Social Trends – Page 170 – Digital Finance Analytics (DFA) Blog

Foreign Commercial Property Investment Significant – RBA

In the RBA Bulletin there is an interesting analysis of foreign property investors in the commercial sector. The FIRB publish data on approvals for proposed foreign investment on an annual basis. The value of these approvals has increased substantially in recent years, from $11 billion in 2009/10 to nearly $35 billion in 2012/13

Foreigners have accounted for around one-quarter of the value of commercial property purchases in Australia since 2008, up from one-tenth in the previous 15 years. In the first half of 2014, they purchased nearly $5 billion worth of commercial property, about 40 per cent of the value of properties that were sold. Net purchases (which also account for sales) by foreigners amounted to $4 billion in the first half of 2014, close to its level for all of 2013.

The recent increase in foreign investment has been most pronounced in the market for office property. Foreigners’ purchases have accounted for around one-third of the value of turnover of office buildings since 2008, with purchases consistently exceeding the value of foreign sales.

Since 2008, foreign buyers have accounted for 40 per cent of the value of purchases in New South Wales, compared with 20 per cent of turnover in Victoria, Queensland and Western Australia. Foreigners’ preference for New South Wales reflects their strong appetite for office buildings in the Sydney CBD, which industry participants attribute to the greater liquidity of the market and the large amount of prime-grade office space.

Foreigners from many parts of the world have become more active in Australian commercial property markets, although much of the rise in net investment in the past few years reflects an increase in purchases by investors based in Asia and North America. Net investment from Europe has also increased, albeit by much less.

They conclude that the available data indicates that foreign investment in commercial property has increased in recent years, with foreigners having accounted for around one-quarter of the value of commercial property purchases in Australia since 2008. The higher demand for Australian buildings has been broad based across a range of institutions from Asia and North America, although sovereign wealth funds and pension funds have accounted for a greater share of foreign investment more recently. Foreign buyers have typically purchased existing buildings, enabling domestic firms to sell assets for higher prices, supporting their financial position and freeing up capital to be used on new developments. To date, foreigners have shown a preference for purchasing office buildings in New South Wales, but analysts expect foreigners to spread into other markets as they become more familiar with Australia. In any case, foreigners’ acquisitions have benefited developers operating in several states and sectors, and so the indirect effects on construction activity have not been constrained to the New South Wales office market.

Further High House Price Evidence – BIS

The BIS has published the latest data from their analysis of house prices across countries. “The BIS currently publishes more than 300 price series for 55 countries, among which it has selected one representative series for each country. For 18 countries, it also publishes series that span the period back to the early 1970s. House prices can serve as key indicators of financial stability risks, as property booms are often the source of vulnerabilities that lead to systemic crises.”

They show that in trend terms, after correcting for inflation and seasonality, Australian prices are relatively higher than other advanced countries. This is consisted with data from the IMF, Economist, and DFA’s own analysis. “Year-on-year residential property prices, deflated by CPI, rose by 9.5% in the United States and 6% in the United Kingdom. Real house prices also grew, by 7% in Canada, 7.7% in Australia and 2.2% in Switzerland, three countries that were less affected by the crisis, as well as in some countries that were severely affected by the crisis, such as Ireland (+7.2%) and Iceland (+6.4%)”.

They also show the relative benchmark between house price growth and price to rent. Here, overall average house price growth, after inflation, in Australia is close to zero over the last three years (because of averages across the states, the ABS shows how prices vary state by state), and Australia has high price to rent rations, but not the highest. This is because rents are more linked to interest rates and income growth than house prices directly.

Turning to their other measure, comparing house prices to income ratios (the measure we prefer as the best judge of house prices), we find that Australia is shown as the second highest, after Belgium, despite the close of zero growth in absolute prices, after inflation, in the past 3 years.

The codes for the various countries are listed below:

Their comments are important:

Work at the BIS has pointed to the early warning indicator properties of real estate prices. Leverage fuelled housing booms that turn into busts have so often been at the very heart of episodes of systemic distress. Historical experience has demonstrated that the interactions between rapidly growing house prices and excessive credit expansion are a tell-tale sign of the build-up of vulnerabilities in the household sector and the source of future losses for banks.

Strong Investment Lending In Latest Finance Data

In the final element of the monthly series, the ABS today released their lending data for July. The total value of owner occupied housing commitments excluding alterations and additions rose 0.3% in trend terms and the seasonally adjusted series was flat. The trend series for the value of total personal finance commitments rose 0.4%. Revolving credit commitments rose 0.8% and fixed lending commitments rose 0.1%. The seasonally adjusted series for the value of total personal finance commitments fell 1.3%.

