Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), & 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's 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 & charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, author of the New York Times bestsellers 'End Game' & '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 Hmmm, one of the world's most popular & widely-read financial publications.

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

Saturday, 29 November 2014

63 Not Out

Thoughts for the family and friends of PH and Sean Abbott during sad times for the cricket family. Vale Phil, a tragic loss. 


Friday, 28 November 2014

Mining's a Hole But Intentions are Good (Capex!)

Prawn Sandwiches, Anyone?

Had to laugh this week when an Arsenal football fan was arrested for spraying the Manchester United bench with red wine.

In the very same footballing week, a waiter had already caused a kerfuffle at the glistening new Wembley Stadium by serving food during the game, thus blocking fans from watching the match. 

Ha - modern football, eh! Nothing could make me sound much older than saying that it's all a far cry from "them olden days" when we paid 50 pence to stand on the terraces at Blackpool!

No frills or prawn sandwiches back then, of course, but disposable incomes are generally a bit higher today than they were in the 1980s, and Premier League football in particular has become hugely commercialised.

Traditionally a working man's sport it was once de rigeur for fans of southern teams to come up our way (Yorkshire) and berate northern football supporters with the then-popular chant "what's it like to lose your job?" - 'humorously' crooned in a similar strain to that of the Welsh hymn Cwm Rhonnda (basically "Bread of Heaven").

Were the goading chants taken with a cheerful bon homie? No, not particularly, but then as I recall rival football fans didn't take anything at all with much good humour back then.

The thrust of the old football chant was that Britain, then as now, suffered from a noteworthy north-south economic divide.

Manufacture, Resources and Service Industries

Roll back through enough decades and the north of England was once the industrial powerhouse of Britain - leading the world through an Industrial Revolution - with the south of the country being viewed by many northerners as a place for soft wastrels and a general drain on the country. 

However, in our neck of the woods, industries such as steel fell into decline and dramatically cut its workforce. The coal industry in South Yorkshire died too. And as with many developed countries. manufacturing fell into a steady decline, today accounting for only around 8 percent of the workforce.

Some of Britain's success stories since have included a fortuitous discovery of North Sea Oil (it was Scotland's oil really, but was deftly massaged into UK national revenues) and the City - financial services and banking. 

Britain has had another stroke of good fortune since the John Major years, that being that it did not enter the European Monetary Union (EMU) and did not adopt the Euro as its currency, and as such the Bank of England (BoE) has retained control over its own interest rates.

Different Rates for Different States

The BoE has dropped British interest rates to rock bottom for the past half decade and engaged in quantitative easing (QE), but even with your own currency monetary policy can still be quite a blunt tool.

The BoE is the central bank of the United Kingdom, and as such sets its base rate of interest for a diverse range of regions which incorporates 86 traditional counties as well as several different countries (though I still haven't worked out if Wales is actually a country or a principality).

It's a seemingly impossible task when you think about it. 

How does one go about setting interest rates simultaneously appropriate for a region which had been devastated from the halving of its shipyard industries, such as the north-east was in the early 1980s, yet a London housing market which went on triple in value in a decade during the "Lawson boom" as UK economic growth hit a rollicking quarterly growth rate of 2 percent?

Today, London may once again benefit from a few rate hikes, but hikes for Northern Ireland could mean 1 in 6 people at risk mortgage of mortgage stress by 2018.

Short answer - it can't be managed easily.

Capex Not Crapex

Hey hey, anyway, on to today's capex results, and whaddya know, some brighter news for the Aussie economy!

As implied by its full definition "capital investment", capex refers to when a business or enterprise invests in an asset such as a factory, warehouse, equipment, plant or machinery for the purposes of furthering its objectives or deriving a future economic benefit.

Capex is a good thing for economic activity now, and it is expected to be of more benefit to the economy down the track as the asset is put to use. Rising capex is thus a good sign, falling capex is more likely to be a pre-cursor to a dollop of economic malaise. 

It's long been feared that total capex in Australia would drop off a cliff as the mining construction boom unwinds, but although total new capex is down by 5. 9 percent over the past year, total capex actually increased fractionally in Q3, albeit only by a seasonally adjusted smidgeon.

The ABS has been having a bit of a 'mare with a few of its seasonal adjustments of late, so I've charted the original figures for total capex in red too. 


Jolly good. But how so have we recorded an increase given falling mining investment? The answer is that other industries - though notably not manufacturing - are responding to low interest rates and stepping up to the plate.

So while mining investment slipped by a further $640 million in the quarter, transport, postal and warehousing investment, for example, increased by $713 million. 

In other words, the economy is rebalancing away from mining construction, which is what most people who don't hate on the Australian economy would rather like to see happening.


One would expect the mining states to bear the brunt of any capex collapse.

In the event Western Australian mining capital expenditure produce a very robust result in Q3 - likely a combination of project overruns and yet more construction, though state level quarterly data is volatile - with other industries picking up nicely too, while Queensland's decline has not been quite as sharp as feared, at least when viewed over a three year time horizon.

New South Wales recorded an increase in the quarter.


Intentions Are Good

Perhaps the most important part of the capex release is the expected expenditure, which is derived from the management accounts of a sample of thousands of key companies:

"Estimate 4 for 2014-15 is $153,210m. This is 7.5% lower than Estimate 4 for 2013-14. Estimate 4 is 2.2% higher than Estimate 3 for 2014-15."

