Your Weekly Microdose of Data-Based Finance, Property and Economy
25th February 2024
PERTH CONTINUES TO SHINE
The data for the January Home Value Index from Corelogic shows that Perth is still the dominant force when it comes to price growth, with another 1.6% in January. This number comes off the back of 1.8% in October, 1.9% in November and 1.5% in December.
Tim Lawless, director of research at CoreLogic, pointed out what the readers of this newsletter are probably tired of hearing me talking about: "The western capital continues to see housing demand outweigh supply, helping to push values 16.7 per cent higher over the past 12 months. Despite that, housing prices remain relatively affordable compared with most capital cities, with the median dwelling value sitting just under $677,000."
The Real Estate Institute of Western Australia (REIWA) also pointed out the obvious in this report, with a simple and logical line of thinking to get to the conclusion in the 5th bullet point:
- "Over 73,000 people moved to WA in the year to June."
- "If you assume there are 2.5 people per household, that’s an additional 30,000 households in that time."
- "However, we are building about 14,000 new homes per year so we have a significant shortfall in supply versus demand."
- "Earlier this year the National Housing Finance and Investment Corporation stated WA faced a shortfall of 25,200 new properties from 2023 to 2027."
- "At current building completion and population growth rates this is very likely to increase.”
As a Perth investor myself but also as a broker with clients buying in Perth all the time, I couldn't be happier with what Perth has delivered so far to me and to my clients but, most importantly, I'm even more excited about all the growth potential that the city still presents over the next 5 years.
LOW LISTINGS
If last week I mentioned this awesome Residential Property Prospects from Oxford Economics under the lenses of price predictions for different capital cities, this week I'll bring up the report again but on a different context: it forecasts, for 2024, a national stock shortage of about 97,000 dwellings. By 2026, the number is expected to hit 145,000.
The numbers for the January listings are out and certainly substantiate the forecasts from Oxford Economics. It's somewhat surreal to think that in 2012 the numbers were about double what they are now, and yet it was a great time to invest in property.
This is worth repeating as it shouldn't be taken lightly: we are talking about having twice as many properties for sale and a much smaller population (about 22.6 million), and yet look at how much property prices grew since then. Now we have half the properties for sale and a much bigger population (27 million).
CBA PREDICTS 6 RATE CUTS
Off the back of declining inflation, rising unemployment, abysmal retail figures and a per-capita recession (post from 16th of December), the conversation around interest rates has markedly shifted, with CBA now predicting 6 cuts between now and the end of next year.
This would bring the interest rate to 2.85%, a massive 1.5% below the current 4.35%.
QUICK BREAK
I’ll be taking a break from writing this newsletter as I’ll have some family visiting for two weeks and want to make sure I make the best possible use of the short time they’ll spend here. Will be back on the 23rd of March, with plenty of data to catch up on!
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17th February 2024
MILLIONS
Nice to see Sydney finally crack the top-10 in the global ranking of cities with the highest number of millionaires, especially considering that the 9 top spots belong to the usual suspects: big cities from the US and China, London, Tokyo and Singapore.
It's only natural, then, that overseas searches on realestate.com.au are increasing substantially (11.% increase in 'buy' searches and 7.8% increase in 'rent' searches) and are well above pre-pandemic levels, as reported in detail in our newsletter edition from 25th/Nov last year.
Australia is globally seen is a safe place to invest, mostly due to its established, stable and reliable economy and, arguably most importantly, to its solid banking system. Our 4 big banks sit in the global top-6 in the Common Equity Tier 1 Ratio, which we also covered in detail in our newsletter edition from 27th/Jan.
UNEMPLOYMENT CONTINUES UPWARD TRAJECTORY
The January Labour Force data is out and the figures show that the weak trend continues, with seasonally adjusted unemployment now the highest over the past 24 months at 4.1% and measures such as underemployment, total works worked and employment to population ratio all declining.
As contradictory as it may sound, this is great news. It's further evidence that the economy is slowing down, which is what the RBA needs in order to bring inflation back to target.
Interest rates have been undoubtedly working their magic, which we now have tons of evidence to support - from decreasing inflation to increasing unemployment to abysmal retail figures to a per-capita recession. So much so that Michelle Bullock, the RBA governor, conceded that the RBA could start cutting rates even before inflation hits the target range of 2 to 3 per cent.
RESIDENTIAL PROPERTY PROSPECTS REPORT
The most recent Residential Property Prospects from Oxford Economics is predicting both the Sydney and Brisbane property markets to climb about 23% over the next 3 years.
Speaking of Brisbane in particular, this is what the report says: “The return of interest rate cuts from late-2024 should facilitate even stronger price growth over the two years to FY2026. Demand fundamentals are expected to remain strong, with Queensland positioned at the front of the pack in terms of population growth. Adding to this, the 2032 Olympics should provide a sustained boost to developer and buyer optimism from mid-decade.”
Perth is predicted to do even better according to the report: 34% over the next 3 years. In their words: "Perth has underperformed for years, even as the other capitals were rebounding sharply, so it has so much to catch up on to maintain that relativity with those other capital cities. It has a significant stock deficiency and WA has greatest supply chain and capacity constraints of all states. It has the strongest population growth, which we expect it to maintain over the next three years."
The underlying theme is going to make me sound like a broken record, so instead of talking about it yet again I'll just paste the exact words from the report: "With the context of a growing dwelling stock deficiency, the return of interest rate cuts will drive the next acceleration of price growth from late-2024 onwards."
SHAPING SOUTH-EAST QUEENSLAND
Later last year, the QLD government unveiled 'Shaping SEQ 2023', a plan that outlines the long-term vision for the economic engine of the state: the SEQ region, which is comprised of Brisbane, the Gold Coast and the Sunshine Coast. While it makes for great reading, I'll just drop the key numbers here and you can then read the whole plan at your leisure.
The population of the SEQ region is forecast to hit 6 million by 2046, which means:
- Growth of 2.2 million people
- 900,000 new homes
- 1 million new jobs
The cherry on the cake will be the 2032 Olympic Games.
10th February 2024
NO SURPRISES (AGAIN)
If last week we had a 'No Surprises' section on inflation, this week we have another one - this time on the interest rate: as widely expected, the RBA kept it on hold at 4.35%.
With inflation all but beaten, retail numbers getting weaker by the month and employment slowly but surely softening (all of this while immigration continues at record levels, which means the per-capita numbers are even more dovish), it's just a matter of time until the RBA shifts their narrative towards the need for lower rates.
When that will in fact eventuate is the source of heated and passionate debate, with some predicting a rate drop as early as June whilst others are only expecting it towards the end of 2025. One thing is certain: it's no longer a matter of 'if' - the question now is 'when'.
WINDOW OF OPPORTUNITY
As if the continuously increasing chasm between supply and demand due to the combination of the aforementioned record immigration levels (demand) and the record low dwelling approvals (supply) weren't, by itself, enough to boost property prices, we now have to add to the picture the interest rate decreases that will have to take place sooner or later.
What follows from that is rather straightforward: lower interest rates mean increased borrowing capacity and lower repayments on one's mortgage. Those who currently want to buy a property, be it to live in or to invest, but don't have the borrowing capacity for it (or do have it but are not comfortable with what their loan repayments would look like) will naturally start to enter the market once rates go down, which won't do anything to help the already dreadful imbalance between supply and demand.
In the words of Tim Lawless, research director at CoreLogic: “I think buyers will have a six-month window, if you will, in the first half of 2024. Once we see interest rates coming down or even just the expectation that interest rates will be coming down, that should be reflected in a boost in consumer sentiment."
SMART MONEY MAKING MOVES
Unsurprisingly, the data support Mr Lawless's view, with smart money already making moves: December/23 marked the 4th month in a row of increase in Investor Lending for Housing, with a 20.4% increase Year on Year. The last month with a negative reading was August/23 at -3%, after which every single month posted a higher YoY number.
The beauty of looking at Loan Approvals is that, being a forward indicator, it provides a glimpse into the future. What these numbers tell is that there's a window of opportunity right now, before we get to the point in which rates have already decreased and all those people currently waiting on the sidelines are back on the market to buy.
As I said in the newsletter of 20th Jan, there will always be excuses not to enter the property market and, being an investor for way longer than I am a broker, I've seen quite a lot of people miss out because they were "just waiting for prices do come down a bit" or "just waiting for the upcoming salary increase" or "just waiting for <insert your excuse here> " . Smart money doesn't make excuses. Smart money makes moves.
VACANCY RATES BACK TO ALL-TIME LOW
And here we are again, back at that dreadful 0.8% figure for national vacancy rate, just like last November.
Apart from Darwin and Canberra (1.4% and 1.5% respectively), all other capital cities have vacancy rates below 1%. What is considered a "healthy" range is 2.5% to 3.5%, mind you.
Not enough supply, too much demand... sounds familiar?
3rd February 2024
IT'S NOT ME, IT'S THE DATA
Before we get to the data from the week, just a quick note on a more personal topic.
It's always important to remember that it's impossible to be 100% sure of any prediction. A black swan event like World War 3 or a new pandemic can happen anytime and make one look like a complete fool in their predictions. It is possible, however, to make educated guesses on what has a higher probability of happening - and that's done by looking at data.
It didn't take long after starting this newsletter for me to get some interesting reactions from keyboard warriors and doomsday preachers, mostly in the form of the occasional tagging on conversations in WhatsApp or Facebook investment groups. It's always some variation of the main theme: “I'm misleading people by being always bullish on property.”
My response is invariably the same: "It's not me, it's the data".
This newsletter has always been, from its very first edition in January last year, 100% data-based. I provide the source to every single piece of data I mention. EVERY ONE OF THEM, EVERY SINGLE WEEK. And frankly, over the last 12 months the data were so clear about where property prices were heading (not to mention where rental prices were heading, where rental vacancies were heading, where dwelling completions were heading...) that it befuddles me how anyone looking at that data could not think we'd be where we are today. You don't need to be a genius to look at the supply data, then look at the demand data... and then go "Ok, we have too much demand and not nearly enough supply, therefore prices are very likely to go up".
Not every single prediction was right and I have no problems whatsoever with that. The best example would be the November hike, when I thought 4.10% would be the peak rate and definitely didn't expect a hike until seeing data from a few days before the RBA meeting. On the other hand, the housing price predictions were right, the rental predictions were right, the dwelling approvals and completions predictions were right... I’d say it's a rather decent track record.
And now, with inflation all but beaten, construction at decade-lows, immigration continuing at record levels and interest rates inevitably coming down (detailed data on all of this below), the supply and demand imbalance is only going to get more pronounced, as more buyers come back to the market (due to lower interest rates and increased borrowing capacity) only to find out that there's as little supply as last year (or potentially even less). Too much demand, not enough supply = price increase. Again, no need to be a genius.
