exchanges allegedly using customer funds for inappropriate purposes, while in Australia high-profile consumer data hacks have also been giving consumers cause for concern.

The waves of government stimulus rolled out through the pandemic may have been necessary but were also bound to become another significant source of bezzle in the economy.

Illusory wealth

While the bezzle might be most aptly characterised by the most infamous frauds, fugazzis, and Ponzi schemes, such as the Bernie Madoff swindle, asset prices levitating far above their fundamental or productive values can also create unsustainable or illusory psychic wealth across equities and housing markets.

In the residential property market space, Australia’s hinterland boltholes and coastal escapes which were frequently selling sight unseen through the pandemic and attracting ebullient $3 million bids have been repriced lower towards $2 million, and brutally so in some cases.

The bulk of the $½ trillion unwind in Australian housing equity to date has largely stemmed from the upper price quartile. 

This includes sectors of the market which benefited most from the zero interest rate policy and the ‘race of space’ away from higher-density city living and apartment towers with unusable shared facilities.

The bottom end of the residential housing market has to date held up in a more robust manner, which will be a welcome relief to the recent first homebuyers who took advantage of the government’s first home loan deposit scheme. 

This partly reflects the steep increase in building materials and trades costs, which has underpinned the lower end of the market, as well as sharply rising rents.

New South Wales Premier Perrotet has also successfully passed the historic first homebuyer law through Parliament, which will reduce upfront costs for first homebuyers entering the market in the state prospectively and is set to increase first homebuyer demand up to the $1.5 million price point.

Overall, however, market sentiment remains cautious for now, and will likely remain so for as long as the cash rate target is being ratcheted higher.

Fixed rate pain

Historically, Australia only had around one-fifth of mortgage balances on fixed rate products, but this market share ballooned from the September 2020 quarter all the way through until the end of 2021.

With the most common tenor of fixed rate mortgage in Australia being two years, the fixed rate cliff is now kicking into gear, and the ensuing reset will send a few tremors through household balance sheets, in turn impacting the consumption of household goods and services.

In the commercial real estate sector, secondary-grade office space which was previously selling on record low yields also faces challenges. 

Rents are falling as weak tenant demand and low office occupancy rates have persisted long after the most onerous of the COVID-19 restrictions passed, in turn shifting demand into the discounted A-grade stock.

Galbraith posited that the bezzle is eliminated during periods of growing trepidation in the markets, with much of the reversal in paper wealth typically being absorbed by retail punters and ordinary households.

For now, each month tighter monetary policy is sucking money out of the economy, and investors have become more sceptical.

We shouldn’t be too surprised. As Galbraith foretold, every bezzle ends.

Annual building approvals at 21-month low

Building approvals dropped

House approvals are now falling away in most cities, with the HomeBuilder grant boost no longer available. 

Unit approvals fell 11 per cent in October, led by a big drop in Sydney.

The trend for unit approvals is running at around 6,000 per month, having been above 10,000 per month in 2016. 

Analysts expect building approvals to keep falling from here, as rising interest rates bite. 

The annual number of building approvals fell to 192,600, which is the lowest level in 21 months.

Building approvals are dropping off just as immigration is set to romp to a record high.

Interesting times ahead. 

Housing credit points to rental shortages

Impulse improves

Housing credit growth slowed in October, but less sharply, to 7.2 per cent. 

The rate of change or 'credit impulse' seems to suggest that the worst of the housing price declines are now done with (but a lot depends on the outlook for interest rate changes, so let's see). 

Investor credit growth is now slowing, which means Australia is heading squarely for a chronic rental shortage. 

Business credit kept ticking along in October, but credit growth is overall likely to decline from here. 

The rentals market looks to be in dire straits, not helped by extremely tight lending assessment criteria.

Anecdotally, landlords are increasingly looking to increase rents on lease renewals at 10 to 20 per cent higher than a year earlier. 

Inflation falling away

Inflation decline

I had a suspicion the monthly inflation figures were going to be down year-on-year, based on the partials available.

