Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 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 finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete 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'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - & author of Things That Make You Go of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Monday, 31 March 2014

Stocks finish Q1 flat

A bit of 'window dressing' today for the end of the March quarter saw the market finish the trade up nicely by 0.5% or so.

But overall, the market was flat for the first quarter.

Still, not the epic collapse and "Dow below 9,000" predicted by our American forecasting friends...

Markets almost appear to be in limbo, patiently waiting for the taper Stateside and whether this will see the markets correct downwards sharply.

Source: ASX

Property prices keep rising in March


Someone asked me last week if I am "bullish on property?".

It's a bit of wild concept if you think about it.

At the last count there are around 9,300,700 dwellings in Australia, and the vast majority of them I wouldn't invest in.

There are a huge number of areas that I would consider to be extremely risky, in fact, including a whole range of mining towns and regional centres, and even some larger cities with weak population growth and job markets.

My position always been that if you can demonstrate a certain level of skill and invest in the right suburbs and property types you can make a lot of money, but I wouldn't say that makes me bullish on housing per se.

In Britain, London and its surrounds has been the only area worthy of investing for my money over all the years.

In Australia, I generally stick to certain suburbs in Sydney. 

In 2007, that meant a number of key suburbs in the inner west, and even then only certain types of property. 

Last year we were buying on the lower north shore, but again only in a handful of suburbs and certain types of property. 

At the weekend, the lower north recorded another blistering auction clearance rate of 92%. 

I wouldn't get too bogged down in the weekly conspiracy theories about under-reporting: just look at the actual results reported in suburbs like Kirribilli, Wollstonecraft, Cremorne and Neutral Bay. 

The lower north shore is now absolutely flying!

We expect to see Milsons Point and Waverton outperforming in 2014 too.

We try to avoid buying in heated markets, however, so we may leave the hordes to the auction frenzies at ever-higher prices now, and look elsewhere.

Next on our hit-list will include three suburbs in particular to the west and south-west, a little further out than the traditional capital growth hotspots, in order to catch the ripple effect of capital growth which is repeated in most property market cycles. 

March property prices

Later this week, RP Data will release its property price results for the month of March, which unsurprisingly will continue to report very strong gains in Australian capital cities (+2.3%) for the 10th month in a row.

Leading the way, of course, were Sydney (+2.8%) and Melbourne (+2.3%), although in fact gains were recorded everywhere in March.

Over the past 12 months, the best performing capital city has continued to be Sydney, and the worst, perhaps not surprisingly given its weak jobs market and low population growth, Adelaide (click chart).

Housing credit growth fastest since Feb 2011

Told you it was a big week for data. The Reserve Bank's Financial Aggregates show reasonable credit growth for businesses at 2.4% y/y and 5.8% y/y for housing.

That's the strongest result for housing credit in more than three years.

Source: RBA

I didn't bother to blog it last week since I'm not a huge fan, but here is the HIA-Commonwealth Bank housing affordability index, which is essentially at its best level in a decade. Naturally that level will begin to slide if interest rates do revert upwards again.

Source: HIA

New home sales flying off the shelves

The Housing Industry Association (HIA) released its new dwelling sales figures for February.

Commentators have called an end to this recovery at least half a dozen times, but new dwelling sales increased very substantially by 6.9% in February, mainly driven by Queensland this month.

Seasonally adjusted the increase was 4.6%.

It's a very stark contrast with sentiment back in Q3 2012, and a very strong release.

Source: HIA

Bitcoin bubble bursting

It was reported two days ago that an estate agency in Sydney has begun accepting the cryptocurrency Bitcoin for house deposits and for property advertising.

Oh dear. Not so sure that is a smart idea.

Here is the 1 month Bitcoin chart:

And here is the all data chart:


The week

The first two weeks of the month tend to be much more interesting than the latter two.

Why? More local data! This week we have a stack of releases to come.

These include a Reserve Bank Board Meeting on April Fools' Day (no changes expected) and RP Data's property market data for the month of March, which may or may not show the biggest monthly gains on record after a sluggish February.

We also have the retail trade data for February: recall that Janaury showed a stonking increase in sales.

And if that wasn't enough we also have building approvals figures, the international trade data in goods and services data, engineering construction activity, monthly inflation figures, regional population growth and the Dun & Bradstreet Business Survey.

Lots to look forward to!


For this week's movie at Broadway, watched Russell Crowe's Noah.

Very long film. Enjoyed it and it was entertaining, and don't think I need to issue a spoiler alert to mention that the ark scenes were very impressive. And the acting was great, if a little serious. 