If you decide to bury your head in the sand, ignore what the data say and continue to preach the apocalypse and the incoming burst of the property “bubble”, be my guest. Again: It's not me, it's the data.
NO SURPRISES
Actually... yes, a bit of a surprise, but on the positive side: the quarterly inflation reading for the December quarter came back at 4.1%, well below the RBA forecast (4.5%) and the overall market expectation (4.3%).
The reading from one year ago, which marked the peak, almost had an 8 in front of it (7.8%). Remarkable progress in such a short period and, although some expected laggards are only now starting to come down (most notably services and non-tradables), it's a pretty safe bet to say that the war against inflation has been won.
There's a lot that can be written about the ABS release were we to delve deep into its details, but it's not a good use of time and real estate as, by now, I'm sure everyone who has been following this newsletter gets the gist of it: with interest rates doing their thing to bring down inflation, the economy is gradually slowing down, unemployment is steadily increasing (also fuelled by record immigration levels, with one person arriving to live in Australia every 45 seconds) and it's clear that the rate cycle has peaked. Further hikes are safely off the cards, with the question now shifting to when will the RBA need to start cutting rates to bring them back to a more neutral level and inject some life in the economy.
RETAIL TANKING
Retail sales fell 2.7% in December, the largest ever December fall. The annual turnover ($35,187) is now back to where it was in Jan/23 ($35,365), despite 11 months of record immigration and ongoing inflation. What does that mean?
In a somewhat similar vein to the per-capita recession conversation, it means a massive decrease in volume.
No surprises - just interest rates doing what they're supposed to do.
DWELLING APPROVALS DOWN
Last week I mentioned the ABS quarterly building activity release for the September quarter, which showed that dwelling commencements dropped by more than 10% in the September quarter and hit a decade low.
This week we have the ABS monthly building approvals for the month of December to talk about and, although the time period is different, the story remains the same: a fall of 9.5%, which sadly makes the goals of the Government's Housing Australia Future Fund seem more and more laughable by the day (as predicted in our newsletter from 11th November).
RENTAL CRISIS
The Australian median rent value just hit another all-time high at $601/week.
Hard times if you're a renter. Not that hard if you're a property investor.
Just one last time: It's not me, it's the data.
27th January 2024
VERY, VERY LUCKY
Such an abundance of discussion about the tweaks in the tax cuts this week... we'll get to that in a minute but, in the spirit of Australia Day, let's first spend one or two paragraphs on why this truly is the "Lucky Country".
The foundational elements of being the lucky country really come down to sheer luck: location, climate, the length of the coastline and the abundance of natural resources (gold, silver, iron ore, gas, coal, copper, oil, lithium, aluminium...).
With such a great foundation in place, things get a lot easier from a socioeconomic perspective. As a conversation starter: if it weren't for Covid, we'd still be extending the record of longest period without a recession, with the latest one (Covid aside) in 90/91! And even with all the debt we acquired in order to navigate Covid and some of the longest lockdowns in the globe, our Debt to GDP ratio is still sitting comfortably at about 22%, whilst most of the big economies in the world are at 100% or more: Canada, US, UK, Singapore, Spain, France, Italy, Portugal, Belgium... it's a long list.
Speaking of debt, the CET1 (Common Equity Tier 1 Ratio, a measure created off the back of the 2008 GFC in order to protect economies from a financial crisis) of our banks is envy-inducing for banks all over the world, with our big-4 all sitting in the global top-6 (CBA coming 1st, ANZ 2nd, Westpac 4th and NAB 6th – see page 80). For comparison: Morgan Stanley comes 9th, UBS 15th, Goldman Sachs 17th, Citigroup 28th, Santander 35th and Bank of America 42th. How's that for a solid banking system? Subprime mortgages and equally risky assets have no place in our banks' balance sheets.
So there you have it:
- Abundance of natural resources
- Strategic location, far enough to be insulated from most of the never-ending global geopolitical argie-bargie but still close enough to strategic partners such as China and Japan
- Small population (just hit 27 million) in relation to the country's area and resources
- Huge coastline
- Balanced and desirable weather
- Established, stable and reliable economy
- Extremely solid banking system
With all of that, is it really a surprise that people from all over the world want to move to the Lucky Country?
Happy Australia Day!
TAX CUTS STAGE 3
The original stage 3 tax cuts have been dramatically revamped and, naturally, a lot of spirited debate ensued. Rather than taking sides and ending up caught up on such a barbed wire topic, I'll limit myself to simply summarizing what the new version of the proposal will mean for Australians and how much you can roughly expect to save on your next tax bill:
- The first bracket will remain the same ($18.5k to $45k), however the marginal tax rate will decrease by 3%, from 19% to 16%. For someone on $20k/year, this translates to a $54 saving. For someone on $40k/year, a total of a $654 saving.
- For the second bracket, the upper limit will move from $120k to $135k and the marginal tax rate will drop by 2.5%, from 32.5% to 30%. Someone making $60k/year will save $1,179. Someone making $80k/year will save $1,679. Someone making $100k/year will save $2,179. Someone making $120k/year will save $2,679.
- Moving to the third bracket, the marginal tax rate will remain 37% but the bracket itself will move to the right: $135k to $190k (currently it's $120k to $180k). If you make between $135k and $180/year, you'll save $3,729. If you make $190k/year or more, you'll save $4,529.
- Similarly to the third bracket, the last bracket will keep its marginal tax rate of 45% but will move to the right, starting at $190k. As per the previous bullet point, the savings for those making $190k or more per year are constant at $4,529.
If you want to check exactly how much you'll save, this interactive chart is pure gold.
Regardless of whether one agrees or disagrees with the changes, one thing is certain: the tax brackets have been outrun by inflation by a long margin. The last time all brackets were updated was in the 2007/2008 financial year, when the start of the upper bracket was pushed from $150k to $180k. It has been sitting there for 17 (SEVENTEEN!!!) years, and now it's being pushed to $190k. That's 5.55% in 17 years.
PS: this reminds me of the QLD Land Tax and the QLD Stamp Duty Exemptions, whose exemption caps ($600k and $500k, respectively) are comically outdated and out of touch with the reality of land and property prices.
SOME DATA PLEASE
The previous two topics ended up taking a lot more real estate than originally planned, but let's make sure we don't wrap up the newsletter without some data from the week:
- The core PCE (personal consumption expenditures, which excludes food and energy) inflation index in the US fell to 2.9% for the year, below market expectations of 3%. The annualised trend from the last 3 months is down to 1.5%, reinforcing the signs that interest rate cuts in the US will start sooner than originally expected.
- The NAB Business Survey for December has Labour Costs, Purchase Costs, Product Prices and Retail Prices all dropping from November to December. In order, the decreases were 0.5%, 0.9%, 0.3% and 1.2% (first page of the report). This further substantiates the expectations of a good surprise in the quarterly inflation figures that will be released this Wednesday.
20th January 2024
WELL-INTENTIONED DOESN'T MEAN GOOD
Before we get to our usual deep dive of the data, of which there's not a lot this week anyway, some thoughts on a recurring theme I used to notice as an investor but that, as a broker, I get to see a lot more frequently.
When we started our property journey, in July/2017, we were renting in Sydney and bought our first investment property in Crestmead (Logan, QLD) sight unseen, using a Buyer's Agent. Some of the things I heard back then:
- "An investment property? But you don't even have your own house yet!"
- "You live in Sydney and you're buying sight unseen in QLD? Have you lost your mind?"
- "There' a bubble, mate... I keep seeing it on the news all the time, it's gonna burst soon"
- "Cool, I'll start investing as well! Just waiting for prices to come down a bit" (this one is probably my favourite)
Those who own one or more investment properties will certainly relate. These are all pieces of advice coming from a good place and full of good intentions (the first one came from my parents!), but unfortunately they're simply not helpful. I stuck to my plan and, 6.5 years later, we have 6 IPs plus our home and, most importantly, a rather significant equity position, which continues to grow as property prices continue to go up.
None of that advice would have gotten us even closer to the equity position we have today. Only invest close to where we live? No thanks, would have missed all the growth from the areas that really had potential at the time we bought. Buy a home to live in? Nope, all that non tax-deductible debt with Principal and Interest repayments and a heavy cashflow impact would have slowed us down significantly and definitely not allowed us to get to 6 IPs. Wait for prices to go down? HA! No comments.
Quick digression: I'm not saying that purchasing a place to live in before you invest is "wrong". Investing, when done correctly, is purely rational and number-driven, whereas buying a home has a host of factors that simply can't be measured in dollars: there's emotion, there's attachment and there's all the personal circumstances of one's moment in life. We simply can't put a dollar figure on all of that. I'm just stating that, when looking purely at numbers, investing makes more sense. However, if you already bought your home and now you're thinking "am I stuck with all this non tax-deductible debt for 30 years?", remember that you can still debt-recycle your home loan in order to slowly turn it into tax-deductible (reach out if you want to know more).
Back to what we were talking about: as a broker, I see bad advice coming from a good place all the time and I try to explain that we have all the data in the world to substantiate why it's a great moment to invest in the Australian property market. You just need to trust the data, take the plunge and ignore the noise, even when it's well-intentioned. I'm not saying it's easy or comfortable... but it's oh so worth it.
SPEAKING OF DATA
Not much this week, but still some interesting pieces here and there:
- The ABS Unemployment release for December shows a 19-month high, with a decrease of more than 100 thousand full-time jobs, whilst the employment-to-population ratio hit a 19-month low at 64.2%. With inflation pretty much under control and immigration at record levels (we're this close to hitting 27 million people in Australia!), the rise in unemployment is all but inevitable and this release is yet another reason to believe that we're done with interest rate hikes.
- Mortgage stress continues to go down, despite the November interest rate hike (and also despite what the permabears and apocalypse lovers like to make you think).
- This is bad, really really bad: when I thought I was done talking about construction numbers, this ABS release showed that dwelling commencements dropped by more than 10% in the September quarter and hit a decade low. Well, let me clarify: it's bad for the housing crisis… for property prices, it's great.
WRAP UP
Countless times in 2023, the RBA mentioned, in its meeting minutes and press releases, the goal of controlling inflation without burying the economy in a deep recession. It's the so-called "soft-landing" or, as the RBA likes to put it, the "narrow path".
Although widely considered a very challenging feat, it's looking more and more likely to eventuate: inflation is decreasing, unemployment is increasing (but not too rapidly), wages are not spiralling out of control and pretty much everyone is predicting a few rate cuts this year and a few more next year to stimulate the economy just enough to bring things back to a healthy equilibrium.
