July 2016 – Page 13 – Digital Finance Analytics (DFA) Blog

Dwelling approvals continue to rise in trend terms

The number of dwellings approved rose 0.9 per cent in May 2016, in trend terms, and has risen for six months, according to data released by the Australian Bureau of Statistics (ABS) today.

Dwelling approvals increased in May in the Northern Territory (18.7 per cent), Australian Capital Territory (8.2 per cent), New South Wales (2.0 per cent), South Australia (1.9 per cent) and Victoria (1.8 per cent), but decreased in Western Australia (2.6 per cent), Queensland (1.8 per cent) and Tasmania (1.2 per cent) in trend terms.

In trend terms, approvals for private sector houses rose 0.2 per cent in May. Private sector house approvals rose in South Australia (1.9 per cent), New South Wales (1.5 per cent) and Victoria (0.2 per cent), but fell in Western Australia (2.2 per cent) and Queensland (0.5 per cent).

In seasonally adjusted terms, dwelling approvals decreased 5.2 per cent, driven by private sector dwellings excluding houses, which fell 11.3 per cent. Private sector house approvals rose 0.1 per cent in seasonally adjusted terms.

The value of total building approved rose 1.0 per cent in May, in trend terms, and has risen for five months. The value of residential building rose 1.5 per cent while non-residential building fell 0.2 per cent.

Commenting on the results, HIA Senior Economist, Shane Garrett said

Multi-unit approvals tend to bounce around a lot from one month to the next, but it’s been clear for some time that activity on this side of the market has peaked. Interestingly, the RBA cut interest rates during May and today’s result indicate that this move may have helped contribute to steadier conditions for detached house approvals. The decline in approvals during May was quite widespread in geographic terms, with Victoria being the only major state to experience an increase during the month. Today’s figures fit closely with our view that new home building activity is in the process of declining from last year’s record peak to more modest levels as the end of the decade approaches. The contraction in activity is predicted to be concentrated on the multi-unit side, with a more measured reduction in detached house building.

Auction Volumes Down Last Saturday

According to CoreLogic, 70.7 per cent of capital city auctions were successful this week, according to preliminary results. This week’s result indicates an upwards shift in the auction clearance rate from last week, when 66.4 per cent of auctions were successful and is also higher than the clearance rate recorded over the first month of winter 2016 (67.1 per cent). The number of residential auctions held this week was 811, down substantially from 2,218 last week. At the same time last year, 1,674 capital city auctions were held with 76.8 per cent clearing.

ACCC commences inquiry into regulation of wholesale ADSL service

The Australian Competition and Consumer Commission has today commenced a public inquiry into whether the wholesale asymmetrical digital subscriber line (ADSL) service should continue to be regulated.

The ACCC first declared access to the wholesale ADSL service in February 2012. The ACCC is required to review the declaration before it expires in February 2017.

ADSL technologies provide high speed fixed-line broadband services over copper networks. ADSL services are currently the dominant fixed-line broadband technology in Australia.

“A number of changes have occurred since the wholesale ADSL service was first declared in 2012, including the progressive rollout of the National Broadband Network,” ACCC Commissioner Roger Featherston said.

“This inquiry will assist the ACCC in determining whether continued declaration of the wholesale ADSL service is in the long-term interests of end users.”

The discussion paper issued today seeks submissions on a range of issues relevant to the inquiry. Submissions are invited by 29 July 2016. The submissions will inform the ACCC’s decision-making.

The wholesale ADSL service discussion paper is available at wholesale ADSL declaration inquiry 2016 webpage.

The ACCC expects to finalise its decision in early 2017 before the current declaration expires.

Background:

The ACCC can declare a service if it is satisfied that doing so would promote the long-term interests of end users. Once a service is declared, a network owner must provide access to the service upon request and where commercial agreement cannot be reached the ACCC must determine regulated price and non-price terms. Declaration ensures all service providers have access to the infrastructure they need to supply competitive communications services to end-users.

Auction Clearances Still Buoyant

The latest data from APM PriceFinder shows that last Saturday, 2nd July, despite the election distraction, national clearances were at 70%, compared with 64.9% last week, though on much lower volumes for obvious reasons. Compared with this time last year numbers are down a little, but clearly there is still appetite for property.

An uncertain election result may lead to stagnant financial markets

From The Conversation.