That's a very good result in the circumstances, and way better than the ~$145,000 million that many had expected. Notably, expected 2014-15 expenditure is now improving quarter on quarter (circled below) as other industries pick up their game.

The "capex cliff" may be taking on more the shape of a capex...camber? Off-ramp? Need to have a think on that one. Potentially a shallower rate of decline, anyway, which would be welcome news.


Some industries do look set to roll over and die, though.


State Versus State...

To finish up for today, I'd just like to come back briefly to my original point on monetary policy and the difficulties facing a central bank with its blunt interest rate tool. 

While much if not most of regional Australia is suffering from soft labour market conditions and rising unemployment (as I considered here), current monetary policy settings are at the same time too easy for Sydney.

I've been building my case over the years that in many respects Sydney may have the best placed economy - and strongest housing market - in Australia.

With a city population exploding higher by ~90,000 per annum, boom-like retail trade conditions, a Greater Sydney unemployment rate declining to just 5.1 percent and house prices continuing to rise at close to a 17 percent annualised clip (Residex), interest rates are too low for the harbour city at their current setting.

It was first mooted a couple of years that the Reserve Bank may be forced to wear a Sydney housing boom, and thus it is proving.

Although it is true that New South Wales has a well-diversified range of industries, it nevertheless remains the case that NSW capital investment growth has also been very heavily reliant on mining, although other industries are now gradually responding to low rates by deploying capital investment.


NSW has an ace up its sleeve, though. After a dismal lack of dwelling and infrastructure construction over the past decade, there is now multi-faceted building boom underway, showing up to some extent in the capex prints together with a twin boom in residential and non-residential construction (which is now up by a massive 54 percent since Q1 2012, a huge increase in activity).


Across the Queensland border, mining construction is now in near freefall, putting pressure on other industries, which have responded just a little to date. Watch out for soft rental markets in regional Queensland



The mining construction boom never really made it to South Australia with the cancellation or delay of a raft of projects, and as such SA has a few tricks held in reserve from a resources perspective, such as Woomera and a possible Olympic Dam expansion. 

It's just a shame for the state's economy that commodity prices have now tanked, which will keep an effective lid on mining capex for the remainder of this cycle.

One of the challenges for SA has been that manufacturing traditionally made up around half of its total capex spend, but so much manufacture is now dying with the automobile industry set to be the next to wind up.


The Wrap

The capex data set is a dream for nerds such as myself to analyse with alnost limitless scope for charting trends, but let's leave it there for today.

Summarily, challenges remain with mining investment still set to fall sharply, but this was a really good release with some promising signs of rebalancing and a solid pipeline of investment planned for the year ahead. 

Wednesday, 26 November 2014

Construction Data Flashes Red on Systemic Risks

Klaxons Sounding (x2)

The ABS released its Construction Work Done figures for the September quarter which underscored two key systemic risks for Australia's economy and housing markets, with the following alarm bells now sounding loud and clear:

(i) the long anticipated "mining construction cliff" is now well underway, with engineering construction spend registering a significant 12 percent decline over the past year to be 15 percent off from the peak; and

(ii) a forthcoming glut of new build residential properties, particularly of attached dwellings: units and apartments.

Let's take quick 'shufty' in four short parts.

Part 1 - Total Construction Slides

Total construction work done remains elevated in historical terms at a seasonally adjusted $51,146 million in the September quarter. 

From a macro-economic perspective, of course, it is the trend which is of importance, and total construction has now passed its peak, declining further by a seasonally adjusted 2.2 percent in Q3 to be 5.1 percent lower over the year in chain volume measures terms.


This was a slightly undercooked result versus expectations, and hardly the most auspicious of starts for the inputs into the Q3 National Accounts. 

Of significantly greater concern is what will eventuate for mining and engineering construction prospectively, with total spend already being some 12.1 percent lower in chain volume measures terms than only one year ago.

With commodity prices tanking it will be increasingly difficult for marginal projects, such as some of those in the coal sector, to pass through feasibility studies to the construction stage, thus reinforcing the entrenched downtrend.


Moreover, the sheer scale of the mining construction boom on the way up (even today engineering comprises more than 56 percent of construction expenditure reported here at a punchy $28,710 million in Q3) means that there must eventually be an equivalent drag on the way back down - a drag which will be nigh on impossible for work done in the other building and construction sectors to offset.

Low interest are thus clearly set to be with us for some time to come, which must in turn impact investment decisions and other construction trends, as the financing component of new developments remains historically speaking very cheap.

Part 2 - The Mining Cliff Cometh

The engineering construction data by state unsurprisingly revealed that total spend in Queensland and Western Australia is now receding sharply. 

Other states which benefited less dramatically from the boom years are also now in decline, albeit to a less significant extent, as the resources boom continues to transition into the export phase from the construction phase.


The ABS provided few details concerning what caused the tremendous spike in Q3 engineering construction in the Northern Territory, although cost blowouts at the Ichthys LNG project have been reported elsewhere related to the struggling UGL, while Inpex continues to report project progress in its regular updates. 

From a national perspective, we must now expect further declines ahead, and therefore tomorrow's capex data release takes on an additional level of interest!

Part 3 - NSW Now Leads Building Work Done

With a massive 54 percent seasonally adjusted increase in non-residential building in New South Wales since Q1 2012 (mainly related to Sydney projects) in concert with a solid pipeline of residential building, NSW now leads the nation in terms of building work done, which is promising news for the state economy.