The one thing that doesn't seem to have a solution in sight is housing, with supply not keeping up with demand and no light at the end of the tunnel for at least another 5 years, which means prices don’t have elsewhere to go but up. If you own property, this should put a smile on your face.
13th January 2024
NOVEMBER INFLATION
In last week's newsletter we discussed how CBA is predicting a 0.75% cut this year and another 0.75% in 2025, AMP is also predicting 0.75% this year and further cuts next year and Westpac is predicting 0.5% this year and further cuts next year.
The monthly inflation data for November, released this week, only strengthens the case: the reading came at a 2-year low of 4.3%, below market expectations and following monthly readings of 5.6% in September and 5.1% in October.
At this point it's all but certain that the all-important quarterly inflation reading, to be released on the 31st of Jan, will deliver further evidence that the cycle of 13 rate hikes started in May of 2022 has reached its goal of slaying the inflation dragon and, in doing that, has peaked. In fact, this incredibly awesome report published by the UN on the 4th of Jan called 'World Economic Situation and Prospects' has Australia ending 2024 with inflation at 3.3% and 2025 at 3% (page 150).
As we said last week, rate cuts in the US are expected to start as soon as March, off the back of low inflation (nevermind the December uptick to 0.3% - core inflation continues to fall and that's what matters at the end of the day) and services employment at recessionary levels. Down under, we're about 4 to 6 months behind in the journey to tame inflation, which makes it a pretty safe bet that rate cuts in Oz will start sometime between July and October.
NO WONDER WHY
With interest rate cuts on the horizon, it's no surprise that the survey conducted by PureProfile with 1,000 people from all over the country had 14% of non-homeowners saying they intend to buy their home in the next 12 months. This number was 4% in the prior survey, conducted just six months prior.
This simply adds to the 'demand' side of the supply/demand equation, which has an upward trajectory that doesn't seem destined to end anytime soon, with immigration running rampant (one person arriving to live in Australia every 45 seconds).
ON THE SUPPLY SIDE...
Despite a slight uptick of 1.6% in monthly building approvals in November, the number in the 3 months to November is still 8% lower when compared to the same 3-month period in 2022, as noted in this Media Release by the Housing Industry Association.
"The low volume of building approvals throughout 2023 will see the volume of homes commencing construction continue to slow this year", the report says.
We said in this newsletter sometime last year (not sure when... maybe around November?) that the imbalance between supply and demand will probably last for at least another 5 years. Oxford Economics Australia seems to agree: "Against a backdrop of strong population growth, a sustained mismatch between demand and supply for housing is locked in for the next few years at a minimum. While movement on the housing front is encouraging, planning lags and construction time frames mean it will take until the back half of the decade to see a meaningful activity boost".
WRAP UP
As certain as Tuesday follows Monday, while we have too much demand and not enough supply, prices don't have anywhere to go but up.
6th January 2024
CATCHING UP
Another year starts and, with it, lots of data to catch up on, sift through and distil into our weekly microdose.
Before we delve into the numbers, though, here goes a quick shout out to all the property investors who didn't succumb to the sensationalism and scaremongering of the past 18 months (of which there has been no shortage) and, instead, refused to panic-sell their properties, held tight and kept their focus on the long-term.
They have been reaping amazing rewards from a capital growth perspective (in 2023 alone, the average increase in property value was 11.2% in Perth, 10.2% in Sydney, 10.1% in Adelaide and 9% in Brisbane) and are now about to start to get plenty of help on the cashflow side as well, as interest rates start to slowly but surely come down across the globe (which will naturally add more fuel to the fire and push prices even higher, further compounding the capital growth).
Here is some of the data that substantiate our confidence that interest rates will come down in 2024.
US, UK AND CANADA
Picking up from where we left off in December, inflation continues to trend down across the globe and it's all but certain that some of the major economies will start to cut interest rates in the first half of the year. Some quick bullet points from the US, the UK and Canada:
- In the US, services employment is now down to recessionary levels, which reinforces even further the case for a rate cut in March. The 25-year chart is particularly telling, with levels only seen in the last 3 global crisis (early 2000's tech-bubble, 2008/2009 subprime mortgages fallout and 2020/2021 Covid).
- In the UK, prices actually declined in November, with a monthly inflation reading of -0.2% and an annual reading of 3.9%
- In Canada, unemployment and inflation remain unaltered at 5.8% and 3.1% respectively, but their trajectories are on the softening side and indicate the need for monetary loosening in the not too far future, most likely in the second half of the year.
AUSTRALIA
Back home, the RBA minutes from the December Board meeting state that "there have been encouraging signs of progress towards the Board’s objectives" and that "inflation expectations remained consistent with the inflation target".
The RBA minutes tend to always adopt a measured and cautious tone, which is completely understandable and, to be fair, appropriate. However, when we look at media releases that have more “liberty” and, as such, can be more direct and straightforward, what we see is CBA predicting a 0.75% cut this year and another 0.75% in 2025, AMP also predicting 0.75% this year and further cuts next year and Westpac predicting 0.5% this year and further cuts next year.
The Quarterly Inflation numbers, to be released on the 31st of Jan, will be the main factor driving the February interest rate decision, but markets are already overwhelmingly predicting another hold (95%), with only a 5% chance of another hike as of 4th of Jan.
16th December 2023
U.S. RATE CUTS INCOMING
As predicted in our newsletter from last week, the US inflation reading for November brought more good news: a mere 0.1% increase for the month, bringing the annual reading to 3.1%. This number would be even lower if shelter, which accounts for 32% of the overall number and is one of the highest readings this month with an increase of 0.5% for the month and 6.5% over the year, wasn't computed with such a massive lag when it comes to rents. Asking rents posted the biggest decline in 3 years in November, but this decline hasn't made through the shelter component of inflation yet. That's why we can surely expect the shelter component reading to come down significantly over the next few months and, with it, bring the overall inflation figure further down.
Off the back of all of that, the talk of the week has been Jeromy Powell's speech after the Fed published its December rate decision for the US (another hold). The projections published with the speech have the Fed cutting rates by 50 to 100 basis points during 2024 and a further 150 to 200 bps in 2025, to bring the US interest rate all the way down to 2.5% by 2026.
Naturally, other big economies will follow suit in due time and Powell's acknowledgement that the conversations about cutting rates will have to start very soon will probably be looked at, 12 months from now, as the key moment that will have started a wave of rate cuts across the globe. Let’s bookmark this one and come back to it in 12 months.
MEANWHILE IN OZ
Things are following a similar trajectory in Australia, albeit with a delay of about 6 months in the journey:
- GDP growth for the September quarter was abysmal - a meagre 0.2%. When adjusted for population growth, it was actually negative at -0.5%. This is the third consecutive quarter with negative GDP growth per capita. Based on the definition of recession being two consecutive quarters of negative GDP growth, we've been in a so-called "per capita recession" since about July.
- Job ads fell steeply by 4.6% in November, after having already fallen 3.4% in October. Over the past 3 months, the cumulative fall is 8.4%, which will inevitably turn into a higher unemployment rate in due course.
- The increase in household spending for October was, at best, underwhelming, with a reading of 2.7%. After accounting for inflation, it goes into negative territory without even accounting for population growth.
It's still unclear when rate cuts will start in Australia, but all the data suggest that the RBA might need to start cutting in the first half of 2024 in order to avoid plunging the economy into recession.
WHAT TO MAKE OF ALL THESE DATA?
The one-liner out of all of this is that interest rates will inevitably have to fall across the globe in 2024.
For the Australian property market, where we've just officially registered our highest-ever population growth in a financial year (624,100 people in FY23), where building approvals remain at concerningly low levels (despite rising 7.5% in October, they're still 11.2% lower compared to the same quarter last year and around the lowest levels of the decade) and where vacancy rates continue to hold at an all-time low of 0.8% for the 3rd consecutive month, lower interest rates will simply add more fuel to the fire and, barring some black swan event, create even more upwards pressure on property prices.
Smart money, as always, is making moves to take advantage of what’s to come for property in 2024 and beyond. Others, as it’s always the case, will sadly end up being part of the group who looks back in 10 years’ time and says “I can’t believe I didn’t buy it, it was so cheap back then…”
THANK YOU!
A lot of work goes into collecting and analysing all this data over the week and then compiling it into a "weekly microdose" that can be (hopefully) easily and quickly digested, so I want to wrap up our last newsletter of the year with a big thank you to all of you who have been supporting us and spreading the word. Sincerely - it means a lot.
We'll now take a break to recharge and get ready for 2024, which is shaping up to be a massive year for property.
Once again, thanks everyone and have a great Christmas!
9th December 2023
MEDIA RELEASES ON PROPERTY
The expression "perfect data-driven storm" is something I've been using for quite some time in this blog, which is why it was so interesting to read the following in this Media Release from Real Estate published this week: "Influenced by a perfect storm of strong buyer demand, lack of stock, population growth and soaring construction costs, home values clawed back any losses post the boom, and hit new highs every month."
The release focuses on Brisbane and expects price growth to continue, with a prediction of a 6% increase in 2024 for the city. This number doesn't distinguish between houses and units though, which is a considerable flaw and is why it should be taken with a grain of salt.
Domain did a much better job on its Media Release published earlier in the month. The article lists the 5 trends expected to shape the Australian property market in 2024, touching on critical topics such as urban densification, housing affordability and the rental crisis. It is well worth a full read, but if you're short on time and yet keen to know the parts that are relevant to property investing, the following two bits are all you need to know:
- "A cut in interest rates or other stimulus measures will spark demand and create another price upswing – a prospect likely to come to fruition in the latter part of 2024"
- "The recent temporary record strength in migration will continue influencing our housing markets. Domain analysis found population growth has a cumulative longer-term effect on house prices and, therefore, will continue to play a driving role in our housing markets into 2024 and beyond. Together with a perilous rental market, it makes purchasing more attractive and may shift some to buy, given the current challenges of securing a lease"
Most importantly, the release lists Domain's price growth predictions for 2024 by city and, unlike RE, splits the predictions between houses and units. The numbers are quite in line with what we've been talking about for quite some time in this blog: houses in Perth and SEQ (particularly Brisbane and the Gold Coast) are predicted to be amongst the best performers, with annual growth of up to 8%. Houses in Sydney and Adelaide also fared quite well in the list. Units, on the other hand, not that much.
And while we're talking forecasts, SQM Research went into a lot of detail on its rent forecasts for 2024 and, once again, Perth and Brisbane are expected to be the big winners: 12% to 15% increase in rents for Perth and 7% to 10% increase in rents for Brisbane. The forecast makes a brave and, in my opinion, downright wrong assumption: that population increase will come back down to 455k people in 2024. If that doesn't eventuate and population increases by more than that, the report says, we can expect the rent increases for the year to be even higher.