Revolving credit commitments fell 4.7%, while fixed lending commitments rose 1.5%. The trend series for the value of total commercial finance commitments rose 2.7%. Revolving credit commitments rose 5.1% and fixed lending commitments rose 1.6%. The seasonally adjusted series for the value of total commercial finance commitments rose 3.7% in July 2014, following a rise of 11.8% in June 2014. Fixed lending commitments rose 20.7%, following a rise of 0.8% in the previous month. Revolving credit commitments fell 25.9%, after a rise of 37.7% in the previous month. Looking at the data in more detail, we see the concentration of lending by the banks (and mainly the big four).

Within the commercial category, lending for housing investment by individuals was a significant element. Here is the absolute dollar amount by states, with a trend line, showing the relative strength in lending for investment purposes in NSW in particular, then VIC. The investment lending boom is not uniformly spread across the country. Another way to look at the data is on a per capita basis across each state. This chart shows the average amount per capita between January 2011 and July 2014. The movement is NSW in particular since May 2013 highlights both the volume and size of the average loans for investment purposes in NSW, compared with the other states. It is also worth noting the differences between NSW and some of the other states, especially TAS and SA, and we see WA, NT and VIC roughly marching together, behind the rabid pace set by NSW.

Unemployment Better Thanks To Method Change?

The ABS published their August 2014 data today, and on the surface the data appears to rebound from last months seasonally adjusted 6.4% to 6.1%, whilst the seasonally adjusted participation rate rose from 64.9 to 65.2

However, we need to be careful because the ABS introduced a new questionnaire in July 2014, so we cannot be sure how much of the change is due to a data shift. You can read all about the changes here. According to the ABS, the number of unemployed persons decreased by 33,500 to 755,100 in August 2014 following an increase of 41,800 in July 2014 (seasonally adjusted). In trend terms the number of unemployed persons in August 2014 increased by 8,000 to 764,100 and the unemployment rate was 6.2%. Because of the unusually strong increase in employment estimates, the ABS has extensively checked the data.

The seasonally adjusted number of employed persons increased by 121,000 in August 2014 to 11,703,500 persons following a decrease of 4,100 persons in July 2014. The increase in August was driven by part-time employment. The employment to population ratio, which expresses the number of employed persons as a percentage of the civilian population aged 15 years and over, increased 0.6 percentage points to 61.3% (seasonally adjusted).

Unemployment amongst those aged 15-24 remains close to 15%

At a state level, the largest absolute decreases in seasonally adjusted unemployment were in South Australia (down 10,900 persons), New South Wales (down 5,400 persons) and Victoria (down 3,400 persons). The largest absolute increases in seasonally adjusted employment were in New South Wales (up 45,300 persons), Queensland (up 26,500 persons) and Victoria (up 26,100 persons). Tasmania had the largest increase in the seasonally adjusted participation rate (up 0.7 percentage points), followed by New South Wales (up 0.6 percentage points) and Queensland (up 0.5 percentage points). Seasonally adjusted estimates are not published for the territories.

Looking at the latest month, males in Tasmania are most likely to be out of work. Females in NT, least likely.

Finally, looking at underemployment by age ranges, younger people are seriously underutilised, and we see underutilisation in the over 55’s rising. The labour force underutilisation rate increased to 14.3% whilst seasonally adjusted estimated labour force undertuilisation rate increased 1.0 pts to 14.6%. The male labour force underutilisation rate increased 1.0 pts to 12.7%. The female labour force underutilisation rate increased 1.0 pts to 16.9%.

We will see if the data next month continues to reflect the revisions this time around.

Building Approvals To July 2014

The ABS published their Building Approvals Data to July 2014 today. Statistics of building work approved are compiled from, permits issued by local government authorities and other principal certifying authorities; contracts let or day labour work authorised by commonwealth, state, semi-government and local government authorities; and major building approvals in areas not subject to normal administrative approval e.g. building on remote mine sites. The scope of the collection comprises construction of new buildings; alterations and additions to existing buildings; approved non-structural renovation and refurbishment work; and approved installation of integral building fixtures.

The trend estimate for total dwellings approved fell 0.5% in July and has fallen for seven months. The seasonally adjusted estimate for total dwellings approved rose 2.5% in July following a fall of 3.8% in the previous month. The trend estimate for private sector houses approved fell 0.2% in July after being flat in the previous month. The seasonally adjusted estimate for private sector houses rose 1.4% in July following a fall of 1.0% in the previous month. NSW appears to be underrepresented given the relative population by states.

The trend estimate of the value of total building approved fell 0.2% in July and has fallen for seven months. The value of residential building rose 0.2% and has risen for two months. The value of non-residential building fell 0.8% and has fallen for eight months. The seasonally adjusted estimate of the value of total building approved fell 10.4% in July after rising for two months. The value of residential building rose 0.8% following a fall of 3.2% in the previous month. The value of non-residential building fell 26.5% after rising for two months.