But while an inherent infrastructure and dwelling deficit are working in favour of the NSW economy, some other states are building too much of what they do not need. 

Residential building work done has increased by 9 percent over the past year. However, new house building has now slipped past its cyclical peak, representing adverse news for the construction sector,  and note the alarming trend of the red line below for "other new residential" building.

We have known for many months of course that Australia has been approving far too many apartment buildings in certain locations, and now these building approvals are becoming a stark reality, showing up in the construction data as an unprecedented spike which is still booming.

Yikes.


New Builds Risk Flashing Red - Systemic Risk?

The next three years will see Australia break many all-time records in the residential property space.

These include the highest annualised rate of apartments constructed in Australia's history, and thus in turn record developer kickbacks and commissions paid to 'investment advisers' (i.e. developer salesmen) for the sourcing of willing interstate buyers of the detritus which developers have been unable to flog themselves (itself quite a notable achievement in the prevailing climate of cheap credit).

And the inevitable corollary will be a record number of investors losing their hard-earned cash on dud new development investment properties.

We would never recommend new build units anyway from a risk management perspective - they are too expensive and inherently lacking in scarcity value - but we cannot be any clearer on this point at this stage of the cycle. Too risky.

The Block?

Just as an infestation of cookery shows in Australia has paradoxically coincided with a record boom in the consumption of takeaway food, similarly the glut of TV renovation shows has not led to an equivalent uptick in major home renovations.

There have been many murmurings of a boom in renovation intentions but this is not to be evidenced here in the "Alterations & Additions" data, reflected by the moribund trend in the green line of the above chart.

The Housing Industry Association (HIA) forecasts a miserly 2 percent increase in renovations work in the year ahead following on from a 0.9 percent increase over the past year. 

"Every little helps" from a macro-economic perspective, of course, but as the above charts clearly demonstrate these renovations numbers are merely a drop in a very large ocean of construction spend as compared to the forthcoming declines in engineering work to be completed.

Part 4 - Residential Building by State

Lastly for today, a glance at residential building by dwelling type at the state level. We already know that Victoria has been building huge numbers of new houses as compared to elsewhere, but new detached house building has now surreptitiously tiptoed past its cyclical peak.


As you can see from the chart below, it is new units and apartments which are the greatest risk area for this residential property market cycle, as developers construct unprecedented volumes of attached dwelling stock.

With apartment construction hitting record heights there will also inevitably be a glut of new stock to be sold on by commission-hungry agents. Caveat emptor!

Our previous detailed analysis of the data including here and here has shown that apartment approvals in Sydney have long since rolled over and accelerating Greater Sydney population growth reduces oversupply risk on a city-wide basis to some extent, despite some pockets of new stock over-supply (cf. CBD, inner south). 

However, it must also be observed here that with unprecedented construction of attached dwelling stock set to take place through the 2-3 years ahead, particularly in Brisbane, Melbourne, Perth and Sydney, but also elsewhere, there will inevitably be some blood spilt down the track for a substantial number of today's purchasers of new and off-the-plan properties.


Scarcity Value

Always remember that, as in any asset class, buyers of and investors in residential property should look to purchase an asset with an element of scarcity value.

In this respect, with building approvals breaking record highs in 2014 - a glut of new supply being precisely the polar opposite of scarcity - and the price of new stock at sky high levels, it is therefore almost by definition the most risk-laden time to buy new property that we have yet seen.

One of the many problems with new build investments is that all too often the choice boils down to an over-priced house (as compared to established stock) in a fringe suburb where few people want to live, which is a poor investment, or an over-priced apartment in an suburb which is set to be flooded with new apartments, which is frequently an even worse prospect.

Alas there will forever be some nailed on guaranteed winners from this phase of the construction cycle, including the developers who have long land-banked their own gains from key development sites, and the so-termed 'investment advisers' plundering thumping sales commissions on new stock.

Scant consolation to be found for those at the end of the food chain who lose out, though.

Saturday, 22 November 2014

The Great Haka Stand-Off

The New Zealamd All Blacks play Wales at the Millenium Stadium in Cardiff this weekend.

One of the great sporting moments took place exactly 6 years ago on November 22 2008, as Welsh rugby decided to see what might happen if you were to stare down the fearsome All Blacks haka in front of 75,000 fervent fans.

Rather them than me, particularly the young Welsh back Leigh Halfpenny who was just 19 years old at the time.

See how it played out...


The brilliant story behind the haka stand-off is here.

Wednesday, 19 November 2014

The Trouble with Bubbles

US Stock Bubble

When the Dow Jones industrial index (DJIA) moved above 12,500 at the beginning of July 2011 we started seeing the first references (at least, the first references I remember taking in) to a "US stock bubble", at the point circled on the chart below.

The bubble calls appeared to be absolutely vindicated when in August 2011 fear of European debt contagion stemming from Spain and Italy ripped through markets causing sharp corrections across global indices, while France's AAA rating also came under threat.

By August 6 2011 America had its own S&P credit rating downgraded from AAA to AA+ for the first time in history, with suggestions and fears that further downgrades could follow.


Fear Abounds

Investors may recall that mid-2011 was therefore an exceptionally hairy time for stockholders.