I personally find this latter scenario much more likely to happen. Population increase is, in my opinion, not coming back down to these numbers until at least 2025. Let's bookmark this one and come back to it in one year's time.
NUMBERS FROM ABROAD
Inflation in the Eurozone continues to post numbers below expectations, with the November rate (2.4%) being the lowest since July 2021.
In Canada, the unemployment rate reading for November (5.8%) is the highest since Jan/22. And let's not forget that the October reading for inflation (3.1%) was below the September one (3.8%) and also below market expectations of 3.2%. The November reading will be out soon and it's widely expected to bring with it some more good news.
Similarly, the US inflation reading for October (3.2%) was below September (3.7%) and also below market expectations (3.3%). The November reading is out this Tuesday and should also bring more good news.
Inflation down, unemployment up and the global economy, as a whole, gradually slowing down. No wonder why US markets are pricing a 50% chance of a rate cut as soon as March and an 80% chance in May.
HOLD
Not much to see here - as expected, the RBA kept our interest rate on hold. The Statement of Monetary Policy Decision said that "Higher interest rates are working to establish a more sustainable balance between aggregate supply and demand in the economy. The impact of the more recent rate rises, including last month's, will continue to flow through the economy. High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment."
We're not entirely out of the woods yet, with a small risk that services inflation sticks around for a bit longer than desired and also some global uncertainty around China and the war in Ukraine.
2nd December 2023
HOUSE PRICES HIT NEW RECORDS
The November numbers from CoreLogic's Home Value Index are out, full of great data and insights as usual. There's one piece of data that stands out though: the nominal index value, which reached an all-time high of 193.4 off the back of the 0.6% increase for the month.
A lot can be written about the reasons behind this incredible and somewhat unexpected recovery, but I'll stick to Tim Lawless's (Executive Research Director of Corelogic) nifty summary: "The 'V' shaped recovery may seem counter intuitive, given high interest rates, deeply pessimistic levels of consumer sentiment and high cost of living pressures, however the recovery can be explained by an imbalance between supply and demand."
Supply and demand. It's that simple.
BRISBANE FOR GOLD
Digging a bit deeper in the numbers, we continue to see that the clear winners when it comes to price growth are Perth (1.9%) and Brisbane (1.3%).
Readers of this newsletter know that Brisbane and Perth have been my choices for capital growth for quite a few years and, as per above data, they continue to deliver great results.
There's an abundance of data to substantiate this belief, most of which has already been covered in this newsletter. For Brisbane in particular, it's always good to remember that we're about a decade away from Brisbane hosting what will likely be the biggest sporting event in Australia history. The Olympics themselves won't directly influence the property market, but everything that comes along for the ride most likely will: the jobs, the economic growth, the infrastructure development and the change in how the city is viewed by the world.
We have billions and billions of dollars being poured on projects as we speak, the main ones being the new Brisbane Metro ($1.4 billion), the Cross River Rail ($6.3 billion), the redevelopment of The Gabba ($2.7 billion), the Brisbane Arena ($2.5 billion) and another 16 upgraded or new venues that will receive a total of $1.87 billion in investment. Cr Krista Adams, Deputy Mayor of the Brisbane City Council and Civic Cabinet Chair for Economic Development & the Brisbane 2032 Olympic and Paralympic Games, said that “We’re planning for 2042, not 2032. We’re planning for what happens afterwards – the legacy of the Olympics and what Brisbane will look like after.”
it's pretty much impossible to imagine a scenario in which all these things don't result in sharp and extended growth in property prices. As Jeremy White, HSBC’s state manager for Queensland said in March, "It’s going to be so incredible to be living in this city".
WORK-LIFE BALANCE
At the risk of dedicating too much real estate of this newsletter's edition to Brisbane, I'll quickly mention the Forbes Advisor Work-Life Balance Index for 2023, which features 3 Ozzy cities in the top-25: Brisbane in 17th, Melbourne in 18th and Sydney in 22nd.
An interesting exercise would be to overlay the weather factor on top of this top-25. I personally can't imagine Brisbane not being at the top 3 in this hypothetical new ranking, considering that, with the exception of Brisbane, Barcelona and Valencia, all other cities in the current top-25 have winters that are, at best, severe and, in quite a few cases, extreme.
By the way, this visual version of the ranking is more digestible if you're short on time.
OCTOBER INFLATION AND THE DECEMBER RATE CALL
This Tuesday's RBA decision is pretty much a lock on keeping rates on hold, given the inflation numbers released this week for the month of October: market expectations were around 5.2% but the reading came at 4.9%. Perhaps more importantly: when excluding volatile items and holiday travel, the number is 5.1%, the lowest since April 2022.
Add to that the increase in seasonally adjusted unemployment to 3.7% and the decrease of 0.2% in retail turnover (in the middle of the fastest population growth on record) and it's pretty safe to bet that there won't be any movements in the interest rate this Tuesday.
The RBA only meets again in February, when it will have the quarterly inflation figures for the current quarter.
25th November 2023
CHINESE INTEREST IN OZZY PROPERTY
According to the latest quarterly report on Foreign Investment from the FIRB (Foreign Investment Review Board, a government entity responsible for, amongst other things, reviewing and approving investment from overseas), Chinese interest in Australian property continues to increase: in the 22-23 Financial Year, a total of $3.4 billion was approved for buyers from China to purchase residential property in Australia, an increase of $1 billion (more than 40%) compared with the previous FY.
That's more than the total sum of approvals for all the remaining 9 countries of the Top 10, which adds up to $2.6 billion. These numbers are the perfect reminder that Australia is the favourite destination for cashed up Chinese property investors, even with the FIRB restricting them to buying only new or off-the-plan properties.
As expected, PropTrack reported that searches on realestate.com.au continued their growth trend over the last 3 months, with 'buy' searches increasing 11.5% and 'rent' searches 7.8% over the period. The numbers are now well above pre-pandemic levels.
Demand for property keeps increasing from all fronts, be it record immigration levels, decreasing household size or, as per above, increased overseas investor interest.
CONSTRUCTION STRUGGLES CONTINUE
While demand continues on the rise, the other side of the equation keeps following its abysmal trajectory, with supply deteriorating by the hour.
I know I've talked a lot about dwelling approvals over the past few months, but yesterday I was having another look at the official ABS approval numbers and realised something that is well worth yet another reference to the subject: we are now approving the same number of houses that we were approving 15 years ago, when the country's population was 21 million. We're now at 26.9 million.
Unfortunately (or fortunately if you own property) it doesn't look like it's going to get better anytime soon, as noted in the Media Release from the HIA earlier this month: "The RBA’s rate increases are yet to adversely impact the lagging indicators of economic activity like unemployment or inflation, but they are impeding future home building activity. Leading indicators of home building activity including approvals and lending have fallen sharply, to decade lows, and have remained at these levels for most of 2023. This will flow through to a significant slowdown in detached home building in 2024, producing the lowest level of new commencements in more than a decade and keeping apartment construction suppressed".
No wonder we've already had more than 1000 insolvencies in the construction industry in the 4 and a half months of this financial year.
RBA SPEECH
The RBA published a very interesting speech a few weeks ago called "The Outlook for the Australian Economy". If you're not keen on reading the whole piece, here are the key takeaways:
- "The Australian economy has evolved more or less as we expected a year ago. GDP growth has slowed, labour market conditions have eased a little and headline inflation has fallen from its peak of close to 8 per cent in late 2022 to just under 5½ per cent in the most recent data"
- "(...) GDP growth expected to be below trend over the year ahead. This is mainly because of subdued growth in household consumption as cost-of-living pressures, higher interest rates and higher tax payable all continue to weigh on disposable incomes for a time."
- "The very tight labour market conditions of the past year have begun to ease. Given below-trend growth, they are expected to continue doing so over the forecast period. (...) The unemployment rate is forecast to increase to around 4¼ per cent in 2025."
- "Inflation has been declining over the past year as the direct impacts of earlier supply shocks have faded. (...) Nevertheless, inflation is expected to be a little below 3 per cent at the end of 2025"
- "Much of the decline in inflation so far has been driven by lower goods price inflation, helped by the improvement in global supply chains and a decline in raw materials price inflation. We expect that this has a bit further to run"
- "By contrast, domestically sourced inflation – in particular, services price inflation – has been widespread and slow to decline."
18th November 2023
OVERSEAS DATA
- US inflation for October came in at 3.2%, below the already low market expectations of 3.3%, with core inflation also printing the below expectations figure of 0.2% - interest rates doing their thing.
- Still in the US: the October unemployment figure printed 3.9%, beating market expectations of 3.8%. The increase for nonfarm payrolls printed 150k, below market expectations of 170k. Interest rates doing their thing.
- In the UK, October inflation came in at 4.6%, down from 6.3% in September. Just a year ago, this print was a staggering 9.6%.
If you sense a theme here, it's because there is one: the rate hikes are working across the globe to cool down economies and bring both inflation and unemployment to healthier levels.
This amazing chart, with data sourced from the relevant entities for each country/region, it's the best visual I've found so far to show that things are working as expected across the globe.
For the US in particular, where the cycle is ahead of Australia by about 6 months, it's a pretty safe bet that, barring some surprising turn of events, the next Fed move is going to be down. It might happen as soon as the first half of 2024.
CONFIDENCE DOWN
Keeping with that theme, consumer confidence fell in the US, the UK, the Eurozone and down under, whilst business confidence also posted falls for the US, the UK and Australia, whilst in the Eurozone it improved by 0.02% but continues deep in negative territory (minus 0.33%).
THE LUCKY COUNTRY
As it has become tradition now, Australia ranked extremely well in yet another "best places to live" list - this one courtesy of US News and World Report: we came in 4th place, behind Sweden, Canada and, in first place, Switzerland (each to their own, but I'll pick the Australian weather over the top 3 any day of the week).
The methodology is rather interesting and is explained in detail here, but in short it's an analysis of 73 attributes that are grouped into 10 "themes": Adventure, Agility, Cultural Influence, Entrepreneurship, Heritage, Movers, Open for Business, Power, Quality of Life and Social Purpose.
11th November 2023
Some non-data-based content before we delve into the data...
JUST DO IT
For some things in life, the ubiquitous Nike slogan is a lot easier said than done. Property investing, for some reason, seems to be one of them.
Some things we commonly see in investors starting out their property investment journey are fear, hesitation, overthinking and procrastination. For a lot of people, "Just Do It" doesn't seem to apply when we're talking about purchasing an investment property. I was no exception to this, having spent almost 6 months "researching" before finally pulling the trigger on my first purchase, in July/2017. How's that for overthinking?