But struggling to give it more than 6/10 for various reasons. 

Trying to refrain from saying that the plot had "more holes in it than a Swiss Cheese"...but you know what...

Sunday, 30 March 2014

The Ponzi in practice

Academic calls crash

In 2002, Andrew Oswald, a Professor of Economics specialising in housing markets at Warwick University, predicted a great housing crash would spread outwards from London across Britain, and advised all Britons to sell their homes:

"We are about to go through the great housing crash of 2003-2005. This crash will feel worse, in my opinion, than the one at the end of the 1980s. I advise you to sell your house, and move into rented accommodation. I am serious."

Continued the article:

"In late Spring of 2003, it will begin to be recognised that house prices have stopped rising. People will cease being such enthusiastic purchasers. Those who rushed into buy-to-let properties will begin to sell them. House prices will crumble, just a little. Then by late summer of 2003, confidence in housing will go. Prices will crumble more. At that point, newspapers will take up the cause. Headlines will appear: house prices fell 8% last year."

Roll forward to 2003 and, quoted in national newspaper articles, Oswald continued:

"'It's only when these figures come in next week that we'll be able to see clearly how badly house prices are really falling in London.' The key indicator of the stability of the housing market, Prof Oswald claims, is a person's earnings compared with the price of their property, which should be a ratio of 1:4.

'Average earnings are £25,000, so the property value should be £100,000, but we are far above that ratio now - just as we were at the end of the Eighties,' he said. 'The whole of modern history tells us the prices are bound to fall. It will start with a wave that engulfs London then ripples across the country. Nowhere will escape."
Stating that something is "bound" to happen, rather than it may occur or could eventuate, is certainly to take a bold position. In the event, prices continue to roar upwards to unprecedented levels for more than half a decade before finally peaking in most parts of Britain in 2008.
London housing 1998-2014
Here's how the issue played out in London: 
A dozen years on we are still seeing articles about a "Tokyo style housing crash" and the average London house price has long since passed £500,000. Even today, London house price to income ratios remain off the charts and a long, long way from four times incomes, with Knight Frank reporting today that London prices have increased by 68% in the last 5 years alone.
The point of all this is merely to note that whether you are discussing housing markets, share markets or indeed any markets, predictions are devilishly "difficult to make, especially about the future".

And further, what represents  sound advice for one person may be poor advice for another, which is why, for example, stock buy recommendations should always come with lengthy disclaimers attached.
And remember, Oswald is no random blogger, he was and is a Professor of Economics who specialises in housing markets at one of the very highest ranking British Universities. 


It's perhaps worth noting quickly here, that property markets are necessarily granular. In a diverse country such as Australia, what is happening in Perth or Port Hedland may not be in any way reflective of what is happening in Palmerston or Pyrmont. 

Even within cities, some suburbs and regions can remain relatively affordable as compared to incomes, while others can be wildly unaffordable on any metric you care to mention.

For this reason, national measures of averages dwelling prices to average disposable income, while useful indicators up to a point, are necessarily limited in their ability to assess affordability for individual households.


In Australia too, of course, academics have for many years predicted a crash based upon Irving Fisher's theory of debt deflation.

The basic premise was simple enough, often described with emotive or sometimes even vitriolic language thrown in for good measure:  dwelling prices would stagnate then rapidly fall as assets are unloaded en masse onto the market. With demand falling in the housing sector - coupled with an inevitable increase in unemployment - a vicious deflationary spiral would occur and economy activity would grind to a halt.

The academics dismissed out of hand any argument that higher prices are in any way explained or justified by lower interest rates by stating that the 1960s should have prompted an even greater household debt ratio as rates were the lowest on record throughout that decade. 

Now, from what I've read, the 1960s was an interesting decade. I always head to Homebush when Townshend, Daltrey or Jagger visit Sydney. The moon landings were also pretty cool. And I'm as avid a reader of academic theory as the next dude.

But when the boffins start drawing analogies between  today's debt markets/lending standards and those of more than half a century hence (or worse, household debt ratios drawn from the 1861 Census) then it's probably a good time to pull up the ladder and watch the footie instead.

Ponzi finance

The work of Hyman Minsky was cited by the academics years ago as proof of a coming property market crash in Australia, noting that bubbles occur when markets reach a stage of Ponzi finance: income flows cover neither principal nor interest charges, and owners become completely reliant on escalating sale prices (capital gains) to make a profit and meet the cost of the debt.