As the holder of a few heavy long positions at that time I can remember watching stock indices and talking heads on Bloomberg news around the clock...while eating breakfast, in the gym, before bed...hint: if you find yourself doing this, you probably don't have an appropriate long-term strategy in place!

In my experience, the only strategy which allows me to sleep at night through such markets is averaging into diversified products, because I know I'll likely be buying more units at a better price next month. Shareholdings in individual companies are another matter entirely (for me at least).

During Australian trade on August 9 stocks collapsed by as much as 5.5 percent as investors wondered whether the US Fed Reserve might act as a circuit-breaker to support markets, before rebounding within the same trade to close up by more than 1.2 percent.

I stand to be corrected but I don't believe such a whipsaw trade has ever been seen in Australia, either before or since. What is certainly the case is that it took a hardy soul to stay long through all of the talk of double-dip recession and debt contagion, 

Yet look at the Dow Jones (DJIA) close today, at more than 17,700. That is, the index has soared more than 42 percent higher before dividends.

Of course there will be a correction at some point, as is the nature of markets, and no doubt all and sundry will be experts after the event. 

Reading the chart from right to left is a cinch. Calling market turning points in real time when reading the chart from left to right is close to impossible.

Real estate bubbles

Not dissimilarly, Case & Shiller called a US real estate bubble in July 2003 when the index read 142.99, yet the index ran all the way to 206.52 in July 2006 before reversing all the way back from whence it came to 134.07 in March 2007. 

The latest Case-Shiller reading in 2013 showed the index to be 16.7 percent above the level it was tracking at the time of the original bubble call.

Saturday, 15 November 2014

Genworth Q3

Genworth - A Shorting Vehicle?

In May this year Genworth Mortgage Insurance Australia Limited (ASX: GMA) finally completed its initial public offering (IPO) of 220 million shares at an IPO price of $2.65 per share.

The stock is relatively speaking a little tightly held, with Genworth Financial Inc. retaining 430 million of the 650 million ordinary shares representing a 66.2 percent ownership, while institutional investors account for most of the rest - the Top 20 shareholders of GMA hold all but 7.8 percent of the 650 million ordinary shares on issue.

Genworth in Australia (GMA) is a monoline lenders mortgage insurance (LMI) insurer and with a 44 percent share of the Australian LMI market it has been perceived by many to be the ideal shorting vehicle for Australia's long-suffering housing market bears.

While Australia's major banks are somewhat diversified, gross written LMI premiums are essentially the whole of Genworth's Australian business, and as such GMA is a "cleaner" proxy for mortgage delinquencies and thus related housing market sentiment. 

A Walk on The Short Side

While the percentage of total issued capital being sold short will not run high due to the group's shareholding structure noted above, there has been some interest on the short side for GMA, although the data shows that there are currently many more shorters of embattled iron ore producer Fortescue Metals Group (ASX: FMG).


Share Price Action

So how are the shorters tracking? The over-arching answer is "not very well" since the IPO, with GMA's share price having ripped 26 percent higher from the initial offering price after strong reported underlying profits for H1. 


There was a good deal of excitement from the usual quarters when Standard & Poors (S&P) announced a ratings downgrade for GMA to "A+ with a negative outlook".

Being classified as an "insulated subsidiary" of the Genworth group, under S&P's existing rating methodology GMA must be capped at only a three notch differential from the group's component member Genworth Life Insurance Co. (GLIC), which itself had been downgraded to "BBB+ with a negative outlook" following the release of Genworth Financial's earnings.

As such, the downgrade in GMA's rating was not directly related to its own capitalisation nor to Australian mortgage delinquency rates, a point predictably misunderstood in Australia. 

GMA - Q3 results

GMA released its Q3 2014 results on November 6 and in respect of the Australian group reported a third quarter Net Profit After Tax (NPAT) of $64 million and a year to date NPAT of $215 million as at 30 September 2014. 

It was a strong set of results with Gross Written Premiums up by 5.3 percent on the prior comparative period to Q3 2013, and NPAT up by 13 percent (profit before tax is up by 8.8 percent).


Delinquency Rates Decline

Of course, analysts of a monoline insurer are at least as interested in mortgage delinquency rates as they are in the volume of premiums written, and the results were solid here.

Since the 2009 book year, the level of new delinquency rates has fallen substantially lower and this continues to be the case in the most recent book year.


The number of paid claims of the past seven quarters has declined considerably from 722 to only 350, slashing net claims incurred in half over the same time horizon.


Regular readers will know that we do envisage potential problems ahead for some mortgage holders. 

In South Australia and in regional Queensland in particular, where a weak economy and a troubled coal sector are biting respectively, we do see some risks of elevated delinquency rates.

Indeed rates of delinquency have already run notably higher in Queensland (0.49%) and South Australia (+0.43%) than elsewhere in Australia, but thanks to exceptionally low delinquency rates in New South Wales (0.30%) and Victoria (0.32%), the portfolio records a very low rate of Australian delinquencies in aggregate at just 0.36%.

We expect that the unwinding of the mining construction boom will have some effect too, although this may be cushioned to some extent by the lucrative remuneration packages that many employees and contractors have enjoyed through the construction phase of the boom.

GMA's delinquency rate of 0.36% is skewed higher by the troublesome 2008 book year.

However, since that time, mirroring the findings of Reserve Bank research (which revealed that the average mortgage holder is some 24 months ahead on mortgage repayments thanks to Australia's unique loan product structuring), delinquency rates have fallen consistently over the following 5 book years.