Then I moved on to "procrastinating" mode, in which I knew I needed to make my move to purchase my second property but just kept putting it off. It took me about 2 years before finally pulling the trigger on my second purchase. It was only in 2021 that I finally realised how much I was missing out on, which triggered me to start to move quickly to get where we are today, with 6 investment properties.
I never ran the numbers in detail to find out exactly how much capital growth I missed out on due to not taking action, but it's easily in the 200k's, probably 300k's or maybe more. All that hesitating, overthinking and procrastinating cost me hundreds of thousands of dollars - literally.
Now... don't get me wrong: I'm not saying you should just start making hasty, impulsive and uninformed decisions left and right. It's important to be diligent. It is equally important, however, to take action and learn how to be comfortable with taking risks, even if they seem a bit uncomfortable at first. It's a skill that can only be learned by taking the plunge, not by overthinking. If you don't want risks, best to just leave your money in a savings account.
Remember that Australian real estate is inherently a low-risk investment and we are, right now, in the middle of a perfect data-driven storm for property in Australia. Readers of this newsletter are probably tired of hearing me say this week after week, so I won't get in the details again but if you're interested in the data just have a look at our newsletter from 30th September (or any subsequent one).
If I could go back in time, the one thing I would do differently in my investing journey would certainly be to "Just Do It".
TIS THE SEASON
In a somewhat related topic: it's always worth remembering that December is one of the best times to buy property.
A lot can be written about this, but let's just keep it simple: majority of buyers are already in "nah, next year, mate" mode, which means less competition to buy. People are getting ready for the break, making holiday plans, counting the days until their break starts... and they simply postpone their purchase plans to January. No wonder the market always heats up around Australia Day - all those buyers are back in the game, their energy renewed by the break and by their New Year's resolutions, ready to make offers.
As we've been telling our clients: smart money will be making their moves in December rather than waiting for all that competition in January. In a time with ridiculously low stock levels and fierce buyer competition, this is an even bigger competitive advantage.
Just Do It.
INTEREST RATES AND THE "BUBBLE"
Now to some data: between May and August last year, when the RBA started to aggressively increase interest rates, pretty much everyone was convinced that our property market was about to undergo a big correction, with some going as far as saying it was "doomed".
This week the RBA increased the interest rate by 0.25%, but those expecting that this interest rate will make the "bubble" burst are in for yet another big disappointment: while dwelling approvals continue to fall, which will (for obvious reasons) keep new listings and total advertised stock well below average levels for a long time, immigration continues to run at record levels (same for temporary visa holders), keeping rental vacancies at all-time lows.
Mortgage arrears continue below Pre-Covid levels and, while the government continues to promote the pipe dream of 250k new dwelling per year, 33% per cent of all construction companies are having their Credit Rating downgraded.
No data on this last comment, just really an observation: this latest hike will probably bankrupt even more construction companies and certainly scare a few more investors, which definitely doesn't bode well for the rental crisis.
4th November 2023
BACK TO BASICS
Before we delve deep into data and numbers as we usually do, there's something worth spending a few minutes on...
The most common question our clients have been asking over the past 10 days or so (since the release of the inflation reading for the September quarter and all the talk that ensued) is, by far, "what will happen with interest rates in November?". It's completely understandable, given that's all the media seems to care about. My answer is always a more subtle and less abrasive variation of "why do you care?".
Sounds harsh, I know... but with all the relentless and unnecessary (although not surprising in the slightest) media noise and scaremongering around interest rates, it has arguably never been more important to anchor one's mind on the fundamentals - in other words, to go back to basics.
That's when the "why do you care?" question becomes relevant: "Why do you care about an additional 0.25% on your loan (exactly $1,125/year for a $500k investment property with a $450k Interest Only loan, a rather standard scenario) when..."
- That loan is what allows you to own an asset that's growing an average of 30k, 40k, 50k or maybe even more per year?
- Rents will keep growing and eventually the property will be cashflow positive?
- A substantial portion of those additional 0.25% will come back to you at tax return due to negative gearing?
WAIT... ISN'T THIS "CRYSTALL BALL STUFF"?
Whilst it's natural to get some pushback on the items above - after all, they are all predictions that nobody without a perfectly functioning crystal ball can be 100% sure of -, readers of this blog know quite well that we are in the middle of a "perfect data-driven storm" for property in Australia. This was the theme of our newsletter from 30th September, but let's do a quick recap and take the opportunity to use some updated figures (which look even better now than they looked a month ago):
- Dwelling approvals fell yet again in September in most capital cities. The only bright spots are unit approvals in QLD and Tasmania, which increased 34.6% and 18.3% respectively from August. Apart from that, the numbers look either neutral (which is hardly a reason to celebrate, given how undersupplied we already are) or downright abysmal (honorary mentions: -12.7% and -9% for house approvals in WA and VIC; -11% and -10.5% for unit approvals in WA and NSW).
- Immigration continues to run at record levels, leading to the highest annual population growth in Australia history: 563,200 people. We now have an average of one person arriving to live in Australia every 42 seconds.
- Temporary visa holders also hit the record level of 2.64 million
- Rental vacancies for houses have hit (once again) a record low across capital cities and are now at just 0.8%. As usual, once we dig a bit into the detail, some other very interesting numbers come to light: because this is the average, some capitals with higher vacancy rates (Darwin, Hobart and Canberra) offset the scarily low numbers for Perth, Sydney, Brisbane and Adelaide. We are now at a 14.6% increase in rents for the year, with 3.8% coming in the September quarter. With dwelling approvals plummeting and builders going bankrupt left and right, it's pretty safe to expect that the rental crisis won't be over anytime soon, which means that rents have nowhere to go but up. As stated in the report itself: "Construction remains a challenge, with high build costs, limited labour availability and decade-high financing costs resulting in dwelling approvals and commencements sitting at their lowest level in a decade. From here, we expect rents will continue to climb in the major capital cities due to persistent low supply and strong demand which is being exacerbated by the rapid rate of population growth".
- New listings and total advertised stock also remain well below average levels.
- From the Intergenerational Report 2023 released a few weeks ago (which we covered in last week's newsletter): we have minerals that the world currently needs (and will increasingly need), a culture of technological innovation, a solid and well-regulated banking system, a host of strategic partnerships with key global economies and continue to be an extremely desired country for tourists, students and skilled workers.
So... NO, this is NOT "crystal ball stuff" - this is DATA. The sources are all linked for anyone interested in dissecting the numbers and we've been talking about this ad nauseam for months in this newsletter: we have too many people, not enough properties and the gap will continue to increase for years to come as population continues to increase faster than the construction sector can absorb. BACK TO BASICS: supply and demand.
Eventually the construction sector will manage to catch up (and perhaps immigration might also decrease a bit) and restore some equilibrium in the supply and demand equation, but this is at least 5 years away (10 years seems more realistic to me). Until then, there's simply no other trajectory for property prices and rental prices but to continue to go up, barring some black swan event like World War 3 or a new pandemic.
When looking at all the above, the "why do you care?" question seems a lot less harsh and starts to make a lot more sense, doesn't it?
28th October 2023
INTERGENERATIONAL REPORT 2023
More than 20 years after its first edition, the Intergenerational Report, which looks at projections the subsequent 4 decades in order to inform the economy and the budget, had its 6th Edition published this year.
It's a praiseworthy piece of work done by the Treasury and touches a wide range of subjects such as population, education, infrastructure, health, tax, retirement, productivity, participation, climate change and, obviously, the budget.
If you're not keen to read the 296 pages of the report, here are the main takeaways:
- The economy in 2063 is predicted to be 2.5 times bigger and will be heavily influenced - and somewhat dictated - by the ageing of the population (and the consequent increased demand for care services), climate change (or, more to the point, the emission goals), ongoing geopolitical tensions and, as obvious as it sounds, technology (and, most importantly, the AI revolution).
- The population in 2063 is expected to be around 40.5 million. It will be a much more aged population, with more than double the number of Australians over 65 and more than triple the ones over 85.
- As a natural consequence of a more aged population, participation rate is expected to fall to around 63.8%.
- Despite decreased participation rate, productivity is expected to grow at 1.2%/year.
- Demand for Lithium, of which Australia is the world's largest producer, is expected to be more than 8 times higher by 2063, which is certainly good news.
- All in all, despite the ever-present challenges with housing, energy and infrastructure, Australia remains deserving of the "Lucky Country" nickname: we have minerals that the world currently needs (and will increasingly need), a culture of technological innovation, a solid and well-regulated banking system, a host of strategic partnerships with key global economies and continue to be an extremely desired country for tourists, students and skilled workers.
INFLATION SLIGHTLY ABOVE EXPECTATIONS
The inflation reading for the September quarter came in 0.1% above expectations, which triggered all sorts of commentary and, as usual, some panic. Never mind the fact that it's the third consecutive quarter of lower annual inflation; or the fact that the biggest contributors were, by a long margin, automotive fuel at 7.2% (caused by higher global oil prices) and electricity at 4.2% (caused by the annual price review from July being passed on to customers), items "external" to interest rates; or the fact that food rose by only 0.6%, the lowest quarterly rise since Sep/2021.
As readers of this blog have long known, this reading shows yet again that interest rates are working as expected to curb inflation, albeit a bit more slowly than desired by the RBA.
The November rate call is therefore a live call, with the possibility of a 25 basis points increase now definitely on the table.
The RBA governor Michele Bullock spoke before the Senate this week and, understandably, gave a neutral answer to the question of whether the CPI reading would lead to a rate rise: "The print came out a little higher than we'd been forecasting at our August statement on monetary policy, but it was pretty much where we thought it would come out, given the information we'd come into since then, particularly the monthly CPI indicator, so we thought it was going to be about where it came out. We're still analysing the numbers at the moment. I wouldn't like to say more or less likely, we're still looking at it."
Anneke Thompson, chief economist of CreditorWatch, sensibly noted that "in some key categories, such as rents, utilities, insurance and fuel, a cash rate increase will have little to no impact on any future pricing". In her view, an increase of 0.4% in quarterly inflation from June to September caused mostly by petrol and electricity doesn't constitute a "material change in the inflation outlook", which is the term used by the RBA to describe what would be enough reason to justify another rate rise.
The RBA is trying to walk the narrow path between high inflation and recession while also trying to not add fuel to the housing crisis fire. I'm sure it's not lost on the RBA though that another rate rise will undoubtedly worsen the rental crisis and send a few more developers into bankruptcy as their cash flows get hit even harder.
