Unemployment Stays at 6.3% (Trend) – ABS

The ABS released the Labour Force data for February, today. Australia’s estimated seasonally adjusted unemployment rate for February 2015 was 6.3 per cent, compared with 6.4 per cent for January 2015. In trend terms, the unemployment rate was unchanged at 6.3 per cent.

The seasonally adjusted labour force participation rate decreased to 64.6 per cent in February 2015 from 64.7 per cent in January 2015.

The ABS reported the number of people employed increased by 15,600 to 11,652,400 in February 2015 (seasonally adjusted). The increase in employment was driven by increases in both full-time (up 10,300) and part-time employment (up 5,300). Seasonally adjusted employment increased for both males (up 9,300) and females (up 6,300) in February 2015.

The ABS seasonally adjusted aggregate monthly hours worked series increased in February 2015, up 13.0 million hours (0.8%) to 1,620.8 million hours.

The seasonally adjusted number of people unemployed decreased by 15,800 to 777,300 in February 2015. The decrease was driven by those looking only for part-time work, down 18,600.

The seasonally adjusted underemployment rate was 8.6 per cent in February 2015, a decrease of 0.1 percentage points from November 2014 based on unrounded estimates. Combined with the unemployment rate of 6.3 per cent, the latest seasonally adjusted estimate of total labour force underutilisation was 14.9 per cent in February 2015, a decrease of 0.1 percentage points from November 2014.

Note that The February 2015 data incorporates estimates rebenchmarked to the latest population estimates and projections. Commencing from the May 2015 issue this will be a regular quarterly process which will ensure that the Labour Force series reflect the most up to date population benchmarks. So further tweaks to the data have been made, making series comparisons difficult.

Hot Sydney Market Distorts National Property Picture

The CoreLogic RP Data Market Summary to 8th March highlights the disparity between the Sydney market and other capital cities. For example, the monthly lift in prices was 1.3% in Sydney, compared with a combined capital city change of 0.2%. It should also sound a warning, if the London market is anything to go by.

8MarchValues2015Auction clearance rates in Sydney were at 83.3%, compared with a weighted average of 73%, and half of all properties sold were in Sydney (677 out of 1,227).

8MarchAuctions2014The average house price in Sydney has now broken above $800,000, compared with a combined average of $596,677.  8MarchPrices2015A word of warning, parallels have been drawn between Sydney and the London property markets in recent time. So, its worth reflecting on this commentary relating to the London market.

Further evidence is emerging that the central London housing market bubble has burst and price falls are spreading throughout the rest of Greater London, the latest index suggests. Prime central London prices are still falling as the supply of properties rises and confidence in property as an investment ebbs away,’ according to the data from Home.co.uk. Central London locations dominate the latest list of biggest house price falls across the UK, with Walworth in the London Borough of Southwark seeing a 15% fall in average house prices between January 2014 and January 2015.

House prices in Belgravia fell by 10.3% over the same period and Cromwell Road in Kensington saw a slump of 8.3%. Of the 20 UK areas with the biggest annual fall in sales prices, 11 are in London. Landlords’ return on investment on central London properties is also falling. Of the 15 UK locations recording negative real % yield, which occurs when the value of the property depreciates by more than the annual rent, 12 are in central London.

The index shows that in January 2015, landlords with a property in Walworth recorded a negative real % yield of 11.3%, while in Belgravia the negative real % yield stood at 7.1%.

Central London flat prices are among the hardest hit. On average, the price of a flat fell by 9% in central London between January 2014 and January 2015. Over the same time, the number of flats for sale in central London has increased by 64%.

Since November 2013, the price of a typical flat in Belgravia has fallen 20%, from £1,995,000 to £1,600,000. A similar price correction has already spread into Islington, where the typical asking price of a flat has dropped 11% since March 2014. This represents a loss of £85,000 for flat buyers in Islington over the last 10 months.