Low interest rates and low interest repayments are clearly helping homeowners, and mortgage stress is relatively speaking low at the present time.


Regulatory Capital Position (RCP)

Genworth's RCP is strong thanks to strong underlying performance since 2009 and the ongoing seasoning of old books. 

GMA's earnings release figures reported a strongly capitalised position with a Level 2 solvency ratio of 156.4 percent (a prescribed capital amount or "PCA" ratio of 1.56x) and the company retaining "additional capital flexibility". 

GMA also reports a strong balance sheet with $2.4 billion of net assets, a "highly rated" cash and fixed interest investment portfolio of $4 bilion, and a balance of $1.3 billion sitting in its Unearned Premium Reserve (UPR) account.


The Wrap

Just as in the way that "super-cat" insurers are priced by the market for the potential fallout from bad years as much as for what happens in the good, mortgage delinquency rates tend to be fine until they are not.

Such is ever the nature of housing market cycles, and in the post financial crisis era, not least because of the ever-present short sellers of such stocks, PE ratios on a stock such as Genworth Australia are unlikely to ever be elevated.

For these reasons GMA continues to trade at at a single digit PE ratio of a shade under 10.

Those with short positions will be hoping for further rises in the unemployment rate since Australia does not engage in widespread sub-prime lending (or even much "low doc" lending) and high interest rates are completely off the table as a cause of deliquencies for the foreseeable future.

A recent survey by Genworth showed mortgage stress to have halved while only 2 percent of surveyed borrowers were behind on repayments. although such these surveys are very small and shouldn't be relied upon much more than anecdotal evidence.

The beauty of GMA as a proxy for housing market sentiment is that market moves will be almost instantaneous and assuming that the market remains rationally priced, any forthcoming flood of delinquencies should be quickly anticipated and reflected in the share market.

Unfortunately for the shorters, GMA's performance has remained solid, reflected in the 26 percent increase in its share price over the past six months.

A skim through recent Statements on Monetary Policy (SOMP) confirms that regions which might be at the greatest risk of an elevated rate of delinquency include coal mining regions

As Genworth Australia is 66.2 percent owned by Genworth Financial Inc. and with the "instos" mopping up much of the rest the market, GMA will be far from the most liquid market on the ASX. 

Nevertheless, the GMA share price chart should act as an effective bellwether for expectations of non-performing loans and delinquencies, and thus analysts will therefore continue to scrutinise future price action with a keen eye.

World's Best Tall Building is...on Broadway!

Go Sydney!

As a long-time resident of Pyrmont and more lately Ultimo, way back in February I wrote a short piece on this blog "a glimpse into Sydney's future" about the One Central Park development.

I also uploaded a few photos from the complex from during the construction phase, noting how despite my initial scepticism about the unusual concept of "vertical gardens", the finished article was looking set to be pretty impressive.

Since that time One Central Park has gone on through completion to put Broadway right on the map in being named the Best Tall Building in Asia and Australasia in June, and now it has gone one better still in being judged the Best Tall Building in the world

Bravo, what an achievement, adding to the already bright allure of living in Sydney's inner ring suburbs.


During the construction I was regularly left befuddled as to why on earth a residential tower on Broadway would need a helipad.

Turns out it was a podium and a "heliostat". Silly me.

Friday, 14 November 2014

Alarming Disparity in City vs. Country Employment Growth

The Alarming Disparity

The ABS released its Detailed Labour Force data today and, mirroring a point which I have been making on this blog since its very inception, it revealed a concerning and widening disparity between the prosperity of capital city Australia and our struggling regional centres. 

There's a bit of analysis to rip through here, so let's dive straight in and take a look in three short parts, commencing with...

Part 1 - Capital Cities are Dominating Employment Growth

In the two largest states, aggregate employment growth is now being driven entirely by the capital cities, although even therein the trend has softened.

Note that regional New South Wales has barely added any employment at all in aggregate (on a net basis) for more than 6.5 years. Regional Victoria has fared little better with total employment lower today than it was in January 2011.

Moreover, the trend in the regional employment has now clearly been down over the past couple of years.


There has only been one shining light in terms of regional jobs growth over the past half decade, that being regional Queensland.

Alas with the mining construction boom now unwinding total employment is now declining in regional Queensland too. The coal industry in particular looks vulnerable.

The size of the total workforce in South Australia has been shrinking, with regional employment falling significantly over the past five years and total employment in Adelaide now some 20,000 lower than it was around 18 months ago, with the fallout from the decline of the automobile manufacture industry probably yet to be felt in full. 

Not a pretty picture for SA.


Employment Over the Long Run

Now sure, property "advisors" are virtually all vested interests of one sort or another, and of course anyone can torture the figures until they confess.

One of the latest favourites has been the "strongest property market performer of the month!" proclamation which is appallingly misleading.

But through presenting the full data sets across a range of timelines as we shall now undertake below leaves far less wriggle room for blatantly making nonsense up.

Indeed this is a perennial problem in the real estate commentary space - as if by a force of nature few advisors will ever highlight risks facing regions they own property in themselves, which is understandable enough, but not very helpful for would-be investors.

Personally I own property in regional Victoria (and regional Britain) but I'm hardly going to recommend that it's likely a great idea right now from a macro perspective given what the graphic below tells us. Any credibility I have would quite rightly be shot to pieces!