Anyway, the point of this post is not yet another tedious "will there/won't there be a housing crash?" discussion. Lord knows that particular debate has well and truly been done to death in both London and Sydney over the past decade.

Instead, today I'd just like to shed a little more light on the nature of the "Ponzi finance" in this era of low interest rates, and particularly, in Australia's prevailing tax environment. In other words, what might the numbers relating to property investments actually look like in practice?

Neutrally geared?

While the cost of capital remains so low, property investors for whom cashflow is a significant concern may easily source property investments which do not entail significant holding costs. 

Take the below scenario of an off-the-plan property in Sydney around 11km from the CBD, bought by a middle-income earner, which gives rise to decent depreciation or on-paper losses. 

Generally, rental yields have slipped markedly in Sydney over the last couple of years as dwelling prices have increased. Significantly higher gross yields than this can be found in western or outer Sydney suburbs (or regional centres) for those who demand stronger cashflows, but let's use the example of a new apartment which generates a moderate 4.5% yield.

I note in passing that much of this new stock demands a material "newness premium". I'm trying to be polite here - what I really mean is, it's way over-priced. And therefore a capital growth rate of 4% could well be overtly optimistic (click chart).

It's been possible lately to fix mortgage rates at least 50bps lower than this, but let's suppose a 20% deposit, a 5.00% mortgage rate and a flexible interest only loan, for the sake of argument. 

Naturally, you can argue from now until the cows come home about whether wages and rents will grow and at what pace, whether inflation will hit the implied 2.50% target, whether property prices will stall or fall...or whatever. And, of course, markets are at last pricing in rate hikes by Q2, 2015!

These variables are all arguments for another day. What I'm considering here is the possible cash flows of a property bought and financed in such a manner today (click chart):

With the cash rate at generational lows of 2.50% and mortgage finance available at tremendously cheap levels, there is no need for any investor who so desires to be suffering a significant net cash outflow, should that be the outcome which they demand.

...or not neutrally geared?

This is where the point on market granularity comes in. 

Wealthier investors or high income earners may buy dwellings in the premium sector and incur significant cash outflows, being able to afford to soak up cash flow losses. Others are motivated simply by the lure of paying less income tax. 

Let's say a higher rate taxpayer buys an established $1 million apartment with painfully high strata fees by using only a 10% deposit, attaining relatively weaker depreciation and on-paper deductions, and achieving a dismal gross yield  of under 4% (click chart).

As you might expect, in this scenario, while the high income earner may save a lot of tax, he or she will experience net cash outflows for some years, even in the event of borrowing rates remaining at historically low levels. 

Eventually, the property will surely become cashflow positive in its own right, but perhaps not for many years depending on what happens to mortgage rates and rental incomes (click chart):

Note that we've again stripped out the 1.5% Medicare Levy here, and in this scenario the buyer would likely be zinged for Lenders Mortgage Insurance (due to the use of a low deposit) in addition to around $55,000 in stamp duty and land transfer fees, and other acquisition costs such as legal or conveyancing fees.

This investor is sitting squarely in what the academics would classify as the "Ponzi finance" category. Cashflows will likely be relatively poor for years to come and therefore some capital gains are required in order for this investor (speculator, whatever) to achieve a positive internal rate of return (IRR).


The concept of a market supported solely by Ponzi finance is fundamentally flawed in the current environment since it incorrectly assumes that every investor in Australia bought their property today (and airily ignores the role of homeowners in the housing market). 

Many of us Generation X'ers, for example, own investment properties bought back in the 1990s for which the cashflows are so far in the black - more than double or even triple the mortgage repayments - that it's hard to envisage any reason for ever selling the income-producing asset. 

Rental incomes from well-located properties tend to increase over time so any rational investor who bought a few years ago would perhaps be unlikely to be suffering negative cashflows in the current environment.

It's erroneous in the same way that some people argue that shares have been "a poor investment" by casually electing to ignore the ongoing tax-advantaged dividend flows and working on the unsound presumption that investors bought their entire portfolio precisely on the day of the 2007 stock market peak (exteremely unlikely).

Source: ASX

By the same token, housing affordability arguments which argue that where first homebuyers can't afford to buy a median-priced house in Sydney, then prices across the board must inevitably and immediately return to a certain pre-determined price/income ratio, may also be misguided.

Whether you desire that outcome to occur or not, this overlooks a huge number of variables such as the role of inheritances, mortgage rates, the large portion of housing stock which is owned unencumbered, the substantial role of equity, that investors can afford to hold property based upon rental incomes, and all manner of market distortions such as the prevailing tax regime and much more besides.