As it turned out, even that optimistic expectation was well overcooked, with monthly inflation coming in flat for a massive drop in the year-on-year reading, all the way back down to 6.9 per cent (against a market expectation of 7.3 per cent).

Note that some market forecasters were looking for 8.3 per cent, so it was a big beat.

The building approvals figures also came in at the bottom end of the market forecast range, dropping another =6 per cent in October, taking annual building approvals down to a 21-month low of 192,660.

Inflation has largely (though not totally) been driven by supply-side factors such as global supply chain disruptions, the international border closures and related labour shortages, the Ukraine war, and repeated bursts of flooding in Australia. 

The good news is that the reopening inflation "belch" now appears to be passing.

Callam Pickering, Chief Economist of Indeed, shows how the inflationary pulse is now falling away over the past few months. 

There had been a bit of BS talked about the risk of the Aussie dollar "collapsing" if the Reserve Bank didn't keep hiking interest rates quickly, leading to a risk of imported inflation.

In the event the Aussie dollar rebounded from 62 US cents back up to 67 US cents (and in any case its the trade-weighted index measure that should hold more sway from a currency perspective). 

There was the usual questioning about whether the inflation figures were 'right' or not, but financial markets clearly saw today's data as meaningful.

Australia's 3-year bond yield has declined from 3.8 per cent in September to 3.16 per cent today.

Good news, and one significant step closer to the end of the interest rate hiking cycle. 

Temp visas up +567,000 from the lows

 Visas rocket back

Temporary visa holder numbers increased to 2,209,907 in October, up by around +64,000 from a month earlier.

This represents an increase of +567,000 from the lockdown lows of Q3 2021. 

Tourism has yet to rebound strongly, but other categories such as temporary employment and working holiday maker visas are rebounding apace. 

Excluding visitor visas, the numbers have almost returned to their pre-pandemic levels, being up at around 1.9 million. 

There will be further increases over the period ahead, with student visa holder numbers are still more than ¼ million below where they were three years earlier. 

As previously noted increase of ½ million will help to solve the labour shortage, but exacerbate the rental shortage. 

Steve McKnight: From survival to significance: how to build wealth that matters

Property Pod

This week on the Pod, a fascinating extended discussion with one of Australia's biggest ever selling finance authors, Steve McKnight.

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

You can also tune in at Apple podcasts or Spotify.

You can also tune in at Youtube here:

Housing prices to recover in 2023

House prices to recover

From Louis Christopher of SQM Research, and his 2023 Boom and Bust Report, the base case scenarios sees housing prices rising +3 per cent to +7 per cent in 2023.

The rebound is set to be driven by Sydney, with a +5 per cent to +9 per cent increase:

Source: Louis Christopher

The predictions are predicated on the cash rate target peaking at no higher than 4 per cent, which it should. 

Unit vacancy rates continue to fall

Rental supply shrinking

The Reserve Bank Governor spoke before the Senate Economics Committee today, and noted that Australia's is heading for a shortage of rental properties. 

He's not wrong.

Population growth has only just begun to increase again, and yet rental vacancies are already notching all-time lows.

We can expect to see record high population growth over the next few years.

But the combination of rising interest rates and APRA's extraordinary 3 percentage points lending assessment buffer is going to effectively cripple the rental supply. 

Vacancy rates for units are now at record lows at under 1 per cent, according to CoreLogic.

Source: CoreLogic

Unit rents are now soaring, rising by 13 to 14 per cent annually in the three most populated capital cities. 

Source: CoreLogic

I recently noted the global war for talent and the forthcoming Big Australia debate here.

Retail sales are falling

Retail weakening

Retail turnover was down -0.2 per cent in October, and -0.6 per cent excluding food purchases.

James Foster with the graph:

Given retail prices have increased, including for food after recent flooding, this suggests that retail turnover in volume terms is sinking.

And particularly so for household goods and department store retailing. 