Logically, from my perspective, property investment is likely to entail significantly more risk where employment is falling or flailing, so to my mind there is a good deal of more elevated risk facing parts of Adelaide and Canberra, as well regional New South Wales, regional Victoria, regional Queensland, regional South Australia and regional Tasmania.

Why? Because employment is falling.


It should - but probably doesn't - go without saying that we also continue to believe there to a very high level of risk associated with mining and resources towns and regions in the current climate, and indeed, going forward as the mining construction boom implodes.

There is always some risk involved in buying property, that's a given. Our recommendation is that if you're going to do it, minimise the risks to the extent that this is possible through detailed research at both the macro and the micro level.

Part 2 - Unemployment Elevated and Rising in Regional Australia

As noted here previously, headline unemployment figures as reported by the ABS can be a relatively crude and volatile measure, failing to adequately capture discouraged workers or the underemployed, for example.

Nevertheless, it is worth a look at what is happening around the states, and the general picture is that unemployment is rising sharply in the regions. 

Sydney remains well placed with a headline unemployment rate of only 5.1 percent and a huge volume of dwelling and infrastructure construction in the pipeline, yet in regional New South Wales the unemployment rate trend has been up to now sit above 7 percent, which is much too high for comfort,


Below we have presented the 3 month moving average figures for Victoria, but we note that this month's ABS data is now beginning to record a sizeable disparity here too, with Melbourne's 6.3 percent unemployment rate now substantially lower than regional Victoria at 7.2 percent.


The most concerning of all states, perhaps, is Queensland. While this is not yet fully reflected in the 3 month moving average figures, Brisbane's unemployment rate of 6.3 percent has diverged dramatically from regional unemployment which has leapt alarmingly to 7.7 percent. 

We have warned about parts of regional Queensland here repeatedly, particularly potential job losses in the coal mining sector.


With our chart pack on demographic statistics revealing a debilitating "brain drain" from South Australia in the form of net interstate migration, and the total size of the workforce having shrunk, it is perhaps unrealistic to expect elevated unemployment rates in the state's regions.

In fact the unemployment rate in regional South Australia has all but evaporated into thin air over the past month or two, but this is clearly not due to employment growth since there were more folk employed in regional South Australia way back in 2007 than there are today.

Adelaide's unemployment rate is too high for comfort at 6.9 percent.


Perth and WA still have the lowest headline unemployment rates respectively, although the trend in Perth has been steadily up since 2009 when the Western Australian capital city was effectively close to full employment.


Finally the unemployment rate appears to have fallen in Hobart which is wonderful to see, but regional Tasmania has even managed to record a double digit unemployment rate reading in the past two months, which is less heartening.


Part 3 - The Casualisation of the Workforce

I think we are about done for today, but let's just acknowledge here the likely gradual casualisation of the workforce which must be a key consideration for property investors, particularly in the regional Australia where full-time employment in aggregate appears to be in an entrenched decline.



The Wrap

We've covered a lot of ground in a short space here, but the macro picture is that unemployment rates are trending up worryingly in regional Australia with jobs growth overwhelmingly focused in only the four largest capital cities.

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Last of all for today, to my knowledge this is one of very few blogs in Aussieland (Cameron Kusher of RP Data writes another excellent blog of a similar ilk) which provides this type of analysis - every day for more than 3 years, I might add! - without charging a hefty subscription fee or relentlessly spamming readers with weight loss/mature dating/online gambling or "get rich in 9 days by giving us a thousand bucks" type ads.

Therefore, do please kindly feel free to share a link to my blog on social media in the Twittersphere, on Facebook, through LinkedIn, or whatever else it is that people do on t'internet these days. 

Cheers for today! PW

Wednesday, 12 November 2014

Blood Swept Lands and Seas of Red

Remembrance, 2014

London is a sensational paradox of a city.

The history of the city is at times beyond comprehension, while it has continually and quite dramatically evolved over the decades to be an exciting, cultural melting pot today.

It's also a very frustrating city. 

Expensive, crowded, intermittently freezing and then without warning almost ridiculously sticky and hot, with no air conditioning on the Tube, the ever-present strikes and transport delays and no beaches in summer for respite, although the parklands are grand.

And then, every so often, London does something quite brilliant, and all is forgiven again.

The poppy exhibition at the 11th century Tower of London has been once such event. I got in early to avoid the crowds...




Indeed, combining many of the best and worst aspects of London, the breathtaking Blood Swept Lands of Seas of Red installation has been so wildly popular with Londoners and great swathes of tourists that the public were urged not to visit during the busy half term time as Tube stations were unable to cope.

The 888.246 poppies, each representing a fallen Commonwealth soldier from the First World War, are to be auctioned off for £25 each, raising £11.2 million after costs for charitable causes.

Obviously, this post may be a day late if you are in Australia, since my clock is set to PMT, myself being in Britain this week.

They shall grow not old, as we that are left grow old;
Age shall not weary them, nor the years condemn.
At the going down of the sun and in the morning
We will remember them.
Lest We Forget

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Remembrance has changed over the years, and rather than focusing only on the homegrown fallen from the Great War, this week is largely a time for reflection on conflicts in the world.

On a related theme, November 12 is also a public day of commemoration for my dear friends in East Timor (Timor-Leste), being the anniversary of the Santa Cruz cemetery massacre in Dili of November 12, 1991, undertaken during the 24 years of occupation from 1975-1999. 