If you were to take the debt deflation theory to its illogical conclusion then nobody would ever buy a dwelling since they would always expect them to be cheaper in the future. Prices would fall to zero. 

However, property markets are relatively illiquid and are not so straightforward. Homeowners account for most of the housing stock and are not always inclined to sell in a downturn, even when instructed to do so by the talking heads in the press (2002, 2008...).

And if I had ten bucks for every time I'd heard someone say: "I'm going to wait and buy a property when prices fall by 10%" then I'd surely soon have enough moolah to give Gina Rinehart a call and fund the entire Roy Hill project. 

In any event, the understanding of debt deflation has been around for so many decades now that governments and Central Banks are painfully aware of the potentially destructive effect of shrinking credit markets. Market interventions, while not always effective, are at least likely.

While moderate corrections in housing markets are periodically welcomed, a long, drawn out decline in house prices is considered to be poisonous to economies, and corrective action will be invoked.

Long, drawn out falls in dwelling prices also have a habit of killing off housing supply as we saw in Sydney from 2004. And while academics sometimes argue that housing supply is irrelevant, I doubt you'd find anyone in the real world who would agree with that (how else would one explain the price of a detached dwelling in Hong Kong if supply is unimportant?).

I strongly agree on one point though, that being the fundamental importance of debt markets in the house price equation. If there ever is to be a sharp property crash in Australia, it is as likely, in my opinion, to be caused by a short-circuit in the credit markets as anything else. 


As noted at the beginning of the post, predictions about the near-term future are almost impossible to make.
Yet a salient reason that most people continue to be poor or average investors in all asset classes is that they spend far too much time concerning themselves with what might happen in the next 30 days and not nearly enough considering where we might be in 30 years.

Nothing is a sure bet in life, but I'd take a wildcard punt that housing affordability will still be a barbecue topic when I'm 65 as it was when I was 25. Hopefully, all Aussies will be vegetarian by then too so I might be offered something to eat, though I'm not holding my breath on that one.

Saturday, 29 March 2014

Earth Hour - Sydney

Below are two photos I snared at Darling Island this morning (just having a coffee over here).

Now, if everyone is being good, there should be no lights on tonight from 8.30pm to 9.30pm in the CBD, since it is Earth Hour.

Earth Hour is one export that we can be proud of, since, as you may recall, it began as a lights out event in Sydney back in 2007. 

Today, more than 7,000 cities and one billion people globally take part in Earth Hour.

It's a great event, but realistically if companies (and people) were serious about making a difference they'd turn office lights off every night, wouldn't they?

More than that, the future must lie in investment in green technologies.


China growth slowdown?

With Australia's domestic economy showing signs of picking up, much of the focus in the year ahead will be on what's happening elsewhere, particularly  in China.

It's certainly one of the most interesting and yet mysterious economic stories of the modern era, the great demographic shift from a nation of farmers to the world's second biggest economy.

Much will be debated in the year ahead as to whether China's economy will slow down to well below its 7.5% growth target.

Forecasts suggest some downside.

Source: Bloomberg

One point which rarely gets much airtime, of course, is that when an economy expands very rapidly in size, one must expect that it will eventually grow more slowly in percentage terms.

In China's case, the rampant double-digit growth it was experiencing before the financial crisis took hold means that the economy is now approximately double the size that it was in 2007.


If you play around with a few numbers therefore, you will find that with an economy of around double the size today, just 7% growth in 2014 is approximately the same as 13% growth in 2007.

OK, so that's a dumb oversimplification, but not entirely incorrect in principle:

100 * 1.13 = 113

200 * 1.07 = 214

A similar result in terms of growth then, and continued growth at that rate would see China overtake the US as the world's largest economy by the end of this decade.

If stimulus is what is required to hit the growth target, then a kleptocracy such as China can surely deliver it.

Of course, China has its challenges. What if the reported numbers aren't real, for example? 

Sceptics would instead look at electricity consumption as a proxy for GDP, and suggest that growth may be some way weaker than reported.

Source: Bloomberg

There are also fears of a property bubble in China coming back to bite (ongoing housing price inflation may be underestimated according to various sources), and the perennial challenge remains the transformation of the economy towards one of domestic consumption rather than one of investment driven by rapid urbanisation and dwelling construction.

Flighty capital

Over the long term this will be one of the biggest global stories of the decade.

Over the shorter term, much of the Australian reporting will be focused on the impact of capital flight.

