Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Monday, 27 March 2017

Sydney year-high clearance rate

Investor rush

CoreLogic reported the highest preliminary clearance rate of the year for Sydney at well above 80 per cent from more than 1,000 planned auctions.

Domain reported a preliminary clearance rate of just above 80 per cent with a median auction price of $1,300,500.

Melbourne posted a similar clearance rate.

The median Sydney auction price was 11 per cent higher than a year ago, when the reported auction clearance rate was only 61.4 per cent.

The freakishly high median auction price result of 25 February has dropped off the 4pMA chart below. 

Next week a much lower price on 4 March will drop off, meaning that another record high is a shoo-in.


This mirrors what most dwelling price indexes are now showing, which is median dwelling prices rising to new highs in 2017.

There has been plenty to suggest that investors are piling in to the market to 'get in' ahead of any potential changes to tax legislation. 

Despite higher auction numbers, total listings are below where they were last year in each of the most populous capitals, indicating markets that have tightened.

Sunday, 26 March 2017

Achtung shorts!

Resources pain

I recently wrote a short piece here at Property Update about the mixed fortunes of regional Queensland's housing markets. 


Mortgage delinquencies relating to regional Queensland have long been higher than the average in Australia since widespread flooding in the state in 2011.

But now delinquencies across parts of the state with exposure to resources are rising sharply further still. 

And remember that reported delinquency rates can lag falling prices, particularly when there are high vacancy rates and high rates of unemployment.

As resources construction continues to decline over the next year, some of these housing markets will be veritable disaster zones if they aren't already.

I've spoken to investors that were market participants in the mining town markets in 2012, and the news they deliver has been universally calamitous. 

For obvious reasons I don't discuss specific securities on this blog. 

But stocks with exposure to various housing markets of regional Queensland are likely to cop some serious fallout. 

Don't pay the rack rate; nobody pays the rack rate!

Rack rate

It was a bit of a quiet afternoon on Saturday, so thought I'd lob up to stay up on the Sunshine Coast for a couple of nights.

When I looked up the hotel cost on the hotel's website it was nearly $400 per night!

I didn't pay that rate, of course.

After all, who pays the advertised rack rate these days?

Better call Saul: Rental losses are falling

There was an interesting media story this week where Saul Eslake noted that the recent hike in investor mortgage rates could result in a "hit" to the budget totalling hundreds of millions of dollars. 

It was a good yarn, albeit one which stopped somewhat short of telling the full story. 

In fact between the 2008 and 2014 tax years the average net rental loss has cratered by 64 per cent.

Given that mortgage rates have declined substantially since 2014, the budget impact today of negative gearing appears to be heading towards trifling. 


In any case - omitted in Eslake's calculations - higher mortgage rates will simply lead to higher bank profits, and in turn a higher corporation tax take. 

The banks like to argue that they have faced rising funding costs, but in reality funding costs fell in 2015 and fell even further in 2016.

Yeah, I know, the banks are doing it tough out there now. 

Evidence? Check out Commonwealth Bank's outrageous record profit of more than $4.9 billion for the first half, up yet again by another 6 per cent from the prior corresponding period. 

Meanwhile, rents have been rising, so over recent tax years net rental income has been steadily moving towards zero as more property investors record net rental profits on their tax return (remember these numbers need to be tax effected at the relevant marginal rate). 


Indeed, the number of landlords declaring a net rental loss is all but unchanged since the 2008 tax year despite Australia's rising population.


Back to those rack rates...

According to the Reserve Bank of Australia's Statistical Tables the standard variable rate on investor loans was already up to 5.55 per cent by January.

But here's the thing: who is really paying such a high rate of interest today, when investor loan products have been available from around 4 per cent?

Probably not that many people, I reckon.


For evidence? Take a look at the national accounts.

With the population having increased by about 16 per cent from 21 million in 2008 to 24.4 million today, you'd expect to see interest charges rising over time.

Yet the amount of interest payable on dwellings today is lower than it was in 2008.

The total interest payable by households on outstanding mortgage debt implies a considerably lower average mortgage rate than the quoted 'rack rates' (record mortgage buffers and the use of offset accounts have likely played a role here too). 


The wrap

With mortgage rates having declined since the last available full suite of tax data for financial year 2014, the impact of negative gearing on the Federal Budget would now be getting fairly close to zero.

Meanwhile, state government figures show that revenue offices are cleaning up from investor activity, with New South Wales alone swallowing up an outlandish $9.4 billion in stamp and transfer duties over the year to January 2017.

Negative gearing doesn't really represent a 'loss' to the budget as such - rather it is a timing difference, with the 'loss' typically recouped as investment properties become cash flow positive over time, or in capital gains tax at the point of sale.

With relatively few new dwellings being bought or constructed by owner-occupiers, the government also saves further by constructing comparatively little social housing.

The reality is that after accounting for the undoubted disruption to residential construction, the economy, and to housing markets, Federal Budget savings from changing negative gearing rules today would be approximately diddly squat.

Treasurer ScoMo won't be going there. 

Saturday, 25 March 2017

Mad for it

Manc recovery gathers pace

The UK 20 Cities house price index rose by 6.4 per cent over the year to February 2017, having increased by 7.8 per cent over the year to February 2016. 

The 5 year average growth for this index has been 6.5 per cent per annum, as the UK market continues its post-financial crisis rebound. 

Nationally there has been some loss of momentum, but price growth is rippling out to some of the regional cities. 

Scenes...

Manc moves to the top of the tree for UK house price growth at 8.8 per cent over the year to February 2017, with Pompey, Bristol, and Glasgow also scoring highly. 