There is further evidence that price falls are rippling out to more remote areas of Greater London and look set to spread further into the South East. The spectre of negative equity is looming large for recent buyers.

Further out in Greater London, Holloway flat prices peaked in May 2014 but have since dropped by 13%, while the typical time on market for flats in the area has more than doubled. Meanwhile, Muswell Hill in North London has seen flat prices fall 4% since October last year.

‘Optimism in the UK housing market is still riding high in the rest of the country, but it comes as a shock to many to learn that prices are?crumbling in the most expensive streets in London,’ said Doug Shephard, Home.co.uk director.

‘These price movements may soon have a knock-on effect for the rest of Greater London and, later, the Home Counties,’ he added, pointing out that prices in central London went up too far, too fast during 2012 and 2013.

‘In a synthetic property boom and bust such as London has experienced, on account of ultra-low interest rates and other stimulus measures, it is hard to imagine any possible remedial action on the part of the government. Prices this time may simply have to fall back to a more natural equilibrium,’ he added.

It’s The Supply Side Stupid!

Housing is, no surprise, an issue in the NSW election, with Baird promising to facilitate a small number of extra homes (20,000 over 4 years) and Labor talking about deferring stamp duty for first time buyers.

Here is the thing. DFA modelling for NSW indicates we need an additional 150,000 homes in and around Sydney, each year, for the next three years, just to bring things back to equilibrium. Many of these should be starter homes in the inner suburban area, not on the urban fringe. We also need properties designed for older less mobile households.  Our modelling takes account of net migration, demographic shifts, and household preferences. In particular we know there is demand for units and small houses in the inner suburban area, from both first time buyers and investors.

We do not believe that further “assistance” to first time buyers, whether via stamp duty, or access to super, per Hockey’s comments recently have any economic merit (more likely they should be seen as dog whistle politics).

Anything which eases the purchase price will simply lift the price, as for example in the now defunct first time buyer incentives.

The right question is how will policy be changed to release more land for development, and how will planning regulations be tweaked to allow the development of starter homes. How many will be built? If the answer is not in the 100,000’s we do not have the right answer. Such an inflection in supply would have a dampening effect on house price growth.

The root cause of the current issues in property in NSW goes back to pure Economics. Simply put, supply and demand are out of kilter.

On the supply side, not enough property is being constructed to meet increasing demand from local and overseas purchasers. Either space is a problem, land releases have not kept pace, or builders cannot get funding.

Demand is being stoked by demographic shifts, like more single households, older independents and young families. Also, investment purchasers see property as a good hedge against wider uncertainty, so are very active. Many can enjoy tax breaks. Plus Chinese investors have become a major force.

Thanks to the banks, purchasers can borrow more, and this lifts prices. First, low interest rates are making larger mortgages more affordable. Second, they have been able to increase the supply of home lending credit, thanks to lower capital rules, especially for those using the most sophisticated capital management. Next, they see risks in property lending much lower than commercial lending, so are happy to skew their portfolio. Finally, they have changed their lending criteria (although some regulators are pushing back), making larger loans possible, for some.

As a result, rising property prices are artificially lifting bank and household balance sheets. History shows that prices won’t necessarily defy gravity for ever. If they do correct there could be significant consequences for households, banks and the community.

We need proper supply-side strategies.


Limits To Low Interest Rate Policy

In a recent speech, “Low Inflation in a World of Monetary Stimulus” RBA Deputy Governor Philip Lowe highlighted the impact of low interest rates. Significantly he observes that low interest rates are not translating into buoyant consumer spending. As a result, such monetary policy will not necessarily deliver the desired economic outcomes.

One area where low interest rates do appear to be having the broadly expected effect is on asset prices: global equity markets have been strong; property prices are again recording solid gains in some countries; and bond prices have increased substantially. However, for these increases in asset prices to boost the global economy, households and businesses need to respond by increasing their spending. While in the United States there are now some signs that this is happening, on the whole the response of private spending to higher asset prices has been muted.