That's because there are now more than 1,100,000 Chinese millionaires - a number expected to hit around 1.5 million by the end of the decade - and a huge number of whom are looking for places to shift their funds. 

Canada has cancelled its Significant Investor Visa leaving 46,000 Chinese millionaire applicants high and dry, while CNN reports that the US visa system has been overwhelmed following a panic-stricken run of applications.

Source: Credit Suisse via The Age

"Chinese nationals account for more than 80% of visas issued, compared to just 13% a decade ago, according to government data.
That translates to nearly 6,900 visas for Chinese nationals last year, a massive bump up from 2004, when only 16 visas were granted to Chinese.
"The program has literally taken off to the point that in China, the minute anybody hears I'm an immigration lawyer, the first thing they say is, 'Can we get an EB-5 visa?' " said immigration lawyer Bernard Wolfsdorf.
"There is a panic being created in China about the demand getting so big that there is going to be a visa waiting line," he said."
The number of applicants in the US is capped. Australia's turn next?

Gold rally fades

The gold price has given back its gains of the last month and then some as sentiment improves. 

Some interesting data out of Europe this week. 

Some are looking at thing optimistically, including Shane Oliver of AMP, seeing the Eurozone crisis as a "distant memory":

True to a point, but others see deflation risk in the Eurozone and persisting high youth unemployment, and Britain recorded a hefty trade deficit in the last quarter of 2013 it was revealed yesterday.

A way to go yet then for Europe, you might say.

Here are the gold charts:

Source: kitco

Saturday Summary: articles of the week

The most interesting property articles of the week.

Summarised by Michael Yardney at Property Update here.

Friday, 28 March 2014

Tens of billions earmarked for infrastructure

A bit rough on Victoria, perhaps, since the state has already sold off many of its assets, but a significant boost for the Australian economy, and particularly for the states with assets to sell off.

This is what the economy needs as the population booms: infrastructure spending.

States will not be allowed to use proceeds from asset sales to pay down debt. 

Instead, funds must be spent on infrastructure, and spent quickly.

From Business Day:

"Federal Treasurer Joe Hockey says he has struck a ''historic agreement'' with state treasurers that will create tens of billions of dollars of new infrastructure across the country.

The Commonwealth has promised to provide an ''asset recycling pool'' of money that will be used to encourage state governments to sell their public assets and recycle that money into new, economy-boosting infrastructure.

The pool will be used to give states an extra 15% of the sale value of their assets but state governments will only receive the extra money after signing a bilateral agreement with the federal government promising to use the proceeds from privatisation to invest in new projects.
''We need to fill an infrastructure hole in the economy and we need to do it fast,'' Mr Hockey said on Friday.

''The net outcome will be tens of billions of dollars of new additional infrastructure in Australia.''

State governments will need to show the Commonwealth what infrastructure projects they would like to build and the federal government will judge each project on its merits before handing them any money.

''This is a blank sheet of paper for a project proposal but, obviously, there needs to be a net benefit to the economy, it needs to be result in more jobs and it needs to be a good use of money,'' Mr Hockey said.

State governments will not be allowed to use the money to pay down debt.

The 15% bonus from the federal government will only be paid on the amount of asset sales reinvested in ''productive infrastructure''.

Announcing the decision on Friday, Mr Hockey conceded some states would get more money from the pool than others because some states had more public assets to sell.

The decision angered Victoria, which has already sold many of its assets.

Victorian Treasurer Michael O'Brien said his state's previous history of privatisation ought to be recognised.

''We would certainly prefer that there had been some recognition that Victoria, and other states including South Australia, have done a lot of the heavy lifting when it comes to economic reform and asset recycling,'' Mr O'Brien said.

But Mr Hockey said he was not interested in history, saying he had to ''deal with the challenge that lies before us''.

The money will only be available until June 30, 2016, to encourage state governments to start selling assets quickly. 

The money will be paid out over a five-year period, with the expectation that some asset sales will take years to bring to fruition."

Record Australian household wealth

Record wealth

Commsec reported that Australian household wealth has reached a new record high as share markets (and therefore super balances) as well as dwelling prices continued to rise in 2013.

Source: Commsec

At the end of 2013, total household wealth exceeded a record $7,500 billion, an increase of around $250 billion in the calendar year.

That's an average of $322,757 per capita, making Australia an extraordinarily wealthy country.

Household wealth during the financial crisis suffered a little as share markets dived, but Australia had bounced back relatively swiftly by the end of 2013.


As in all capitalist societies, however, the wealth continues to be distributed unevenly.