London prices were 5.6 per cent higher over the same period, although HomeTrack has noted a slower turnover in stock in the most expensive markets, including Bristol and Oxford.

On the other hand stock turnover has increased in some regional cities away from London, which likely bodes well for disruptive players in the real estate markets such as Purplebricks. 


Source: HomeTrack

Aberdeen was the worst performer of the 20 cities in the index following the painful correction in oil prices.

Manchester is buzzing, and has been on our radar for some time now. 

Weekend reads: Must see articles of the week

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Friday, 24 March 2017

Build baby build

Detailed labour force quarterly

Total employment increased by 80,000 over the three months to February 2017, according to the Detailed Labour Force Figures reported yesterday by the ABS. 

Over the year to February, employment was up by 190,400, the strongest pace of growth in a year and well above the long run average.


Very good on paper!

Rather too good, in fact, in the event.

To cut a long story short, upon checking with the ABS, it seems that the figures were just not right.


A slight glitch in the matrix, one might say.

Construction crazy

The quarterly gains were driven by a large 45,500 increase in construction employment.

Mining employment is also now seen to be rising again. 

On the other hand, the rebound in manufacturing employment seems to have popped, and employment in the retail trade sector has apparently been crushed over the past year, down by a thumping 62,700. 


A bit of a mixed bag, and one which suggests to me that the economy has become too heavily reliant upon the residential building boom.

Construction employment has now soared to 1,114,800 from a total workforce of about 12 million, which seems incredibly high - well above historic norms - and probably peaky. 


Remarkably the rebound in total mining employment to 241,700 means that employment in the industry is now only 36,700 below the 2012 peak. 

Where are the jobs?

Perhaps I'll look at the regional jobs growth another time.

Just to note here for now that Sydney has consistently seen the lowest unemployment rate of the major capital cities, and Adelaide the highest. 

Hobart takes out the most improved award. 


Brisbane is now seeing population growth picking up as expected, which over time will help to tackle the inner city apartment glut, though this is also putting pressure on detached house prices in sought after school zones. 

But to date Greater Brisbane doesn't appear to be creating the jobs to keep its unemployment rate down.

And it needs to.

Gold in them thar hills!

Gold rush!

In 1851 the population of Victoria was below a lowly 80,000, although Aboriginal inhabitants weren't included in the Census counts. 

By 1854, the state population had tripled according to some estimates, and by the time of the 1861 Census the population had doubled again, by which point the population of the state had hit a seething mass of 540,000, more than 320,000 of whom were men. 

There was a similar trend unfolding in New South Wales, though the numbers weren't as dramatic, as hundreds of thousands of men and their wives came from Britain, other parts of Europe, and America.  

The reason, of course, was gold

The 1861 Census of Victoria makes for eye-popping reading, with employment for gold mining and mechanics dwarfing everything else, including agricultural work, and reported unemployment extraordinarily low. 

Boom & legacy

Gold production reached a peak in 1853, yet immigration continued to boom for long after this point as men came to seek their fortune.

This reflects one of the paradoxes of a population boom: when the music stops - that is, when the initial or underlying drivers of a demographic boom subside - then the downturn can get nasty.

During the 1850s the population of Victoria exploded - the value of property rose rapidly and for a while this was the richest "country" in the world, with Melbourne becoming a genuine boomtown and one of the British Empire's greatest cities. 

The gold rush in many ways made Australia what it is today, with the national population rising from under half a million to 3.8 million by the turn of the century. 

The boom wasn't without its challenges, with the famous Eureka Stockade arising from the poor conditions experienced by workers, racism and killings experienced on the goldfields, and ultimately changes in legislation surrounding gold exports and a slump in global demand. 

Last of all, there was the Great War, which bled Australia of its mining labour. 

Melbourne reigns again


Since the tail end of the gold rush boom in 1888, for many decades population growth in Victoria failed to attain the top spot of the states. 

Over the last two years, however, Victoria has returned to number one.

There are three components to population growth: the natural increase (births minus deaths), net migration from interstate, and net migration from overseas.

Victoria has historically lost residents interstate, but now this trend has reversed with gusto, and population growth is once again soaring to record levels. 

Net interstate migration (17,185) is at levels we've not recently seen and rising, natural increase is pumping along (41,700), and net overseas migration (68,613) is reverting northwards too, particularly into Melbourne.

The result is explosive annual population growth of 127,498, with the total state population blazing past 6.1 million.


There have been many predictions of apartment oversupply, but in the short term at least, these have been negated by the accelerated population growth. 

In fact, dwelling completions have not been keeping up with demand, and Melbourne's vacancy rates have declined close to a 10-year low


Cautionary note

There was no gold rush, this time around, rather we've seen a Melbourne jobs rush, with the construction boom and its associated multiplier one of the underlying drivers (arguably there's the dubious "most liveable city" thing as well). 

Yesterday's employment figures showed that nationally the greatest net jobs creation was seen in construction (+45,500) over the three months to February 2017, far outweighing employment growth in all other sectors of the economy.

Total employment in the construction sector has now risen to more than 1.1 million from a total workforce of under 12.1 million.

Of course, I don't know for certain where the limit is for construction employment, but I'm personally willing to take a bet that we're somewhere close to the top here. 

There's an inherent associated risk for Melbourne's property market.

As I've noted before on various podcasts, explosive population growth is great for property markets until it isn't, and you never want to hit a bump in the road when you're travelling at twice the speed limit.

Should employment from the record residential construction boom subside quickly, or should Melbourne fail to create the necessary jobs to sustain its population boom at gold rush like levels, there could eventually be some fallout given that dwelling units under construction are still at near-record levels.

In the meantime apartment landlords can probably breathe a bit of a sigh of relief.