Overall, looking at this experience, I find it difficult to escape the conclusion that changes in interest rates are not affecting decisions about spending and saving in the way they might once have done. Undoubtedly, low interest rates are helping to repair balance sheets by lowering debt-servicing costs and by pushing up asset prices. In so doing, they are helping lay the foundations for future growth in consumption and investment. But, while this repair process is taking place, consumption is weaker than it otherwise would be. In turn, subdued consumption growth is feeding through to a more subdued business climate and weaker investment.

Arguably, a similar dynamic has been playing out in government finances in a number of countries. After the financial crisis, many governments found themselves with debt levels that were very high. Like many households, they have responded by tightening their belts. Given the high levels of debt and ongoing imbalances between recurrent revenue and expenditure, few governments have seen the very low interest rates as an opportunity to support long-term infrastructure investment at low cost. Rather, much as households have done, governments have taken advantage of the lower debt-servicing costs to help shore up their finances.

He concludes that low interest rate monetary policies are unlikely to succeed.

Finally, stepping back from the short term, the low interest rates we are seeing globally and in Australia are a direct consequence of an elevated appetite for saving and a muted appetite for real investment in many economies. Monetary policy globally has responded to this reality in a way that a decade or so ago would have hardly seemed imaginable. In doing so it has helped the global economy through a very difficult period. But, at the end of the day, the solution to the problems caused by the disconnect between the desire to save and the desire to invest cannot lie with monetary policy. Instead, it lies in measures to improve the investment environment so that once again there is strong productive demand for the use of our societies’ savings.

Retail Trade Slightly Up Again – ABS

The ABS released their trade data for January 2015 today. Households are still being cautious about their spending patterns, driven by slow wage growth, rising living costs and falling confidence. The trend estimate rose 0.2% in January 2015. This follows a rise of 0.2% in December 2014 and a rise of 0.3% in November 2014 In trend terms, Australian turnover rose 3.1% in January 2015 compared with January 2014.

By industry in January, household goods retailing (0.3%), Food retailing (0.1%), Clothing, footwear and personal accessory retailing (0.7%), Cafes, restaurants and takeaway food services (0.3%) and Department stores (0.5%). Other retailing (-0.2%) fell in trend terms in January 2015.

By state in January, Queensland (0.4%), Western Australia (0.4%), New South Wales (0.1%), South Australia (0.3%), Tasmania (0.1%) and the Northern Territory (0.1%). Victoria (0.0%) and the Australian Capital Territory (0.0%) were relatively unchanged in January 2015.

Building Approvals Continue To Favour Units

The ABS released their building approvals data today for January 2015. We see continued strong growth in unit approvals, though this does vary by state. The trend estimate for total dwellings approved rose 1.3% in January and has risen for eight months.  The trend estimate for private sector houses approved was flat in January, whilst the trend estimate for private sector dwellings excluding houses rose 2.6% and has risen for eight months.

BuildingApprovalsJan2015The value of residential building rose 2.9% and has risen for 10 months.

ValueofBuildingWorksJan2015The state trends show variation, with a peak in units in NSW and some momentum in QLD. On house approvals, NSW, SA and WA all fell, offset by a rise in VIC and QLD.


House Prices Lift In February

CoreLogic RP Data February Home Value Index results released today showed that Australia’s combined capital cities have seen dwelling values rise by a further 0.3 per cent in February taking home values 8.3 per cent higher over the past twelve months. The monthly rate of growth slowed from 1.3 per cent in January and 0.9 per cent in December, however the growth trend remains strong, particularly in Sydney and Melbourne.

Sydney is once again the clear standout with dwelling values 13.7 per cent higher while Melbourne values are 7.4 per cent higher. Australia’s third largest city, Brisbane, recorded the third highest rate of annual capital gain with dwelling values up 5.9 per cent. In contrast, dwelling values have increased by less than four per cent in every other capital city over the year.