Largely thanks to our compulsory superannuation (a major driver of the high average household wealth figure) most working Australians will have benefited from a strong 5 years on the share markets.

Similarly those who own their own home will have benefited since dwelling prices reached new heights in 2013 as wages and household incomes increased for yet another year.

The losers in today's low interest rate environment include net savers and often pensioners, since fixed interest returns have dived over the past two decades.

The beneficiaries since the financial crisis have included those with profitable businesses, large share portfolios and heavy real estate exposure.

Australian population growth breaks some records

Population booming

The ABS released its demographic statistics yesterday, which showed that Australia's population continued to boom dramatically by 405,446 persons in the year to September 2013 to 23,285,800, an annual increase of 1.8%.

For those familiar with the concept of compounding growth, it was interesting to note that the natural increase (births minus deaths) of 164,428 was the highest figure ever recorded in Australia.

The remainder of the growth of 241,018 was the net result of migration, accounting for nearly 60% of the growth (click chart).

The implication of this is that although natural increase is now at a record level, it is still immigration which is driving most of the growth.

As for where the population is growing fastest, see below (click chart)

The bulk of the growth as usual was seen in New South Wales (+108,100 y/y), Victoria (+110,500), Queensland (+83,700) and Western Australia (+76,300).

This is pretty much as expected while housing markets in the two most populous states remain so strong, although the population growth may tend to slow in those states when prices eventually reach a peak.

Population growth remained significantly weaker in South Australia (+15,300), Northern Territory (+4,300), the ACT (+5,900) and Tasmania (+1,200).

When considered on a percentage basis, Western Australia (+3.1%) remained by far and away the strongest state (click chart).

However, it is noteworthy that the rate of growth in WA has slowed somewhat from its peak (+3.7%), which is an expected effect of the mining construction boom passing its peak.

Queensland's percentage growth was also down a little due to net interstate migration, but this could equally turn out to be noise in the data.

Construction boom

I'm aware that people have suggested that Australia would not be able to stage a residential construction boom due to prohibitive land prices, but with dwelling prices now having experienced an uplift the stage is well set for precisely that.

Dwelling approvals are at decade highs and rising, and the significantly increasing levels of construction in Sydney are already easily visible.

In fact, at a conference in Hong Kong this week, the Reserve Bank Governor Glenn Stevens stated confidently: 

"We are going to have a boom in residential construction over the next couple of years. That is very much on track."

He appears most likely to be right, and while I'm aware that Sydney is not Australia, it's definitely underway here thanks to an uplift in dwelling prices and low interest rates.

While the value of residential construction in itself not remotely likely to plug the hole left by the mining construction boom, the combined effect of low interest rates, rising residential and commercial real estate construction, higher levels of services activity, strong retail sales and booming export volumes all look set to keep the economy ticking along.

The boom in Sydney's construction is already having a tasty impact on the local economy, with retail sales taking off and tax revenues to follow, while building materials companies are enjoying some time in the sun:

Captital city construction and new homes also need new infrastructure: hospitals, schools, shopping centres, cafes, restaurants, service stations and more, so the impact should on our major cities be multiplied over time.

The challenge facing Australia is to keep GDP per capita growing at a fair rate and not only real GDP.


As if to re-emphasise the point, I was out at Sydney's Olympic Park yesterday for the first time since the mighty Sydney Roosters won the NRL Premiership, and...yes, yet more construction. 

And more rain.

Thursday, 27 March 2014


Two days ago I blogged a post entitled "Stop the Moats" stating my prediction for what the newspapers would say about Tony Abbott bringing back Knighthoods and Dames.

Sydney Morning Herald article today:

And, for my next trick, Powerball numbers...

RBA sees financial stability

Comprehensive review

I've made the point a few times that when it comes to monetary policy and other regulatory actions it matters rather less what people say on chat forums and rather more what the Reserve Bank of Australia (RBA) and APRA say, since ultimately they are the bodies tasked with making the key decisions.

While plenty of people disagree with the RBA, a couple of hours spent reading yesterday's Financial Stability review should tell you how comprehensively the central bank assesses risk.

Fortunately, I spent the two hours so you don't have to.

The four points you're probably most interested in:

1- Banking sector

The Australian banking industry emerged from the financial crisis relatively unscathed, but events elsewhere showed that if ever there was a time to bolster capital requirements and shore up risk, it is surely now.

The RBA reported that the banking sector got stronger in 2013 - asset performance is improving and bad and doubtful debt charges declined.