For the second time in the space of ten days, it appears that betting markets and pollsters have got it wrong. First, despite odds showing a 90% likelihood of “Remain” winning, the UK voted to “Leave” the European Union in its June 23 referendum.

Now, a mammoth federal election campaign has resulted in political stalemate in Australia, and the result will not be known until Tuesday at the earliest.

Clearly, the repercussions of a hung parliament are not as wide-ranging as “Brexit” and we are unlikely to see Canberra’s streets flooded with protesters. However, when Australian markets open on Monday they will still be faced with a high degree of political uncertainty. Investors do not tend to react favourably to such ambiguity.

Investors reduce risk under political uncertainty

Investors tend to respond in one of two ways. The most-common situation is for the political uncertainty to manifest in higher levels of market volatility and a flight to quality as investors try to reduce their exposure to risk.

This was what we witnessed post-Brexit: Australian stockmarkets and the dollar fell by more than 3%, while “safe” government bond yields hit an all-time low.

An alternative is for markets to become locked in stasis – where investors sit on their hands, unsure as to whether they should buy or sell. Market liquidity falls and asset prices become resistant to change.

This is effectively what happened following the hung parliament of August 2010. In the aftermath of that election, stock prices remained within a tight trading range and the dollar hardly budged over the course of the following week.

When the result of the 2016 election is finally known, it appears that the outcome will be either a minority Coalition government or a hung parliament. The Senate is likely to be more fractious than prior to the election.

Talk has already started about potential unrest among the conservative faction of the Liberal Party who supported former prime minister Tony Abbott. There is even discussion of an election re-run if the parliament proves ungovernable. Clearly, this uncertainty could linger for months.

Concerns for jobs and growth

The likelihood of a lengthy period of uncertainty is important. It means it will be difficult to pass any economic or budgetary reforms. Without such reforms, it is unlikely the budget will return to surplus in the near future (if ever) and it becomes more likely that the AAA credit rating will be lost.

This creates multiple concerns for Australian financial markets, and the broader economy. A credit rating downgrade will likely increase the cost of funding for Australia’s banks.

The Big Four banks will be particularly impacted given the significant role that offshore funding plays in their balance sheet management. This will mean higher interest rates for borrowers – which would not be beneficial for the housing market.

A prolonged period of uncertainty will make it difficult for firms to finalise investment decisions. At a time when the economy is still attempting to transition away from the boom in mining investment this will dent economic growth and employment. So much for “jobs and growth”.

Essentially, this is a recipe for a “risk-off” environment of declining stockmarkets and a depreciating Australian dollar. It is also likely that the market will price a higher likelihood of a reduction in the RBA target rate at the July or August meeting. This will further aid a continued rally in relatively safe government bonds (bond prices rise as yields fall).

If you consider the ongoing political uncertainty resulting from Brexit and the forthcoming US presidential elections in addition to the federal election, then months of nervous markets may lay ahead.

Author: Lee Smales, Senior Lecturer, Finance, Curtin University

Black market jobs cost Australia billions and youth are at the coalface

From The Conversation.

Young people, job creation and taxation have all been at the centre of the federal election campaign; yet almost nothing has been said about one of the sleeper issues these have in common – the cash-in-hand economy.

Youth unemployment is typically twice the national unemployment rate. Millennials are finding it harder to secure full-time work after leaving university. Shockingly, Australians aged 15-24 are at the highest risk of hospitalisation following a workplace accident.

However, there is another risk young people face that we know surprisingly little about.

A rose by any other name?

“Cash-in-hand” is a familiar phrase in our economy. Like most shady dealings, it goes by many names: unreported employment, the informal economy, or a grey labour market. Whatever we call it, it is used to circumvent Australian workplace and taxation legislation.

This should not be confused with being paid in cash. For example, let’s say an employer wanted to reduce their expenditure on transaction fees. They could add up an employee’s hours, calculate wages for the week minus tax, superannuation and other deductions. The adjusted wages could then be paid straight from the till, accompanied by a payslip.

The tell tale signs of a “cash-in-hand” job are a lack of formal employment paperwork, such as signed contracts, weekly payslips or a group certificate at tax time.

There are obvious downsides. These jobs are unlikely to pay the correct minimum wage, penalty rates, or super contributions. A greater concern is these jobs aren’t covered by workers compensation. Considering the previously mentioned risk of hospitalisation, cash-in-hand jobs become a serious concern.