I used to do detailed analysis of all the figures by sector and state, but it seems superfluous now as other people are doing it better and on a more timely basis!

Alex Joiner from IFM:

Source: Alex Joiner

It's a really big week for economic data, which will serve as a decent litmus test for how much the economy has slowed so far as a result of the tightening of monetary policy.

Given new home sales have collapsed, I would guess that the economy has slowed a bit to date, but that'll be nothing compared to what we see in 2023.

Millionaire migration

Millonaires move for lifestyle and tax

Hong Kong has very sadly dropped off the radar as a place for talent to head to.

The wealth are leaving too, with over 3,000 millionaires leaving Hong Kong in 2022.

Russia is also losing wealth overseas, steadily, and sometimes by stealth, with -15,000 wealthy people lost overseas over the year.

China (-10,000) and India (-8,000) are also seeing something of a drain.

Source: Visual Capitalist

The world's migrating millionaires are predominantly heading to low tax countries such as Singapore and the UAE, and to Australia. 

Australia's wages growth has peaked

Wages growth fading

The peak in Australia's advertised salaries growth has already long since been and gone, according to SEEK's excellent advertised salaries index. 

Source: SEEK 

Also, via the FWC this week, it's clear that wages increases remain modest in Australia:

New Zealand's central bank seems crazily hellbent on hiking interest rates into a deep recession, but there seems to be little pressing need to Australia to follow them down that misguided path.

That's especially the cases with visas now being processed at warp speed, with 3.4 million applications processed since June 1.

Inflation is also set to fall way in the US over the months ahead, with the price of gas crashing from above US$5/gallon to just $3.64/gallon.

Australia's fuel prices have calmed down too, but diesel prices remain frustratingly high. 

50-100 million 'Big Australia' debate hoving back into view

Brexit tensions

A couple of decades ago I lived in the south-east of England (a crowded trade if ever there was one!).

There were theories doing the rounds, even in the pre-Youtube days, that as the Baby Boomer generation moved on the population of the UK would halve, effectively leaving the island half empty.

It never made any logical sense, and in any case it contradicted the evidence of my own eyes, which could see towns and cities sprawling at a very rapid pace, worsening traffic queues, crowded schools and hospitals, and so on.

Between the most recent two Censuses the English population continued to expand rapidly by around 3½ million to more than 53 million.

To state the obvious, that's an awful lot of people - and extra people! - for such a small space.

It's a lot, however you may try to position it, particularly due to the gravitational pull of London and the south-east of England. 

A little while ago the Office for National Statistics (ONS) forecast that the England population would grow by a further 3½ per cent over the course of this decade, with the total UK population expanding by 3.2 per cent to 67.1 million by 2030. 

Not all that surprisingly this has been causing significant angst in some towns and cities, and the desire to "take back control of the borders" was arguably a key swing factor in the controversial 2016 Brexit referendum, which ultimately voted 52 to 48 in favour of leaving the European Union. 

UK hits record immigration

Ironically, despite the government's strong rhetoric, there has been no apparent "taking back control of the borders" to speak of, however loosely that may be defined. 

Statistician and social commentator Jamie Jenkins forecasts that more than 50,000 migrants will cross the channel in small boats this calendar year alone. 

Approximately half of the migrant crossings are accounted for by Albanians, overwhelmingly male.

Where I stay when in the UK, half a dozen of the town's local hotels are reportedly being used to provide accommodation for the new arrivals while the Home Office processes asylum seeker claims. 

These local stories can be beaten up, no question, but the headline numbers and associated costs are real enough. 

Yesterday the ONS also reported that the net immigration figures for the year to June 2022, which showed more than 1.1 long-term immigration million arrivals, for a net immigration figure of a staggering +504,000.

Source: ONS

Students accounted for a large part of the surge, taking the net immigration figures into the UK to the highest level on record. 

After accounting for the natural growth in the population this clearly implies that the population forecasts for the decade are significantly undercooked. 