Regardless of whether we end up with a rate rise or not, the property market is surely going to continue its steadfast run, fueled by what I described as the "perfect data-driven storm" in our 30th September newsletter:
- New listings and total advertised stock remain well below average levels
- Dwelling approvals continue to fall and also remain well below average levels
- Immigration continues to run at record levels, leading to the highest annual population growth in Australia history: 563,200 people
- Temporary visa holders also hit the record level of 2.55 million
- Rental vacancies are at a record low of just 1.10% for the month of August
21st October 2023
SOME DATA FROM THE WEEK
- Rental vacancies continue to fall, which should come as no surprise for those who read this blog (even if just occasionally): the September figure came in at 1.1%, 0.1% lower than August. Over the past 12 months, the cumulative increase in average rent across the capital cities is 16.2% - naturally, some cities have had much higher increases than others.
- The latest CoreLogic Chart Pack shows the continuation of a trend that started in January: the time it takes to sell a property has been steadily decreasing. The average in September was 30 days, 6 days less than the "peak" in January. Important to keep in mind that this is the national average, which gets skewed by markets that are "not hot" at the moment: 59 days in Darwin, 44 days in Hobart and 42 days in Canberra. When looking only at the "hot markets" (Brisbane and Perth), the numbers are scarily low: 22 days in Brisbane and 13 days in Perth - no wonder prices keep going up. The other main markets are hovering around the average: 30 days in Adelaide, 29 days in Sydney and 28 days in Melbourne.
- Employment figures for September confirmed that the economy is slowly softening due to interest rates doing their thing. Although seasonally adjusted unemployment decreased by 0.1% to 3.6%, it's important to keep in mind that a decrease in unemployment doesn't necessarily mean an increase in employment. In this case, it was merely a reflection of a high number of people getting out of the workforce, which causes the headline unemployment number to come down. The key numbers to look at are hours worked (fall of 0.1%), participation rate (fall of 0.2%) and full-time employment (-53,000 fall in the quarter).
- Things continue to look concerning in the construction space, as evidenced by the latest ABS report. With construction costs still too high and builders operating on ultra slim margins, it's no surprise that we've had a total of 783 construction insolvencies in the September quarter. In seasonally adjusted terms, dwelling commencements plunged 11.8% from the March quarter to the June quarter and dwelling completions fell 7.5% in the same period (and it won't surprise anyone if the September quarter data comes in even softer). As I said in last week's post, the targets of the Housing Australia Future Fund are all but a pipe dream.
- The UBS Global Wealth Report 2023 has Australia in second place for Median Wealth per Adult (but pretty much tied for first place, a mere $1.5k USD behind Belgium), more than $45k more than 3rd placed Hong Kong.
TL;DR
Rental vacancies at all-time lows and falling even further, properties selling more quickly (and, therefore, more dearly), construction sector on life support: even with thousands of investors being kept out of the market by the nanny-statey lending buffers and the higher interest rates for investor loans, property prices don't have anywhere to go but up.
Meanwhile, we continue to be one of the wealthiest countries in the world and our economy is slowly but surely softening due to interest rate hikes. This should mean no further hikes, unless the September quarter inflation figures (to be released this week) have some nasty surprises in store - not likely in my opinion, but never say never.
14th October 2023
GOING UNDER
The RBA's Financial Stability Review released this month is a fascinating read. Whilst it delivers great news around the fact that Australians continue to service their loans extremely well (despite all the media scaremongering about the "fixed-rate cliff"), the news are not so encouraging when it comes to the Housing Crisis.
The microdosed version of the story can be extracted by looking at 2 Graphs:
- Graph 2.18: The number of insolvencies in the construction space is off the charts (almost literally). Developers are going under at an alarming pace across the entire country.
- Graph 2.19: Profit margins are way too slim for large residential builders at the moment (worst in at least 10 years), with too many of them operating on negative cash flows - in other words, losing money -, which explains the insolvency numbers from the previous graph.
The consequences are, as it's usually the case, rather easy to extrapolate:
- Low housing stock is set to be the "new normal" for quite some time: too many new people, not enough new dwellings. With such an imbalance between supply and demand, it's hard to imagine an outcome other than property values to keep going up. This obviously won't last forever, but the data are pretty clear: it's not ending anytime soon.
- No relief in sight for the rental crisis. It's pretty safe to expect rents to continue to increase (although at varying paces depending on the location), driven, again, by the very basic and yet rarely flawed law of supply and demand.
- The government target of 240,000 new dwellings per year for the next 5 years is doomed from the start. The HIA (Housing Industry Association) seems to agree (see here, here, here, here and here).
GREEDY CAPITALISTS
A few months ago, an article published by SBS "exposed" the fact that the majority of Australian politicians own one or more investment properties. Being a property investor was portrayed in the article under a negative light, with an openly judgemental undertone.
There's a cheeky intellectual dishonesty (and laziness) in the view that owning investment properties is inherently bad. A lot can be written about the matter, but suffice to say that:
- Property investors are an undeniably essential component of the housing market - the government simply can't provide enough social housing for every single household who can't afford to purchase their own property. Property investors are providing a service to these people, otherwise they'd be homeless.
- Let's make sure that we, once again, look at the data: something that is rarely mentioned is the fact that the vast majority of property investors are the so-called "mum-and-dad" investors - families with average incomes that own only one or, in a few cases, two investment properties. As of July 2021 (latest dataset available), there were 2,245,539 property investors in Australia. Out of that number, 71.5% own only one investment property and 18.9% own two investment properties. This means that less than 10% of all property investors in Australia (about 200k individuals) own 3 or more investment properties. This is quite the opposite of the cartoonish image of the "greedy property tycoon" that usually gets associated with the term "property investor".
Mum and dad entrepreneurs who start a cafe and a decade later have 5 cafes are not greedy capitalists. They're providing a service and being compensated for it. Their expenses to keep their businesses running are tax-deductible. Their coffee machines, refrigerators and other business assets are depreciated a little every year at tax time. They're deservedly praised for their achievements, not condemned for them.
Replace "cafes" by "properties" in the aforementioned scenario and you'll immediately be seen by some (thankfully not by everyone) as greedy and unscrupulous... for providing a service way more essential than the one a cafe provides.
Just something to keep in mind for the next time you hear someone complain about those "greedy property investors".
7th October 2023
PERTH SHINES
Last week I posted a collection of data points that strongly suggest that, barring a black swan event, the Australian property market is in the middle of a perfect "data-driven storm", poised for growth for at least another 10 years. That post referred to the Australian property market as a whole but didn't dive deep into any regions or cities.
This week I'll make the case - based on data, as always - for Perth having the highest potential among all capital cities when it comes to price growth (although Brisbane and South-East QLD as a whole come VERY close in my view).
- Affordability: The latest Corelogic Home Value Index, released earlier this week, has the median price in Perth at just $646k for houses and $437k for units, worlds apart from Sydney's $1,381mil for houses and $828k for units or Melbourne's $933k for houses and $612k for units. This means that getting on the property ladder is way easier in Perth, especially when considering the next data point...
- High income: the latest ABS release on this shows that the median weekly income is pretty much the same between Sydney, Melbourne, Brisbane and Perth (Perth comes at the top, but the difference is not significant). This will come as a surprise to a lot of people, but it has been the case for a while. Salaries vary greatly depending on the industry, but the median is the same for all four. The punchline from these latest two data points is that people make the same money in any of these four cities but pay significantly less for a property in Perth and, to a lesser extent, in Brisbane.
- Population growth: WA had the fastest growth rate from all states in the 12 months up to March: 2.8%. This data is released quarterly and it's the second reading a row that has WA at the top. The next data release, in December, will contain the data for the 12 months up to June and the expectation is that WA will have the highest rate yet again.
- Internal migration: WA and QLD are the only states in positive territory on this metric, with VIC and NSW posting the lowest numbers (unsurprisingly).
- Immigration: WA continues to receive a massive intake of immigrants and the numbers will probably go up, now that the state government substantially relaxed the rules for its Skilled Migration State Nomination program.
- Extremely low vacancy rate: somewhat as a consequence of all the above, the vacancy rate in Perth has been abysmal for years and is currently sitting at 0.8%, a far cry from the range that is considered "healthy": 2.5 to 3.5%. And let's keep in mind that rental listings historically decrease in the Summer months, which means there's a chance we'll hit (or even beat) the lowest number on record for Perth: 0.4% last February.
This is NOT an opinion - this is DATA. Not much else to say, really.
AS EXPECTED, ANOTHER HOLD
If you're a regular reader of this newsletter, the RBA decision to keep interest rates on hold should have come as no surprise to you. In the first meeting with its new governor, Michele Bullock, the central bank did what was widely expected.
A lot of unnecessary noise arose from the monthly inflation increase in August but, as we all know, news outlets don't care if it's unnecessary as long as it generates clicks.
Why was it unnecessary? Because when not accounting for volatile items, CPI actually continued its downward trajectory, declining from 5.8% to 5.5%. Not a sexy headline for click-hungry news outlets, who expectedly chose to focus on the number that didn't matter but would generate clicks.
We're not 100% out of the woods yet, which is absolutely normal and expected. Fuel, energy, insurance and rents continue to bother a bit, but most of those items are not driven by demand and mostly influenced by global/external factors, so the likelihood of another rate increase continues to be low.
The inflation reading from the September quarter, due at the end of the month, should provide enough clarity for the path forward which, although impossible to predict with 100% accuracy, is likely to be a sequence of holds followed by some easing next year.
30th September 2023
PREDICTIONS ON PROPERTY PRICES
Whilst the noise about the housing affordability "crisis" and the property "bubble" has been going on uninterrupted for decades (sensationalist, alarming and, frankly, comic newspaper articles from the 80's, 70's and even 60's on the "impending market doom" can be easily found online), those who ignore the nonsense and look at the data keep making profits and accummulating generational wealth.
Predicting the future is a game of probabilities. Readers of this blog often hear me say that nobody should ever state with 100% certainty that abc WILL happen or that xyz WILL NOT happen. It's all about probabilities.
And what predictions do the data and the data-derived probabilities allow us to make right now?
- New listings and total advertised stock remain well below average levels
- Dwelling approvals continue to fall and also remain well below average levels
- Immigration continues to run at record levels, leading to the highest annual population growth in Australia history: 563,200 people
- Temporary visa holders also hit the record level of 2.55 million
- Rental vacancies fell even further in August, with PropTrack reporting a record low of just 1.10% for the month
Looking at the above data it's easy to understand why, for instance, KMPG's media release from last week forecasts that capital house prices will rise 4.9% over the next nine months and then another 9.4% in the year to June 2025... and why SQM Research owner and director Louis Christopher said “the fear of missing out is about to explode as buyers who have been waiting on the sidelines for prices to fall realise that the market has bolted, and are now responding by buying in" and “I think this will continue now that interest rates are most likely to remain on hold for some time, so it’s very likely that we will see ongoing price rises through to at least to the end of the year and probabilities are increasing that we’ll see a strong start to the calendar year 2024 in terms of price increases"... and why a quick Google search yields several similar predictions from banks to economists to armchair experts.