The Santa Cruz massacre was one of the events during the occupation which sparked outrage when brought to international attention, culminating in a vote for independence in 1999 and the foundation of the independent nation of East Timor in 2002. 

Tuesday, 4 November 2014

MYOB Pulse: 5 ways to celebrate Melbourne Cup in the office!

Read my latest MYOB Pulse article here.

Happy Melbourne Cup day and best of luck!


Australian Land Values Soaring

Land Values Pumped Higher

The ABS released its System of National Accounts for 2014-14 last week which contained some interesting data on aggregate Australian land values. 

As discussed on this blog often before, while commercial property tends to offer comparatively high yields. this is at least in part due to a comparative lack of capital growth in this asset class. 

While residential land values have boomed over the years, commercial land values have been virtually flat since 2008 and have simply never performed in the same manner. 

Residential land on the other hand...


This is not surprising, since the entire Australian financial and taxation system is set up for us to strive for home ownership and in many cases, to strive for property investment on top.

I noted the year 2008 above because it was at that time that the Australian property bubble theory really garnered support (to be fair, much of the financial world outside of Australia was imploding at that time), with some big studies eventually being released explaining why the Australian land value bubble must collapse.

The data series produced were never wrong, but they were frequently misinterpreted because users of the data took no account whatsoever of the factors which did not support their theory that land prices must collapse.

For example, disregarded were many of the real world factors which have served or continue to serve to push land values higher, including the deregulation of the financial system, interest rates falling substantially from above 15 percent to only 2.50 percent today, massive population growth in Australia, and a string of other factors as often discussed here before.

Six years on, let us now consider on what has happened to land values according this latest ABS data. 


Goodness. As the chart shows the thesis that land prices would inevitably suffer an epic crash from 2008 levels are looking shaky to say the least.

Over the last six years, residential land values have continued to increase by 37 percent in New South Wales, by 46 percent in Victoria, 21 percent in Queensland, by 33 percent in South Australia and by 11 percent in Western Australia, having previously already boomed in Perth. 

Land values have taken off dramatically in all of the less populous states too.

Of course, with Australia's population growing at around 1.7 percent per annum, and thus some new land being rezoned for residential use, we would expect to see some increase in aggregate land values.

In fact, between June 2008 and June 2014 the Australian population increased by 2,051,000 or 9.6 percent (although apparently, it was further argued, population growth does not impact dwelling prices).

But clearly a population increase of less than 10 percent in no way accounts for residential land values in Australia increasing by 33 percent across the same time period. 

For completeness, here is what happened to commercial land values across the states. 


And rural land values, which outside of New South Wales, have done absolutely nowt.


Overall, the data shows that the demand for residential land, which is so heavily focused on a few key coastal locations, particularly Sydney, Melbourne, Brisbane and Perth, has pushed land prices higher over time.

Media Links

A couple of the places where you can catch my thoughts today...

Firstly on Property Update here, where I take a state-by-state look at what is happening in the jobs and the labour force, and how this is set to shape our real estate markets in the years ahead. 

Take a read here.

And also here on Property Observer, where I look at the shifting face of interstate migration, and in particular how population growth in the mining states is now declining. 

As further suggested by the headline, interstate migration away from New South Wales has fallen to the lowest level ever recorded...

Take a read here

Monday, 3 November 2014

Building Approvals show no Sydney oversupply

Inflation weakening

Another month, another weak inflation print, with the TD-MI gauge recording inflation of 0.2 percent for the month, now equating to 2.3 percent year-on-year in October.

Following on from a number of soft prints since May, this suggests that we will see the inflation gauge sagging towards the bottom of the 2 to 3 percent target range in due course, particularly as a temporarily strong 0.7 percent reading - partly caused by the easing in the exchange rate - will soon drop off the annual reading as soon as December.

Given that inflation is traditionally weak on this gauge in the fourth quarter of the year (only ~0.3 percent is expected in Q4) it seems fairly likely that by the time the Q1 data rolls around the notion of another interest rate cut could feasibly tabled once again.

Adding to the case for a further cut in this long, drawn out easing cycle will be the fact that after a strong run the Building Approvals data now seems to have passed its peak, as we'll now consider in three short parts below.

Part 1 - Building Approvals roll over

Firstly, the headline data was weak.

While a seasonally adjusted 9134 houses were approved in September (+9 percent year-on-year), which looked decent enough, only 5685 unit approvals were recorded in the month.

This represented a substantial seasonally adjusted 34 percent decline in unit approvals year-on-year and a 22 percent decline from the August figure.


The monthly data is unavoidably lumpy, no question about that, but on a rolling annual basis the trend in total approvals has slunk back to below 193,000 from above 195,000 and the peak for apartment approvals appears to have slipped past in recent months. 

Part 2 - Capital city data shows no Sydney oversupply

There has been a lot of punditry discussing an oversupply of properties in Sydney.

Some of the information we provide on this blog is available elsewhere, but parts of our analysis reveal findings that contradict what you will hear from other expert sources or mainstream media (usually, it seems, because they simply don't analyse the data), and on this point in particular we've found something quite different to the consensus.

By analysing all of the available data series, we have found that a combination of soaring population growth (in part caused by the lowest interstate migration away from Sydney ever recorded) and apartment approvals having long since passed their peak, this suggests to us that there is no looming oversupply of stock in Sydney.

