Social Trends – Page 168 – Digital Finance Analytics (DFA) Blog

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.

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.

Wage Growth Still Slow

The ABS released their wage price index to December quarter 2014, showing continued slow wage growth. The Private sector index rose 0.6% and the Public sector rose 0.7%. The All sectors quarterly rise was 0.6%, which marks the ninth consecutive All sectors quarterly increase between 0.6% and 0.7%.

The Private sector through the year rise to the December quarter 2014 of 2.4% was smaller than the Public sector rise of 2.7%. Through the year, All sectors rose 2.5%. The CPI is now down to 1.7%, so wages are running slightly ahead.

In original terms, wages rose 0.6% in the December quarter 2014 for All sectors. The Private sector rose 0.5% in the December quarter 2014, smaller than the Public sector rise of 0.7%. The All sectors through the year rise was 2.6%. The Private sector rose 2.5% and the Public sector 2.7%.

The largest quarterly rise of 0.7% was recorded by Victoria, South Australia and Western Australia. Tasmania recorded the smallest quarterly rise of 0.3%. Rises through the year ranged from 1.7% for the Australian Capital Territory, to 2.8% for Victoria and the Northern Territory.

In the Private sector, the quarterly rise for South Australia of 0.7% was the largest quarterly rise of all states and territories. The smallest quarterly rise was 0.3%, recorded for Tasmania and the Australian Capital Territory. Rises through the year in the Private sector ranged from 2.0% for Western Australia to 2.7% for Victoria, South Australia and Tasmania. Wages growth in Western Australia continued to ease in the December quarter 2014. For the fourth quarter in a row the quarterly growth was smaller than the same quarter the year before.

In the Public sector, Western Australia recorded the largest quarterly rise of 1.5%, with Tasmania recording the smallest quarterly rise of 0.2%. Western Australia and the Northern Territory both recorded the largest through the year Public sector rise of 3.5%. For the second quarter in a row, the smallest through the year rise for the Public sector was recorded by the Australian Capital Territory (1.4%). Commonwealth government employee pay changes are most evident in the wages growth reported for the Australian Capital Territory. Public sector wages growth in other states and territories is mostly driven by regularly scheduled State and Local government pay increases.

By Industry, Information media and telecommunications recorded the largest All sectors quarterly rise of 1.2%. The smallest quarterly rise for All sectors of 0.2% was recorded by Accommodation and food services.

The All sectors through the year rises for the December quarter 2014 ranged from 1.9% for Professional scientific and technical services to 3.4% for Education and training and Arts and recreation services.

In the Private sector, Information media and telecommunications recorded the largest quarterly rise of 1.3%. Public administration and safety recorded the smallest rise of 0.1%. Rises through the year in the Private sector ranged from 1.9% for Professional scientific and technical services to 3.9% for Arts and recreation services.

In the Public sector, Education and training recorded the largest quarterly rise of 1.2%. The smallest quarterly rise of 0.4% was recorded by Professional scientific and technical services and Electricity, gas, water and waste services. Rises through the year in the Public sector ranged from 3.4% for Education and training to 1.5% for Professional scientific and technical services, the equal smallest through the year rise in this industry since the commencement of the Wage Price Index.

Australians Trading Fixed For Mobile Broadband

According to the latest OECD data, published today, whilst we are lagging behind other developed OECD countries in fixed broadband, we rank third in the world for wireless broadband behind Finland and Japan. Some Australians have more than one wireless service and mobile growth is significantly higher than fibre.

Using June 2014 data, Australia ranked 20 out of 34 OECD countries based on the number of fixed broadband connections for 100 inhabitants, behind nations including Switzerland, UK Korea, New Zealand and Japan. Total penetration was around 27 per cent. About 81 per cent of connections were via DSL, 15 per cent and 3 per cent fibre. Our fibre rates are lower than the 17% OECD average. Mobile broadband penetration has risen to 78.2% in the OECD area, making more than three wireless subscriptions for every four inhabitants, according to data for June 2014 released today.

Mobile broadband subscriptions in the 34-country area were up 11.9% from a year earlier to a total of 983 million, driven by growing use of smartphones and tablets.

Seven countries (Finland, Japan, Australia, Sweden, Denmark, Korea and the United States as ranked in descending order of mobile broadband subscriptions) lie above the 100% penetration threshold.