The Chain Measures series, which reflect changes in the volume of building work approved after the direct effects of price changes have been eliminated. The ABS tell us that the chain volume measures are annually reweighted chain Laspeyres indexes referenced to current price values in a chosen reference year. We see a swing up in value for both houses and other residential buildings since July 2012, impacted by lower interest rates and higher demand. However, the absolute value, was relatively similar in March 2004, to July 2014 after correcting for inflation.

Depending of whether you go with the original data or seasonally adjusted data, you can argue that residential building approvals are either up, or down.

More Evidence That House Prices Are Too High

The Economist has just published its latest interactive house price comparison tool. It enables comparisons to be made across multiple countries, comparing absolute prices, real prices, rental ratios and prices against income. It is a powerful tool and highlights some interesting facts. One nice thing is you can select the range of dates also. Here are a few examples. First the trend in prices for selected countries. It shows Australia near the top of the list.

The trend since 2000 shows Australia clearly out in front amongst the countries I selected.

Turning to price relative to income, we see Australia again featuring near the top

Looking at the trends since 2000, we see how rentals are tracking. High, but not as high a house price movements suggesting perhaps linkages to interest rates and income growth?

But the most stunning chart in my view shows the change in values since 1975. We lead the way in Australia, leaving New Zealand, Canada and the UK in our wake. Also its worth noting the Japan story, no upward growth since 1975, that’s a different world.

Finally, in real terms, after correcting for inflation, Australia is way, way out in front looking at the long run from 1975. The trend since 2000 is not quite so stark.

We like the tool, and recommend it if you want further proof that Australian property on an international basis looks expensive, on nearly any measure you care to select. But there is a broader question to reflect on. What is driving sky high property prices in a number of countries, including New Zealand, Canada and UK? Could the ultra low interest rates and quantitative easing in Europe and US simply be the root cause, inflating stock prices and property prices? The mega-economic experiment we are in the midst of is a path never before trod. So the outcome is not certain.

Where Capital Growth In Property Lives

In the Opening Statement to House of Representatives Standing Committee on Economics today, Glenn Stevens made the following points:

not only are funding costs low, but banks want to lend and are competing to do so more actively than they have for some years;

net worth per household has risen by about $120,000 over the past two years;

the community’s monetary assets have risen by around 13 per cent – over $180 billion – over the same period;

It is worth reflecting on the fact the main reason for the increase in net worth is a bounce in the stock market, and lift in capital values of property, thanks to rising prices. After all real income is falling for many. In addition, the average hides the differences.

We have been looking at capital growth for the average household, across the states, and between the main urban centres and the rest of rest of the state. From our surveys we have been able to assess the relative growth in the value of property, over time, by marking property to market and comparing that with its purchase price. The chart below shows the relative growth in net capital value of property since 2004 (where our surveys start). It subtracts the original purchase price from the current value, to give a theoretical capital or wealth value. It shows that in the early 2000’s there was a similar level of growth in the cities and regional centres, but that more recently it has diverged. In the past 2 years, the average capital appreciation in the urban centres was $79,000, whereas in the regional centres, it was just $18,000.

However there are significant variations across the states. In Sydney, households in the past 2 years, have on average enjoyed a lift in net worth of more than $230,000 thanks to price hikes, whereas Brisbane, Adelaide, and regional areas in SA and TAS have not experienced much of an increase at all.

Looking at the longer term trends, across states, the situation gets even more interesting. Of course people have bought in at different times, but we can plot the overall capital growth trend. For example, In NSW, a household who bought in Sydney in 2004 and held the property would on average be nearly $300,000 better off now. If they had bought in early 2012, though they could have nearly earnt the same gain! All the action has been in the last couple of years, in Sydney itself. There have been a more gentle lift in regional NSW. Note that I have not corrected for inflation in any of the current calculations, if I did, the regional centres in NSW would have stood still.

In VIC, the situation is somewhat similar. It is worth noting that compared to NSW, the correction in 2009 was less severe.

Turning to QLD, there has been no capital growth in either Brisbane, or the regional centres since 2010. If you were to correct for inflation, it would be going backwards.

In WA, growth peaked in 2010 in Perth, with a further small peak recently, whilst in the regional centres, values are falling in real terms, before inflation. We compared Perth and Sydney recently, in more detail.

Looking at SA, growth in Adelaide is back to 2011 levels, but in the regional areas, growth is still lower than in 2010.

In TAS, since a peak in 2010, both Hobart and regional centres are flat, before inflation.

Finally, we look at the remaining states. Growth in Darwin has been sustained, whilst regional NT and Canberra are flatter since 2011.

So, my conclusion is simple, some households especially in Sydney and Melbourne, may be experiencing the wealth effect halo of smugness, but many households across other states and regional centres are not enjoying capital growth. Indeed, for many there has been a reduction in true value, before inflation since 2011. It is unlikely therefore that we will see a sudden surge of consumer spending activity in response to the housing boom (which is not uniform across the country as we have shown). It is really a Sydney and Melbourne boom. The RBA may be waiting for a long time if they are expecting households to start spending big.