I have been investing in property for about 6 years, always following the data to help me make data-driven decisions, and I can confidently say that this is the first time in these 6 years that I see such a perfect "data-driven storm" for property prices. Barring some black swan event, today's property prices will, in all likelihood, seem ridiculously cheap 10 years from now - that's what the data clearly tell.
INFLATION, JOBS... AND INTEREST RATES
The CPI reading for August printed 5.2%, a widely expected increase from the steep decline to 4.9% in July. This was mostly due to rising fuel, insurance and rents - nothing to see here. As months go by, some high printings from late last year will continue to drop off the annual figures. Interest rate increases are doing what they're supposed to do.
With job vacancies continuing to fall considerably while the size of the labour force continues to increase at rapid pace due to record immigration levels, we should see unemployment increase a bit over the next few months, which should put to rest any conversations about a potential wages growth spiral.
Given all the above, it's extremely unlikely that Tuesday's RBA meeting (or any subsequent meeting over the next 6 months for that matter) will result in an increase in the interest rate. In fact, it's much more likely (and actually expected) that the next move will be down and will happen as soon as mid-2024.
26th August 2023
MORE LAND PLEASE
The resilience of the Australian Property market stems from the combination of a multitude of factors, most of which I talk about ad nauseam in this newsletter. There's a very important one that I've neglected to mention in a while here though: lack of land.
Australia has plenty of land, sure, but the process to be able to start effectively building is cumbersome and takes time - roughly a decade.
This Housing Industry Association's release from a few weeks ago makes for great reading and goes to the heart of the issue in these two sentences: "On average, it takes ten years to move land through the seven stages of land release. Decisions made today about land release can be expected to affect housing supply ten years from now."
With immigration at record levels (1 person arriving to live in Australia every 41 seconds), it's a safe bet to expect land prices (and, therefore, property prices) to continue their upward trajectory for decades to come.
CHINESE EYEING AUSTRALIA PROPERTY
The world is slowly but surely getting back to normal, with Australia back at the top of the list for Chinese home buyers. Juway IQI released its "Top Countries Report" for the first half of 2023 and Australia is back at number 1, ahead of Canada, UK and US. Quite an insightful report.
RBA MINUTES AND SOME DATA
The Minutes of the RBA Meetings are always interesting to read. The latest edition noted that the most aggressive interest rate hike cycle in history is "working as intended" and that the Board has "time to wait and see how the economy evolves". Although it did make it clear we're not entirely out of the woods yet, stating that "it was possible that some further tightening of monetary policy might be required to ensure that inflation returns to target in a reasonable timeframe", the data coming from all directions seem to indicate we're all but done with rate rises:
- Unemployment in July was the highest in 14 months in seasonally adjusted terms, with participation rate, employment to population ratio and overall employment all declining.
- Job ads increased by 0.4% percent from June to July, beating the 0.1% that was expected by the market
- ANZ-observed spending was down a whopping 10.4% year-on-year in the first 20 days of August, with in-store spending down 12% year-on-year in the CBD's of Australia's big cities.
- The US inflation reading for July printed only 0.2%, with 90% of the increase driven by shelter.
Never say never, but the data are extremely compelling for 1) no more interest rate rises and 2) rate decreases next year.
19th August 2023
Peak Rates
CBA, ANZ and Westpac are now predicting no more rate rises, with rate cuts necessary next year to stimulate the economy and reverse some of the damage done by the most aggressive (but necessary) interest hike journey in history. NAB remains the only big bank still predicting one final 0.25% hike in the coming months, but this prediction will probably be adjusted soon, just like it happened with the other 3.
I'll make an exception from my usual approach and won't bother linking sources for this one - a quick Google search will return plenty to be read (although it shouldn't come as a surprise for those who regularly read this newsletter attentively).
Rental Crunch
Whilst vacancy rates didn't fall and instead held steady in July at 1.3% - which, lest we forget, it's already extremely low -, the likelihood that rents will stabilise from here is pretty much zero: there's simply too many people and not enough places to rent, to put it in simple English. This is, for obvious reasons, great news for investors and not so great news for renters... here's some data:
- A press release by CBRE from last month shed even more light on a grim reality: whilst we have a current pace of approximately 55k new apartments per year in the country, the estimation for the next 3 years for Sydney, Melbourne, Brisbane, Perth, Adelaide, Canberra and the Gold Coast combined is that the total need will be of around 570k units - that's 190k/year, almost 3.5 times the current pace.
- The Housing Industry Association has stated in an early August article that "The number of loans issued for the purchase and construction of a new home has fallen to their lowest level since 2008 and the number of detached building approvals has fallen to its second lowest month since 2013". Another interesting bit of the article: "Australia has a structural undersupply of housing, with rental vacancy rates around the country at record lows, driving rents and dwelling prices to new heights. The return of overseas workers and students, without an equivalent boost to housing supply, will exacerbate the situation." The HIA has been saying for a while that the RBA went too far... and they may be right.
- CBA estimated in its Global Economic and Market Research article that dwelling approvals will reach the lowest number since 2011.
Queensland's "Big Build"
In a very interesting (but not in the least surprising) Media Statement published late last month, Queensland Deputy Premier Steven Miles stated, at the back of the released data estimating that South-East QLD's population will increase from 3.8 million to 6 million by 2046, that "We are in our decade of opportunity. We have a strong economy. We have a 10-year pipeline of infrastructure projects in the lead up to and beyond Brisbane 2032. And we are creating good, secure jobs in the key industries that will help us decarbonise. Thanks to all of this, and our great Queensland lifestyle, we’ve seen record levels of net interstate migration and now increasing international immigration."
The "Big Build", a 4-year plan from QLD's government to spend $89 billion in infrastructure over the next 4 years, is certainly going to contribute to the continuous growth of the property market in the Sunshine State over the next 10-15 years.
Distressed sales are... falling? Fixed-rate cliff?
For all the doom and gloom around the impact of rising interest rates in the property market and the ever "about to explode" property bubble, the number of distressed property sales is actually going down.
The fixed-rate "cliff", which for months and months on end was continuously assigned, in conversations and articles, the unflattering role of "trigger of the crisis to come", has already passed its peak, with a CoreLogic's August release stating that:
- "The risk of arrears and default remains contained within Australia’s large mortgage market and we expect a level of resilience amid tight labour market conditions"
- "A vast, and increasing majority of housing debt, is on variable rates. In contrast to fixed-rate mortgage holders, variable rate borrowers have already been exposed to the majority of cash rate rise."
- "While variable-rate mortgage holders have been feeling the pinch of rate rises and high cost of living pressures, official data suggests arrears remain in check and are still below pre-pandemic levels, and rising home values since February has likely only further reduced the incidence of loans in negative equity"
29th July 2023
Inflation Down as Expected
The most anticipated quarterly data came out on Tuesday and brought very positive news: Inflation for the June quarter slowed to just 0.8%, totalling 6% for the financial year and reaffirming what we all knew - the most aggressive interest rate rises cycle in history achieved its goal.
The trajectory is clear: peak of 1.9% in the Dec/2022 quarter, then 1.4% in the March quarter and now 0.8% in June 2023. The next quarterly reading is due in late October and should post an annual figure below 5% as the reading of 1.8% from the Sep/2022 quarter will drop out of the figures.
Just Getting By
A very interesting report from Compare the Market had 61% of households reporting to be "just getting by", two thirds of participants feeling "anxious" about the cost of groceries and more than a quarter of adults reporting a backwards trajectory in their savings.
It's no wonder then that consumer sentiment remains "in deeply pessimistic territory" despite a very modest rise of 2.7% from June to July.
Too Aggressive or Too Soft?
As if all the above wasn't enough, there's also the data from the retail sector, which is clearly feeling the pinch and posted a fall in turnover of 0.8% in June.
All eyes turn now to the RBA meeting on 1st August. The case for another pause is extremely strong, but the concerns about employment still being too strong might play their part and make the case for yet another rise.
On the other side of the spectrum, there are those arguing that we've already gone too far and haven't seen the full damage yet. The cost of home building materials is coming down and the Housing Industry Association (HIA) expects it will continue to decline as construction continues to slow. With one in 10 Australians working in the home building industry, the view from the HIA is that this decline in activity will result in significant increases in unemployment, which will only show the real extent of the impact of the interest rate rises in early 2024.
Wrap Up
Things are never as incredibly awesome or as terrifyingly horrific as the media wants us to believe, which leads me to strongly believe that the tightening is working as expected and we're on the right path to controlling inflation without entering a deep recession.
This bodes extremely well for the property market, which in all likelihood turned a corner in February, when it posted its last month of value decline - it has been going up ever since. With immigration running at record high levels (one person arriving to live in Australia every 42 seconds) and the number of people per household at historically low levels, it's very unlikely that there will be another price correction anytime soon, especially with the clear signs that interest rates are, if not at their peak, extremely close to it.
22nd July 2023
Psychology in Investing
Before I dig into the all the data from the week, a bit of a reflection on the Psychology of Investing.
I'm using capital letters because, at the end of the day, Psychology is a big part of investing. The importance of taking a step back and looking at the long-term cannot be overstated.
Investors who make decisions based on the news of the day or on the media's favorite new headline of the month end up either losing money or losing the opportunity to make money. It's tempting to feel compelled to act (or not to act) when relying on the daily news without looking at the big picture and the long-term.
It's easy to find, every single day, a different reason not to invest - especially in the last 12+ months, with all the interest rate rises and non-stop media fearmongering about the ever imminent "property crash". Going back in time, we can see this has always been the case:
- In the late 1980's, the news were all about the "ridiculous" property prices, with people certain that they couldn't go any higher and that the generation of their children (Baby Boomers) was doomed as they would never be able to afford their own home.
- Same story in the early 2000's, after another impressive property boom.
- And again in 2015/2016, when 11 out of 10 articles in the media were about the "housing bubble"
On a more personal note: it was exactly at that time that I bought my first IP (late 2016) and it did nothing for more than 2 years in terms of capital growth. There were no shortage of news tempting me to sell it because they were "proving" that the market was going to crash, or that I didn't buy well, or that it wasn't a good suburb, or this or that. And I won't lie: there were times when I did consider selling it. Thankfully I had good mentors that gave me the right advice and, instead of selling, I doubled-down and bought several other IPs. That first IP today is worth about 110% more and if anyone is interested I'm happy to privately share the address.
