Renovation activity has ticked up a little, but barely enough to even register a blip in the National Accounts, and the net contribution to GDP in Q4 is likely to be essentially be nil.
In aggregate, then, this leads us to another soft result which suggests that the previous upward trend in lending finance is set to roll over fully in 2015.
Part 2 - Impact on Interest Rates
"In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates."
Cash rate futures markets had previously assumed that subsequently weak economic data potentially superseded the importance of the word "likely", and as recently as Monday markets were pricing in a 38 percent chance of an interest rate cut at the very next Reserve Bank Board Meeting in February.
Since that time we have had some (moderately) better than expected Labour Force figures and the Reserve Bank's own Governor Stevens also went to some lengths in an interview with the Australian Financial Review to allude to a leaning towards policy stability.
- inflation appearing very likely to head towards the bottom of the 2-3 percent range;
- sub-trend growth expected in 2015;
- sharply declining commodity prices;
- a national unemployment rate ticking up to a 12 year high of 6.3 percent and rising; and
- a number of other weak indicators.
Part 3 - Sydney Investor Loans Explode; Brisbane Improving
One of the key themes of this blog over the years has been that since Australia hit its effective "peak household debt" in 2006/7, the inner Sydney property market will clearly be the star performer, for a whole range of inter-related reasons that we don't need to re-cap on here.
In particular, as noted here in the earlier in the week, $200k fringe suburb detached housing where land values are a low component of a property's value are unlikely to be performing investments in an era where household debt has already peaked.
Even if fringe land values were to boom by 50 percent from, say $50,000 to $75,000, this is unlikely to make for much of an investment return on the total value of the asset (12 percent, to do the maths for you) given that the replacement build cost of detached housing greenfield sites is now not increasing in real terms.
Project home builds are increasingly representing outstanding value for money today, meaning that the substitutability of established outer suburban dwellings has shifted favourably for new homebuyers.
This is not a popular viewpoint with many property commentators we understand, but the statistics are pretty much speaking for themselves since 2008, with Sydney standing head and shoulders above every other significant property market. The best performing suburbs have largely, though not solely, been located in the inner west over that time.
In October, some $12.1 billion of investor credit was written with New South Wales accounting for a massive $5.24 billion of that amount.
Over the past year an unprecedented $54 billion of investment loans have been written in NSW, a huge number but pretty much what we have been expecting to see due to low interest rate settings, the only question being how long this rate of increase might be sustained.
What's more, the rolling annual value of loans is set to run at least 10-15 percent or more higher unless regulators can find a way to halt the market trend (the case that they even feel strongly compelled to do so seems to remain at best unconvincing).
Part 4 - State Level - The Good, Bad & Ugly
As for where else we see out-performance in 2015? In a word: Brisbane.
Two points of warning, though.
1 - Watch out for a looming oversupply of inner-Brisbane attached dwelling stock, and be equally wary of recommendations to buy off-the-plan from "advisers" the sole aim of whom is to snare hefty commissions.
Personally I would avoid this type of stuff like the plague right now. Correction - avoid it always.
Whatever anyone may tell you, leveraged investing in a secondary or regional market where unemployment rates are high (say ~7.5 percent plus) and are running higher may carry a material risk premium that could result in significant financial loss.
We'll cover again which regions have elevated and rising unemployment in more detail later in the month.
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