Since the beginning of the growth cycle in June 2012, dwelling values have moved 22.6 per cent higher across the combined capital cities.  However in Sydney values are up 34.8 per cent cumulatively over the cycle to date across Australia’s largest capital city.

Evidence of compressed rental yields is continuing across each of the capital city markets. A year ago the gross rental yield for a capital city dwelling was averaging 4.3 per cent; by the end of February the typical gross yield has been eroded down to just 3.7 per cent – due largely to the consistent high rate of dwelling value growth relative to rental growth. In Melbourne, the yield profile is the lowest of any capital city with the typical Melbourne dwelling showing a gross yield of just 3.3 per cent. Sydney isn’t far behind with a gross dwelling yield of 3.6 per cent.

Total returns in Sydney are approaching the 20 per cent mark over the past twelve months, substantially outperforming other asset classes.  This compares with 11.1 per cent in Melbourne and 10.9 per cent in Brisbane. Given low returns from bank deposits, and full share prices it is not surprising to see continued momentum in the investment sector.

DFA believes these trends suggest the RBA should hold off on a further rate cut tomorrow, unless, and until macroprudential levers can be pulled to take some of the exuberance from the market.

HIA New Home Sales Push Higher in January

The latest result for the HIA New Home Sales Report, a survey of Australia’s largest volume builders, signals further upward momentum for the new home building sector. Total seasonally adjusted new home sales posted an increase of 1.8 per cent in January 2015. The January new home sales result reflected a 9.9 per cent rise in ‘multi-unit’ sales and a 0.1 per cent increase in detached house sales. Sales for detached houses are essentially flat.


In January 2015 detached house sales increased by 1.2 per cent in New South Wales, 2.7 per cent in Victoria, and 5.6 per cent in South Australia. Detached house sales declined by 1.5 per cent in Queensland and 4.0 per cent in Western Australia. During the three months to January 2015, sales increased by 5.5 per cent in Victoria, 15.9 per cent in Queensland, and 1.7 per cent in Western Australia. Meanwhile, sales declined by 11.3 per cent in New South Wales and by 3.6 per cent in South Australia.

Digital ad spend will pass $5 billion to account for 43.3%

Digital is where Australian advertisers are heading. According to eMarketer, total media advertising spend in Australia will reach $11.59 billion in 2015. Digital ad spend will pass $5 billion to account for 43.3% of total media ad spending, and mobile ad expenditure will total $1.46 billion—29.0% of digital and 12.6% of total media ad spending.

Foreign Investors Fees Still In The Air

Speaking on ABC Insiders this morning Josh Frydenberg, Assistant Treasurer made the point that the foreign investor regulations, recently announced were open for consultation, and that a number of issues had yet to be resolved. For example, should a foreign investor pay the fee each time they apply to purchase a property (so bidding on multiple properties would mean multiple fees)? Or should they pay one fee to cover multiple potential transactions? If they are not successful in purchasing the target property, is the fee refundable? He appeared to be advocating paying the fee before putting a bid in, one fee for multiple bids, and refundable if unsuccessful.

However to decide, we need to know if the fee is simply to cover the cost of appropriate agency administration, or whether it is designed to be a barrier to transact. It is not clear for the available material which is envisaged. Administration would be a combination of assessing the credential of the individual (so once per person), and also the property (so once per property). Also, if unsuccessful, is it appropriate to refund the entire fee? After all, the work needs to be done before allowing a bid (else if you only pay after a successful transaction, what happens if you were declined subsequently, once you have contracted to purchase?)

He also confirmed there had been no action taken on a residential purchase by a foreigner since 2006, adequate data was not being collected, and cross agency communication was not effective.

Clearly more work needs to be done to design this right. DFA suggests that a foreign investor should be able to make application for approval to purchase property in Australia. This should be a licence, which needs to be maintained and renewed from time to time. Then there would be a fee payable on each property application. This latter fee would be refundable in the case of an unsuccessful sale.  It would also reduce the red tape so some extent.