Having increased from essentially nil in 2003, bank's non-performing loans are now declining as households enjoy very low interest rates.

Businesses too, are finding the terrain a little easier than they were during the financial crisis, and bank loan books look much healthier for that.

The non-performing share of banks’ domestic housing loan portfolios fell over the six months to December 2013, to 0.6% down from a peak of 0.9% in mid 2011, helped by low interest rates and tighter mortgage lending since 2008. 

The ratio of impaired housing loans has fallen recent quarters with rising dwelling prices helping banks to deal with their troubled assets and being able to report a reduction in mortgages-in-possession.

Those are the bare numbers, but a bit of context here might be helpful:

We have just been through the greatest financial crisis since the Great Depression, so non-performing loans of 0.6% is a very sound result.

2 - Lending standards and bank balance sheets

Low-doc lending continues to represent less than 1% of loan approvals, while the share of loan approvals with loan-to-valuation ratios (LVRs) greater than or equal to 90% has been fairly steady since 2011 at around 13%.

The share of banks’ funding sourced from domestic deposits has increased from about 40% in 2008  to around 57% currently.

That's a good thing.

Australia's major banks (classified by APRA as "D-SIBS) have bolstered their capital and funding structures since the financial crisis and are in fact already well-placed to meet APRA's more stringent Basel III capital requirements which will kick in in 2016.

A key point here:

Banks are generating imperiously strong, comfortably double-digit returns on equity (ROE) and colossal net profits after tax (e.g. even after tax Commbank cleared a net profit of $7.8 billion in their 2013 financial year - before tax the figure was closer to $11 billion).

Surely then, herein lies a golden opportunity to enforce the strengthening of capital ratios further through earnings retention, reducing dividend payments or scaling back share market purchases in order to offer dividend reinvestment plans (DRPs).

Of course, bank execs will want to continue chasing the golden egg of 15% ROEs through reinvestment and greater expansion of their loan books, but if our major lenders are to receive an implicit government guarantee then, stuff it, make them shore up their capital ratios, I say.

It would be better for everyone over the long term.

3 - Household finances

The overall financial position of the household sector was little changed in 2013 and indicators of financial stress remain low, reported the RBA.

Households continued to manage their finances with greater prudence than a decade ago, household wealth continued to increase, the saving ratio was within its range of recent years and, importantly, households continued to pay down mortgages much more quickly than required.

The household saving ratio remained within its range of recent years, at about 10%.

The proportion of disposable income required to meet interest payments on household debt has now stabilised over the past 6 months, having previously declined in line with the fall in mortgage interest rates in recent years. 

The good news is that households have used lower interest rates to continue paying down their mortgages much more quickly than required.

Remarkably, the aggregate mortgage buffer has risen to almost 15% of outstanding balances, which is equivalent to two full years of total scheduled repayments at current interest rates. 

The RBA notes that therefore households have considerable scope to continue to meet their debt obligations even in the event of temporary unemployment. 

Overall, aggregate indicators of financial stress remain low.

4 - Housing market

As for the housing market, the RBA noted that lending to self-managed super funds (SMSFs) is now being tightened up and remains only a small part of the market, as do purchases by non-residents.

Housing loan approvals are picking up across Australia, but are really firing in New South Wales (read Sydney).

The financial crisis seems to have scared households away from the share markets and towards housing according to surveys. Note how sentiment towards equities hit lows just when share market valuations became cheap and more attractive!

The RBA noted that "the pick-up in investor activity in the housing market does not appear to pose near-term risks to financial stability" but "developments will continue to be monitored closely for signs of excessive speculation and riskier lending practices."

The Reserve Bank is very keen to ensure that lending standards in Australia remain high.


There is much more besides which you can read here, but that is the flavour of the report.

Lending standards will be monitored but on the face of it the RBA appears to be more focused on aggregate loan impairments and indicators of financial stress than dwelling prices. 

Wednesday, 26 March 2014

London housing market breaking records

The Office of National Statistics released the latest housing market data for the UK here.

Daily Mail almost averaging one article a day on this now.

House prices grew +7.1% y/y in England, +6.9% in Wales, 1.4% in Scotland and +2.7 in Northern Ireland.

The average UK house price hit £254,000 in January, while prices in London topped £450,000

Long-time readers of this blog won't be remotely surprised to hear that (a) UK average house prices are making new all-time highs, and (b) it's London (+13.2% y/y) and the south-east of England (+7.1% y/y) that are driving the gains.