Instead we believe that the big players in the developer space will be looking to have their Greater Sydney apartment stock off their books by Q4 2015, and the apparent construction boom will gradually ease back in due course.

Looking at the capital city house approvals data, we can see that Greater Sydney has approved fewer than 13,000 houses on a rolling annual basis, which has been a nice enough uptick, but is hardly the sort of stuff of which an oversupply is born.

If you want to talk about potential oversupply in this sector, check out what Greater Melbourne has been approving for construction over the past decade, which is to say, a lot.

Greater Perth is really beginning  to ramp up its house approvals now, too, so watch this space.


On the units front we have no doubt that the release of new plans for an extra 50,000 apartments to be constructed along the Parramatta Road corridor will inevitably lead to assumptions that Sydney will become awash with units. 

Naturally if all of these apartments are eventually approved and then in turn are built this could result a glut of apartments in the Homebush area, which may be unwelcome news...if you own a flat in Homebush.

But we still don't see there being a huge oversupply of units in Sydney for several reasons:

(i) the very poor "substitutability" of units located along the woefully congested thoroughfare that is Parramatta Road, which simply are not comparable dwellings to properties with genuine owner-occupier appeal;

(ii) even in the event that 50,000 units are ultimately approved, they probably won't all be built; and

(iii) by far the most pertinent point, through the "next few decades" that it takes to push these plans through to their final completion, the Greater Sydney population will have soared by a number that will be better measured in millions rather than thousands.

The big picture is that such a level of stock will quickly be absorbed given the rapid rate of increase in the Greater Sydney headcount.

Below we have charted what we are actually seeing in terms of supply, which is that Sydney unit approvals hit their cyclical peak activity way back in September 2013.

As reported here previously, since that time we see the number of rolling annual unit approvals in Sydney gliding back down towards a comfortably manageable 20,000-22,000 per annum, which will easily be accounted for by the harbour city's burgeoning levels of population growth. 

Greater Melbourne, on the other hand, even now has continued to approve apartments at a ~24,000 per annum pace over the past four months, which will do little to easy oversupply concerns in the Victorian capital.

Some promising news was to be found for Greater Brisbane in today's figures, with the Queensland capital taking its foot off the gas pedal a little with regards to its unit approvals. This is a welcome outcome since Brisbane has been approving apartments galore over the past 18 months.


Overall, there was a huge drop in unit approvals in the month on a nationwide basis for the capital cities, which suggests that any forthcoming oversupply will be confined to a few (mainly inner-city) pockets.

Part 3 - State level - DYOR on regional property

Our analysis published here previously has shown that, with the honourable exception of Queensland, regional jobs growth in Australia has almost totally stalled, and a titanic gulf is opening up between capital city employment and what is being seen in regional Australia...or, more accurately, what is not being seen in regional Australia.

By implication, therefore, with regional unemployment and under-employment rising by stealth, due caution should be exercised when acquiring or investing in property outside the capital cities.

We don't have the space here to look at every region on a case-by-case basis, but the headline data does suggest that some parts of regional Victoria and regional New South Wales in particular may be vulnerable to overbuilding.

DYOR here, and caveat emptor. 


A similar point applies for regional apartments, which in the most general terms can be a more volatile and risky proposition in any case, since demand in the regions tends to be largely focused on detached housing stock.


Summing up

Our analysis has continued to show that we don't believe that there is an oversupply of Sydney property outside of a few obvious pockets, but as a form of due diligence you would probably want to see this backed up by other data series.

On that very note, the Real Estate Institute of New South Wales (REINSW) released its vacancies data for the month of September in the past week, and it showed vacancy rates actually declining in Sydney to only 1.7 percent, rather than rising, which would normally be something of a surprise at this stage in the real estate cycle.

The reason? Population growth - while declining in the mining states, it is soaring in Sydney.

It has often been that an "market in equilibrium" ought to have a vacancy rate of around 3 percent, so in that context the Sydney vacancy rate declining to just 1.7 percent further debunks the oversupply theory, although of course as noted there will continue be a few pockets where a surplus of units does exist.

These include, the Central Business District (CBD), the Ultimo/Chippendale/Broadway corridor, North Sydney, Mascot/Green Square/Wolli Creek, and a few others (but not Pyrmont in this cycle).

Both Outer Sydney (1.4 percent) and Inner Sydney (1.8 percent) currently have relatively few oversupply issues. 

On other hand some New South Wales regional areas do have elevated vacancy levels of above 3 percent, including the Hunter region, the Orana region and the state's Central West, which leapt to 4.3 percent.

An oversupply of apartments actually appears to be a far more material risk in inner Melbourne and inner Brisbane than it is in Sydney at the present time.

Indeed, putting the basket case of Darwin to one side, if there is one capital city where sustained strong dwelling price growth appears to have surged well ahead of the market's fundamentals  at the macro level (unemployment, building approvals, stock on market, vacancy rates etc.) then in our view that capital city is Melbourne.

Finally, from a macro-economic perspective, while it has been good to see an increase in the number of houses being approved for construction, the dwindling headline data does continue to suggest that dwelling construction can hardly be a miracle solution to offsetting of the end of the mining construction boom.

One way or another, it seems, borrowing rates will probably need to fall yet further, either through a cut in the official cash rate or, of equal likelihood, via "out of cycle" interest rate cuts from lenders.