Unfortunately, the news about the "imminent crash" and the "bubble" are the ones that grab clicks and, in a lot of cases, scare people out of the market. Don't fall for that. It will cost you dearly in the future. Instead, focus on data-based sources of news and try to find people who have walked the walk and can mentor you in your journey.
Speaking of data-based sources of news...
UK and Canada Inflation
Finally some good news from the UK on the inflation front, with a reading of 7.9%, below market expectations of 8.2%.
In Canada we now have the lowest inflation in 27 months: 2.8%
It's abundantly clear that the interest rate rises are working as expected across the globe. Each country is at a different stage though, with US (3%) and Canada (2.8%) clearly ahead in the cycle when compared to the UK (7.9%), for example. Down under we are somewhere in the middle, but clearly on the desired path of curbing inflation. All eyes are on the quarterly figures that will be released on the 26th.
Unemployment data out for Oz
Unemployment reading came back at 3.5% for June, below the market expectation of 3.6%. Although this does create talks about another interest rate increase in August (anything does these days), it's important to notice that the complete reading wasn't as strong as the headline suggests: underemployment continues to rise, sitting now at 6.4%, and the same goes for the underutilisation rate, now at 9.9%.
Population growth continues to run at record levels, which will inevitably bring these numbers up in due course. Lastly, let's not forget that unemployment is a lagging indicator and it's usually the last one to turn before a slowdown in growth.
RBA Meeting Minutes
As always, the RBA meeting minutes made for a very interesting read. Highlights:
- Repayments for mortgage interest reached a record high in May (9.4% of household disposable income) and this number will continue to rise even without rate increases due to fixed-loans gradually maturing
- Consumer spending weakened during the first half of 2023 due to the combination of inflation and the impact of higher interest rates on disposable incomes
- Tightening cycle of monetary policy is gradually making its way through the economy
- Services price inflation remains stubbornly high
15th July 2023
Massive week, with plenty of data to look at. Let's go through some of the most relevant and, in a few cases, shocking tidbits.
US INFLATION
The US annual inflation reading for June came lower than expected at 3%, a two-year low, whilst the Producer Price Index fell for the 12th month in a row.
OZ INFLATION
Down under, the trajectory is exactly the same but with a small lag. All eyes now are on the quarterly inflation reading for the previous quarter, due on the 26th of July, but the expectation is that goods inflation will continue its downward trajectory while more stubborn items like energy, rents and particularly services might still be a tad too high.
Whether that will translate to another interest rate hike in August remains to be seen, but what's unquestionable by now is that the ultra aggressive interest rate hiking cycle is achieving its objectives everywhere around the globe and the "narrow path" referred to by the RBA between high inflation and recession is getting narrower by the day, with the risks of a mild recession (and, with it, interest rate cuts) becoming increasingly likely.
RENTAL CRISIS
Some interesting and telling data from PropTrack: overseas search for property hit the highest level on record. In related news, offshore student visa applications also hit a new record in May (45,784) by more than 10,000 applications (the previous record was March/22 with approximately 35.5k).
Meanwhile, Flatmates.com.au had its busiest month on record in May and the waiting time to secure a room in a share house is now 6 to 8 weeks, compared to 2 to 4 weeks pre-pandemic.
One might point to the latest SQM Release, which reported a slight increase in vacancy rates for Sydney, Melbourne, Canberra and Hobart, as a sign that the rental crisis is easing. The aforementioned data tells a completely story though - and let's not forget that we're coming from a ridiculously low base and the numbers are still extremely tight. It's a pretty safe bet that rents will continue to increase for a while.
SUPPLY CRISIS
Pretty much every single paragraph from this early July article from the Housing Industry Association is noteworthy:
- "The number of new homes commencing construction is set to continue to decline, with record low levels of lending for new home building projects so far this year".
- "The number of loans issued for the purchase or construction of a new home increased by 1.9 per cent in May, which still leaves the last three months 31.1 per cent below the same quarter a year ago"
- "There were only two other occasions in the last 20 years when these numbers were so low – the introduction of the GST and for a brief period during the outbreak of the GFC"
- "Lending for the purchase of residential land remains 20.2 per cent lower than at the same time the previous year."
- "With the full impact of the rise in the cash rate still to flow through to these official figures, they are likely to remain supressed for an extended period of time."
- "Approvals of new detached houses were also flat in May (+0.3 per cent), leaving approvals 15.7 per cent lower than at the same time the previous year."
- "Building approvals are expected to continue to slow until early 2024 given the low volume of sales and lending for new homes recorded this year."
It shouldn't come as a surprise, therefore, that there were more than 2000 construction insolvencies over the 2023 Financial Year, the highest number in a decade, up by more than 75 per cent from the previous FY.
WRAP UP
What to make out of all this data?
Sounds complicated but it's actually rather simple:
- Inflation is coming down worldwide, risking a mild recession - this means we'll probably need interest rate cuts as soon as next year;
- Rental vacancies continue extremely low and won't get any relief with increased immigration, which means ongoing rent increases;
- Housing supply continues extremely low and, similarly to rental vacancies, won't get any relief from increased immigration (not to mention dwindling dwelling approvals), which means ongoing housing price increases.
In short: it's a great time to be a Property Investor in Australia.
As I always say: it's impossible to predict the future 100% and I might be proven completely wrong in 12 months time, but I definitely like my odds here.
8th July 2023
Hold
Some good news for mortgage holders under stress came this week in the form of a hold decision on the interest rates by the RBA. The Statement from the RBA meeting said that "The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so" and that "Growth in the Australian economy has slowed and conditions in the labour market have eased". That's what pretty much every possible indicator has been showing for months, as I've been mentioning on a weekly basis on this newsletter.
Is it over? Hard to tell, but the decision to hold for a month to wait for more reliable data in the form of the Quarterly CPI reading for the previous quarter certainly seems reasonable. I'm looking forward to reading the full minutes of the meeting, to be released on the 18th, to understand in more detail all the factors the led to the decision and what to expect going forward.
Housing values and asking rents up
Meanwhile, housing values increased for the fourth consecutive month with a 1.1% rise for the month of June according to CoreLogic’s National Home Value Index and rentals continue to increase at a ridiculously fast pace and hit record highs in Sydney, Melbourne, Brisbane, Perth and Adelaide.
In the face of a severe dearth of rental properties, it's unthinkable that any sensible government would do anything that would hurt landlords... yet that's exactly what the Victorian government did by increasing the state's land tax specifically for landlords.
1st July 2023
Not Nearly Enough
A quick nugget of property-related data before we jump into inflation and interest rates: Albo announced earlier in the month $2 billion additional funds to be added to the National Housing Accord. The Accord aims to build one million homes over five years from 2024. Assuming everything goes exactly according to plan, which we all know rarely eventuates, that's an average of 200k new homes per year from 2024. With the population clock running at around 670k increase per year and an average household size of less than 2.5, 200k new homes per year won't be enough to even keep the current state (which is already dire), let alone improve the situation.
Not long ago I said here that you don't need to be a genius to conclude that property in Australia will continue to be a great investment for decades to come. This is just another argument to add to the list.
Inflation Coming Down Worldwide
Some bullet points of interest from the last few days:
- Inflation reading for May came at 5.6%, well below market expectations, which undoubtedly creates room for a pause in July. A more conservative analysis may look at the 6.4% number for Core Inflation, which excludes volatile items and travel.
- USA, Canada and Eurozone readings are firmly on the way down, with 12-month inflation readings of 4%, 3.4% and 5.5% respectively.
- Pressures are continuously easing in the supply chain space: container freight rates are down about 90% from peak, oil prices are down around 35% from peak and the GSCPI (Global Supply Chain Pressure Index) is down to its lowest level in history. This will have, in due time, a substantial downwards impact on prices as it all flows through.
All of this evidently shows that the aggressive but necessary interest rate rises across the globe are working as expected. What does it all mean for the RBA July decision though? I've tried the exercise of predicting what the RBA will do a few times this year and, just like pretty much everyone else, failed miserably.
The data is pretty compelling for a pause, though. Apart from the aforementioned items, there is the line of thinking that suggests that the RBA should pause in July to wait for the quarterly reading, which is more comprehensive and up to date than the monthly reading (which doesn't update all components every single month and can therefore be misleading). The RBA notes from the June meeting stated that it was a "finely balanced" call, which adds to the case. Add to that the high number of fixed rate mortgages yet to be rolled off to variable and the fact that changes in interest rates operate with a lag and there's a substantial risk that further increases might push the economy into a recession.
Arguments in the opposite direction are the stimulatory minimum wage increase of 5.75% by the Fair Work Commission in June and the aforementioned core inflation still at stubborn 6.4%.
We'll know on Tuesday.
24th June 2023
This week I thought I'd take a break from talking about inflation, interest rates and economy, which have been the main topics of the last 3 newsletters (possibly 4, can't remember!), and talk about my favorite property markets: Brisbane and Perth.
Before I dive in, the usual reminder: freely available data has been referenced and link whenever used. When referenced but not linked, it's because it comes from paid sources (mostly CoreLogic RP Data).
Starting with Brisbane, it's pretty clear that the recovery is for real: March, April and May have recorded consecutive increases in values, with the latest being the highest of the 3 months at 1.4% (source: https://www.corelogic.com.au/our-data/corelogic-indices#daily-indices).
With stock remaining extremely low (about 40% below the five-year average - source: CoreLogic) and the number of people wanting to buy continuing to rise (total number of sales 6.1% higher than the five-year average - source: CoreLogic), it's hard to imagine a different outcome.
Even auction clearance rates are back to the 70% mark (source: https://www.domain.com.au/auction-results/brisbane/2023-06-03). Remember this is a city with no history of strong auction numbers before Covid - we're talking about 30 to 40% for years on end.
Now to Perth, which has finally been getting its time in the sun over the past 2 years after years and years of sideways movement: the increases continue, with 1.3% recorded in May (source: https://www.corelogic.com.au/our-data/corelogic-indices#daily-indices).
The number of listings is reaching cronically low levels: 4013 in June as of today, on track to break May's record for being the lowest over the past 10 years - a record previously broke in April, by the way. Hard to find a more obvious trend than this one (source: https://reiwa.com.au/the-wa-market/perth-metro/).
Add to that the incredible affordability offered by Perth, with the second-lowest median dwelling value amongst all capital cities (only Darwin has a lower median - source: CoreLogic), and it's not hard to see why prices have been growing and probably will keep growing for a long time
To wrap up this week's edition, a very telling article from Domain about regions with ZERO new homes for sale. Apart from a handful of regions (Geelong and Barossa, for example), all of them are around Brisbane and Perth: https://www.domain.com.au/news/the-tightest-property-markets-in-australia-right-now-have-0-new-homes-for-sale-1218987/amp/
Have a great weekend everyone.