Global war for talent

Germany and some other European countries have already gone done the mass immigration route, with decidedly mixed results. 

Recently Canada announced that it would be targeting a huge immigration programme over the coming years.

This suggests that there could be something of a global 'war for talent' afoot in the years ahead.

Hong Kong has dropped out of the race as its talent pool is drained following the en masse exodus of graduates and skilled workers.

What next for 'Big Australia'?

The Big Australia debate has been tarnished over the years since the mining boom glory years, since anyone daring to question what the 'appropriate' level of immigration might be is immediately tarnished with the xenophobia brush by big business and other vested interests. 

But in the context of what's happening in Germany, the UK, Canada, and elsewhere, it's a vitally important debate for the functioning of the country, which merits a fair discussion.

Home Affairs recently announced that Australia had processed 3 million visas since June, reducing the backlog to around ¾ million.

Yesterday, Andrew Giles updated Parliament in noting that 3.4 million visas have now been crunched through since June 1.

That accounts for a big chunk of the backlog, and it's fairly clear what direction things are currently heading in.

But what comes next?

Australia is already likely to see its population increase from 26 million to 29 million by the end of 2030, based on the current trajectory and forecasts. 

An inquiry is due to be held over the coming few months into the role of permanent migration and nation building.

The big picture is that if Australia goes down the 'Big Australia' route the population could feasibly increase to around 50 million by 2050, and...who knows, perhaps 100 million by 2100?

Of course, I'm acutely aware as an immigrant that it's not really my debate to get involved in. 

But clearly the question which needs to be asked and answered transparently is whether that is the goal, and whether the benefits outweigh the costs?

Ultimately, that's the crux of the entire debate. 

SEEK job ads fall for a 5th month

Job ads easing

Job advertisements declined for a 5th month, according to SEEK's index, led by a decline in Victoria.

Source: SEEK

Job ads are now lower than a year earlier, albeit still significantly higher than they were at in 2019.

The cooling continues, and it was interesting to see hospitality and tourism ads coming back down from previously alarmingly high levels. 

Full insights from SEEK here. 

Two-speed housing market to develop as stamp duty reform takes hold

Two-speed market

Stamp duty changes ahoy in New South Wales. 

Read more here (or click on the image below):

What the economic downturn means for property | November 2022 Big Picture Podcast

Big Picture podcast

I joined Michael Yardney to discuss the prospect of an economic downturn and what it means for property markets.

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

Melinda Jennison: Brisbane - what's hot and what's not

Property Pod

This week I was joined by Melinda Jennison from Streamline to discuss what's happening in Brisbane's housing market, following on from recent headlines.

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

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

And also you can listen at Youtube here:

It's happening...

Inflation pukes

Yep, the inflationary 'belch' is passing...and it looks as though inflation is going to start falling fast.

It might take some time to hit the official figures, but it's surely in the post now.

US rents are now falling across most private sector measures (and rents have been a huge part of the US services inflation story). 

Elsewhere, there was a huge miss on producer prices in Germany, which fell by more than 4 per cent in October, for the biggest monthly drop in history (largely driven by energy-related costs). 

Of course, this partly reflects that Europe is sinking into a nasty recession, but it's also a sign of what's to come from an inflation perspective.

The inflation narrative will turn around over the coming months, and it will likely evaporate as fast as it appeared.

Hopefully we'll be talking about falling interest rates again sooner rather than later, after a brutal salvo of hikes. 

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11 days ago National Australia Bank made amendments to rental shading, which increased borrowing capacity by 8 per cent for some borrowers.

Today, Commonwealth Bank of Australia made tweaks to its HEM calculations, which will similarly increase borrowing capacity for some investors. 

Source: Eric Wu, broker channels

Unfortunately, many would-be borrowers are completely shut out of the market (or trapped in a mortgage prison on woeful mortgage rates) because of the extraordinary 300 basis points lending assessment buffer, which was introduced when the cash rate target was 10 basis points. 

Quite.