Fixed broadband subscriptions in the OECD area reached 344.6 million as of June 2014, up from 332 million in June 2013 and making an average penetration of 27.4%. Switzerland, the Netherlands and Denmark remained at the top of the table with 47.3%, 40.8% and 40.6% respectively.

DSL remains the prevalent technology, making up 51.5% of fixed broadband subscriptions, but it continues to be gradually replaced by fibre, now at 17% of subscriptions. Cable (31.4%) accounted for most of the remaining subscriptions.

Annual growth of above 100% in fibre take-up was achieved in OECD economies with low to average ratio of fibre to total fixed broadband levels such as New Zealand, Luxembourg, Chile and Spain. Japan and Korea remain the OECD leaders, with fibre making up 71.5% and 66.3% of fixed broadband connections.

Full details are available from the OECD Broadband portal.

What’s Up With Economic Growth?

What’s up with Economic growth? According to Andrew G Haldane, Chief Economist, Bank of England in a recent speech, since the financial crisis, global growth has under-performed. In the decade prior to it, advanced economy growth averaged 3% per year. In the period since, it has averaged just 1%. The world has grown fast, then slow. That has led some to fear “secular stagnation” – a lengthy period of sub-par growth. The self-same concerns were voiced at the time of the Great Depression in the 1930s. The economic jury is still out on whether recent rates of growth are a temporary post-crisis dip or a longer-lasting valley in our economic fortunes. Pessimists point to high levels of debt and inequality, worsening demographics and stagnating levels of educational attainment. Optimists appeal to a new industrial revolution in digital technology. Given its importance to living standards, this debate is one of the key issues of our time.

“Today’s great debate is where next for growth. The sunny uplands of innovation-led growth, as after the Industrial Revolution? Or the foggy lowlands of stagnant growth, as before it? Which of the secular forces – innovation versus stagnation – will dominate? And if growth is going back to the future, on which side of the Industrial Revolution will it land?

The balance of these arguments matters greatly for future well-being and public policy. Indeed, it is hard to think of anything that matters much more. More parochially, for central banks setting monetary policy one of the key judgements is the appropriate “neutral” level of interest rates. You can think of this as the interest rate that would align desired saving and investment over the medium term.

But what is the “neutral” level of interest rates today? Secular innovation might imply a level at or above its historical average of 2-3%, in line with historical growth rates. But secular stagnation may imply a level much lower than in the past, possibly even negative. In monetary policy, this is the difference between chalk and cheese, success and failure.

One interpretation is society having become significantly more patient, as in the lead up to the Industrial Revolution: higher global saving relative to investment would lower global real interest rates. If that is the cause, bring out the bunting. By lowering the cost, and raising the return to innovation, investment and growth would be stimulated. Falls in real rates would signal secular innovation. The optimists would have it.

But an alternative reading is possible. Low real rates may instead reflect a dearth of profitable investment opportunities relative to desired savings. If that is the cause, bring out the bodies. For this would imply low returns to innovation and low future growth. Falling real rates would instead signal secular stagnation. The pessimists would have it.

And looking ahead, it is possible that sociological headwind could strengthen. One of the causes of rising inequality in advanced economies is believed to be the loss of middle-skill jobs, at least relative to high and low-skill jobs. There has been a “hollowing out” in employment. Technological advance – the mechanisation of middle-skill tasks – is believed to have contributed importantly to these trends.

A second secular headwind, closely related to rising inequality, concerns human capital. Inequality may retard growth because it damps investment in education, in particular by poorer households. Studies show parental income is crucial in determining children’s educational performance. If inequality is generational and self-perpetuating, so too will be its impact on growth.

Growth is a gift. Yet contrary to popular perceptions, it has not always kept on giving. Despite centuries of experience, the raw ingredients of growth remain something of a mystery. As best we can tell historically, they have been a complex mix of the sociological and the technological, typically acting in harmony. All three of the industrial revolutions since 1750 bear these hallmarks.

Today, the growth picture is foggier. We have fear about secular stagnation at the same time as cheer about secular innovation. The technological tailwinds to growth are strong, but so too are the sociological headwinds. Buffeted by these cross-winds, future growth risks becoming suspended between the mundane and the miraculous.