Who, what and why?

The most concerning aspect is that so little data is being collected about these jobs.

A 2012 survey found that one in four young workers had recently done cash-in-hand work. While no concrete data exists on where these jobs are being offered, we can make some educated guesses.

The figure above was created by selecting the top five jobs where the average age of employees was between 15-21. This gives us the most common industries for young Australians: fast food, hospitality, and retail.

Figure 2 ‘Participation in education and/or employment among young people aged 15 to 24, by age group, 2005 and 2014’ Australian Institute of Health and Welfare analysis of ABS 2015

If we look at the orange portion of Figure 2, we can see that 29% of young Australians are combining work and study. This is especially relevant when we consider Student Visas, Youth Allowance and Austudy payments.

We know that approximately 899,000 young people are both working and studying. However, 229,900 are receiving study payments, at a maximum rate of $216.60 per week with the ability to earn an additional $216.50. This puts the maximum payment as $433.10 – just over $30 above the poverty line. Let’s use some hypothetical examples, and say that “Julie” and “Ravi” are two of these student workers.

Julie is 18 and works casually at a local cafe in Brunswick while studying at the University of Melbourne. To maximise her earnings, she works 13 hours during the week at $16.61 an hour. This gives her $215.80, combined with her Austudy payments for a total of $432.40 per week.

She shares a three bedroom house in Brunswick and pays $200 a week in rent. Her average weekly expenses are $104 on food, $10 for her mobile phone, $19.50 on her public transport, and $34 a week on utilities. This leaves her $64 per week for other expenses.

Ravi is a 21 year old international student. He is studying for his Masters at Deakin University and works at a supermarket in Burwood, near the house he and his brother share. His rent and expenses are comparable, but he cannot receive Austudy. His Visa states that he can only work 20 hrs a week, giving him a maximum income of $459.64 after tax. After accounting for expenditure, Ravi is a little better off with $92.13 to cover other expenses.

Neither example accounts for business cycle/seasonal demands, parental income affecting payments, unexpected expenses, legal fees, health costs, or textbooks. Basic living costs account for 80-87% of their entire wage.

If either student faces costs that can’t be met by their usual wages, they may consider “cash-in-hand” work the only viable alternative. Julie will still get her Centrelink payments, and Ravi won’t breach his visa requirements.

What we don’t know could hurt us

The risks of this informal economy extend well beyond young workers. Professor Christopher Bajada estimates that cash-in-hand jobs make up a informal economy equivalent to 15% of Australia’s GDP. Similarly, in 2004 the government estimated the informal economy between 3-15%.

Even if we take the lowest estimate of 3% of GDP, that’s approximately AUD$48.6 billion outside our economy. A 2012 comprehensive report produced by The Australia Institute estimates a staggering $3.3 billion of revenue is being lost to cash-in-hand working arrangements. Given that taxation, debt and public spending have become key election battlegrounds, this lost revenue is potentially game changing.

Author: Shirley Jackson, PhD Candidate in Political Economy, University of Melbourne

UK Will See Large Investment Shock Post-Brexit – Fitch

Fitch Ratings says that there is little doubt that the UK referendum vote in favour of leaving the EU will take a significant toll on the economy.

Businesses are facing a surge in uncertainty on three separate fronts – the future of the UK’s trading relationship with the EU, the shape of the regulatory framework, and domestic political uncertainty, including the future status of Scotland. This uncertainty will prompt firms to delay investment and hiring decisions, while elevated financial market volatility will further damage business confidence.

We expect investment to fall by 5% in 2017 and by 2018 for it to be 15% lower than previously expected in Fitch’s May 2016 Global Economic Outlook (GEO). Consumption will not be immune to this shock and overall spending by UK residents will see a mild decline in 2017. The sharp fall in the value of sterling will provide some offset to the demand shock, with exports likely to benefit somewhat in the near term. Imports look likely to decline as investment contracts and foreign products become more expensive, resulting in expenditure switching to domestically produced goods and services and higher inflation. UK GDP growth is expected to fall to around 1% in both 2017 and 2018. This is a downward revision of 1 percentage point in each year from the May 2016 GEO.