London is powering ahead of the rest of the country, with prices up 13.2 per cent in a year

Gross mortgage borrowing of £11.5 billion was a stonking 47% higher than the same month last year, and the highest level of lending recorded since 2008.

Given the UK's penchant for boom/bust cycles, there are to be no prizes for guessing what happens next: a continued substantial run-up in housing valuations.

House prices are now well above the pre-crash peak, raising fears of a new bubble

March 2014: the biggest month Australian property history?

Goodness, a bold question indeed for a Wednesday arvo.

Whether or not there is any, erm, value, in the concept of daily property values, RP Data's Daily Home Value Index undeniably creates a great deal of opportunity for nerds to play around with charts, and I, for one, am grateful for that.

Until just a couple of days ago the RP Data index was showing national property price gains for March of a staggering 2.3% which, if it were to be sustained, would represent the greatest monthly gain on record for RP Data in Australian capital cities, representing further validation that monetary policy works on dwelling prices.

Over the past year, the home values by city, have increased by 10.51% (click chart).

This is probably easier to see in a bar chart of year-on-year price growth by city (click chart).

Brisbane and Adelaide are now showing some gains in 2014 but, perhaps unsurprisingly, it is Sydney and Melbourne that are really driving values higher.

From what I've heard from Queenslanders who are in the market it appears likely that Brisbane will begin to show some decent gains in the near future.

For 2014 year to date, Sydney prices are up by 3.74% and up by 2.13% in March so far alone.

Meanwhile Melbourne's chart finally seems to have moderated a little, but even so, prices are up by an outlandish 5.67% in 2014 and are still up by some 2.54% in the month of March so far.


Is this all important?

Well, I'm not a huge believer in the idea of daily home values due to the obvious limitations on capturing and processing data, but these figures are certainly important in one sense.

If nothing else, the headlines that record or near-record monthly price gains will  doubtless generate and which will be reported next week can themselves fuel a herd mentality.

Moreover, history has shown that where asset markets get away from central banks they can take on something of a life of their own.

The Reserve Bank will be watching all this with great care, of course.

Indeed, the RBA talked a lot about housing today, it's confidence instrumental in sending the dollar all the way up to a 4 month high of 92 cents.

I'll cover off why they seem so relaxed tomorrow, but I think that we can reasonably expect there to be more talk of macro-prudential measures to cool speculation in the market in the absence of actual interest rate hikes in the near future.

Also tomorrow, the ABS releases its demographic statistics for the September 2013 quarter.

Never a dull moment!

US consumer confidence highest in 6 years

Global news has been a bit mixed of late, but here's some good stuff: 

The level of US consumer confidence has hit its highest level since more than 6 years ago when the global financial crisis was just beginning.

The Consumer Board's confidence index hit a reading of 82.3 up from 78.3 last month.

That's the best reading since all the way back in January 2008.

This is very important, since, after all, in a consumer economy like the US, consumer spending ultimately accounts for about 70% of all economic activity.

US employment increased by 175,000 in February as well - great news, there is nothing better than seeing jobs created.

Aussie share markets will probably follow Wall Street a bit higher. 

Lower north shore lift-off

Aha yes, very timely.

As I noted yesterday, our property pick for this year in late 2013 included a few key suburbs with great transport links on Sydney's lower north shore.

I covered off the reasons why we favour the lower north shore here, and added some more detailed thoughts in our summer edition of the Buyers Eye here.

Weekend results

From APM's weekend wrap:

"The hot Sydney weekend auction market continued on its merry way at the weekend recording its eighth consecutive clearance rate above the 80 percent. 

Clearance rates have been remarkably consistent over the past month fluctuating between these weekends’s 81.5 percent and the months high of 82.7 percent recorded on March 1st.

Vendors are keen to take advantage of Sydney’s best ever autumn selling conditions with strong competition for properties amongst buyers in most region and prices brackets."
Lower north firing
The lower north shore is really getting going now. Continues APM:
"After a quieter weekend last weekend the lower north bounced back this weekend with a stunning clearance rate of 92.5 percent.  
Next best was the city and east with 89.7 percent followed by the inner west with 86.8 percent, the south 83.7 percent, the south west 82.4 percent and the upper north shore and the northern beaches each with a clearance rate of 80 percent."
And, APM wraps it up:
"Sydney’s super autumn home auction market continues unabated with frenzied activity from buyers and sellers set to continue over the next three weekends to the Easter break. 

Next weekend is likely to present the market with its biggest test for year so far with nearly 800 properties due to go under the hammer. The pre-Easter rush is on."