Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Saturday, 31 October 2015

Terms of trade to be clonked again

Export prices steady

The ABS released its International Trade Price Indexes for the September quarter this week, and the "good" news was that export prices did not decline in Q3, coming in flat for the quarter, but import prices rose further by 1.4 per cent.

Looking at the ratio of Australia's export to import price indices, it seems that we are are now not partying like its 2006.

This latest data indicates that Australia's terms of trade likely fell yet again by around 1.4 per cent in the third quarter, plunging nine year depths, which is another tick in the box marked "further interest rate cuts."

Looking at the historical data, the decline in Australia's terms of trade may well have some way to run yet.

Commodities cycle

Many were lulled into believing that Australia's resources boom would run for decades, but this cycle has been a fine example of why commodity prices "never always go up", to steal a phrase used by Chris Caton, Chief Economist of BT Financial.

In commodities markets experiencing a prices boom, sooner or later either the demand which sparked the boom falters, or supply ramps up in response to more attractive pricing.

In this instance we got both.

China's imbalanced growth, once heavily skewed towards construction, is now hopefully rebalancing towards other sectors, while at the same time bulk commodities are now being exported from countries such as Australia in record volumes. 

The result of these shifts will be the end of Australia's resources construction boom, with construction activity now certain to follow the sharp downward trajectory of commodity prices - albeit with an lag - as the last of the mega-projects proceed towards production.

One chapter of the resources boom story that has not yet been written in full is the LNG tale. With LNG exports now being shipped from our shores we know that export volumes have the potential to contribute significantly to Australia's GDP growth over the next year or two, though the question of what will happen to the commodity price remains as yet unanswered.

Two-speed property markets

For property markets in resources regions the labour-intensive construction phase of the boom represented the "the good bit". Now we are faced with the bad bit as the construction phase of the boom fades away.

Unfortunately much of the property market commentary turned bullish on mining regions around 2012, despite commodity prices in SDR terms having peaked back in July 2011 (or September 2011 in Aussie dollar terms).

This has been the subject of increasingly vigorous invective on chat forums from investor folk who were led down the mining hotspot path - which is understandable enough, for the simple artithmetic of portfolio losses determines that many will not be around long enough to get back to breakeven.

This graphic shows why although while property investment is not suitable for everyone, those of us with slightly saner heads were suggesting inner ring Sydney as a safer bet in 2012.

Boom-bust markets are a dangerous game for leveraged speculators, and the fallout from large drawdowns can take decades to recover, assuming that they ever recover. Generally speaking it is better for most investors to stick with capital city markets which offer the long term potential for steady and consistent capital gains.

Queensland recovery

In this context the ongoing recovery in Queensland housing market volumes represents an interesting dynamic.

Despite the dismal performance of many resources regions the latest fortnightly data from the titles registry shows that at the state level Queensland transaction volumes have been continuing to undertake a long, drawn out recovery over the past four years.

Given that we know final demand has been obliterated in a number of resources regions, generally speaking this portends relatively well for parts of Brisbane, and perhaps a number of the tourism regions which are now at last enjoying the fruits of a weaker Aussie dollar. 

On the other hand, there are any number of regional Queensland markets which were recommended by pundits as hotspots just a few years ago that  have been staring down cataclysmic corrections. There's no need to list them all again here, you can look up the 2012 hotspots for yourself. 

There is some evidence that interstate dollars are beginning to pour into Brisbane housing, but even within Greater Brisbane the duality of the market is more pronounced than normal. 

The latest Residex figures showed the median house price in Brisbane increased by 5.2 per cent over the year to September, but those who rushed in to buy pricey off the plan apartments in some of the oversupplied inner city markets may be left gnawing their finger nails over the next year or two.