The long-term impacts of Brexit on the economy are harder to estimate with great precision. However, in addition to less favourable access to the European Single Market, reductions in trade openness and inward FDI could harm productivity performance, while reduced immigration would slow labour supply and potential GDP. These negatives will likely outweigh any GDP gains from deregulation outside the EU or the redirection of EU budget transfers.

Brexit hits the world economy at a fragile juncture, with US growth recently weighed down by external shocks, but the direct near-term impact on the global economy is likely to be manageable. The trade exposures of US and Asian economies to the UK economy are small. The eurozone will suffer a larger shock from weaker UK demand and the depreciation of the pound, but for the block as a whole, growth adjustments will likely be significantly smaller than for the UK. Global financial market contagion beyond the UK has not been particularly severe since the vote, although European bank shares have fallen sharply as concerns about profitability have risen. Liquidity provision and monetary policy adjustments by global central banks should be able to contain the risk of a significant and widespread tightening in global credit conditions, although a further strengthening of the dollar – with implications for emerging market currencies and debt service – cannot be ruled out. Further Fed tightening is now likely to be delayed until December 2016 and the ECB is expected to persist with asset purchases beyond March 2017. The Bank of England is likely to lower interest rates to 25 bps later this year.

Nevertheless, medium to long-term risks to the global economy from the Brexit vote would rise in the event of increased political fragmentation pressures in the rest of the EU or a reversal of globalisation that culminated in rising trade protectionism.

A Two Speed Home Market

The CoreLogic June Home Value Index results reported a 0.5% rise in capital city dwelling values over the month with five capitals recording a fall in dwelling values while Sydney, Melbourne and Hobart values show another substantial rise.

Higher dwelling values across Australia’s two largest capital cities continued to push the CoreLogic Hedonic Home Value Index to new record highs, with dwelling values across the combined capital cities rising by 0.5% in June to be 8.3% higher over the past twelve months.

The June results continued to show a rebound in housing market conditions after CoreLogic reported weaker results for the final quarter of 2015 when the combined capitals’ index was down 1.4%. CoreLogic Asia Pacific research director Tim Lawless said,

“Importantly, the pace of capital gains in June was substantially lower than the April and May results when CoreLogic reported a 1.7%, and 1.6% month-on-month lift in capital city dwelling values.”

“The monthly growth rate reduction is likely to be very much welcomed by state and federal government policy makers and regulators who may be concerned about a sustained rebound in capital gains.”

“As an example, home values in Sydney have been rising for four years, and have increased by a cumulative 59% over this time frame. Melbourne dwelling values have been rising for the same length of time and have moved 41% higher over the growth cycle to date.”

“The combined capitals’ headline result was driven by a strong 1.2% rise in Sydney dwelling values, and a 0.8% gain across Melbourne’s housing market. Hobart values also showed strong conditions with dwelling values moving 1.8% higher over the month,” Mr Lawless said.

Although the headline results are positive, five of Australia’s eight capital cities recorded a decline in dwelling values in June. Monthly declines of more than 1% were recorded in Darwin (-1.6%), Adelaide (-1.3%) and Canberra (-1.1%), while the falls in Brisbane (-0.1%) and Perth (-0.8%) were less severe.

Brexit may more closely resemble Y2K than Lehman – Moody’s

Moody’s latest research note underscores that Brexit, essentially, is “a little local difficulty.” Profits were made in the markets on volatility after the result of the vote was announced, but the fundamental risks are contained and different from the Lehman Brothers GFC trigger.

Thus far, Brexit has fallen considerably short of being the next Lehman Brothers. As far as the US is concerned, Brexit’s ultimate effect may closely resemble the impact of Y2K’s arrival, which did not impart the IT-related havoc that many had predicted.

For now, at least, Brexit lacks the enervating surge in actual and potential defaults that magnified the losses stemming from Lehman’s demise. Put differently, the latest jump in uncertainty lacks anything comparable to 2008’s extremely elevated incidence of mortgage foreclosures.

Thus, the swelling of credit spreads and seizing up of financial markets that ordinarily accompany a meaningful crisis have yet to materialize. Moreover, industrial commodity prices never sank in a manner that otherwise would confirm global distress.

Brexit has made champions out of astute traders. The big winners of the highly volatile past week included those who were long high-quality, long-duration credit and gold and short equities on the eve of June 23’s Brexit referendum. Not long thereafter, those who loaded up on equities toward the end of trading on June 27 emerged victorious.

Depending on timing, Brexit rewarded both bears and bulls. For example, after plunging by a cumulative -10.9% from the close of June 23 to the close of June 27, the Stoxx Europe 600 index subsequently rallied by +6.8% through June 30. Ironically, the UK’s FTSE 100 stock price index more than recovered from its -5.6% plunge of the two trading days following June 23’s Brexit vote with an +8.7% surge during the final three days of June.

The US equity market’s performance was in between the broad European stock price index and the UK. After sinking by -5.6% from June 23 through June 27, the market value of US common stock subsequently rebounded by +4.6% as of the early afternoon of June 30.

There Are Limits To Monetary Policy – Carney

In a speech entitled “Uncertainty, the economy and policy“, given by Mark Carney, Governor of the Bank of England, he highlights that waves of uncertainty are washing over the UK economy, and these waves are getting larger. The result of the referendum is clear. Its full implications for the economy are not. But the question is not whether the UK will adjust but rather how quickly and how well. As risks have risen, further monetary policy interventions are likely, but he says there are limits to how much can be achieved with these levers.

… The decision to leave the European Union marks a major regime shift. In the coming years, the UK will redefine its openness to the movement of goods, services, people and capital. In tandem, a potentially broad range of regulations might change.

Uncertainty over the pace, breadth and scale of these changes could weigh on our economic prospects for some time. While some of the necessary adjustments may prove difficult and many will take time, the transition from the initial shock to the restructuring and then building of the UK economy will be much easier because of our solid policy frameworks.

At times of great uncertainty, households, businesses and investors ask basic economic questions. Will inflation remain under control? Will the financial system do its job?

In recent years, economic uncertainty has been elevated because of fragilities in the financial system and overhangs of public and private debt.

These challenges have been compounded by deeper forces that have radically altered the balance of saving and investment in the global economy. In the process, these have moved equilibrium interest rates into regions that monetary policy finds difficult to reach. Whether called ‘secular stagnation’ or a ‘global liquidity trap’, the drag on jobs, wages and growth is real.

All this uncertainty has contributed to a form of economic post-traumatic stress disorder amongst households and businesses, as well as in financial markets – that is, a heightened sensitivity to downside tail risks, a growing caution about the future, and an aversion to assets or irreversible decisions that may be exposed to future ‘disaster risk’.

Even before 23rd June, we observed the growing influence of uncertainty on major economic decisions. Commercial real estate transactions had been cut in half since their peak last year. Residential real estate activity had slowed sharply. Car purchases had gone into reverse. And business investment had fallen for the past two quarters measured. Given otherwise accommodative financial conditions and a solid domestic outlook, it appeared likely that uncertainty related to the referendum played an important role in this deceleration.

It now seems plausible that uncertainty could remain elevated for some time, with a more persistent drag on activity than we had previously projected. Moreover, its effects will be reinforced by tighter financial conditions and possible negative spill-overs to growth in the UK’s major trading partners.

As the MPC said prior to the referendum, the combination of these influences on demand, supply and the exchange rate could lead to a materially lower path for growth and a notably higher path for inflation than set out in the May Inflation Report. In such circumstances, the MPC will face a trade-off between stabilising inflation on the one hand and avoiding undue volatility in output and employment on the other. The implications for monetary policy will depend on the relative magnitudes of these effects.

Today, while the economy is more complex and our models less reliable, the Bank has identified the clouds on the horizon and can see that the wind has now changed direction.

Over the past few months, working closely with the Chancellor and with HM Treasury, we put in place contingency plans for the initial market shocks. They are working well.

Over the coming weeks, the Bank will consider a host of other measures and policies to promote monetary and financial stability.

In short, the Bank of England has a plan to achieve our objectives, and by doing so support growth, jobs and wages during a time of considerable uncertainty.

Part of that plan is ruthless truth telling. And one uncomfortable truth is that there are limits to what the Bank of England can do.

In particular, monetary policy cannot immediately or fully offset the economic implications of a large, negative shock. The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policymakers.

These will be driven by much bigger decisions; by bigger plans that are being formulated by others. However, we will relentlessly pursue monetary and financial stability. And by doing so we will facilitate the adjustments needed to realise this economy’s full potential.