SEQld demand v supply update

At its core real estate is about demand and supply.

When demand exceeds supply, then values often rise.  When supply is greater than demand, values either plateau or fall.

The degree of rise or fall often relates to the magnitude of the demand and supply imbalance.

I have included six charts this post – three covering the new housing market across south east Queensland and the second trio covering the resale or existing dwelling market.

In short, the new housing market, despite the recent fall in demand – i.e., very little net overseas migration during financial 2021 due to Covid restrictions – still remains undersupplied.

These three charts include my estimates for population growth during fiscal 2021.

The resale housing market is also undersupplied.  In this case demand is growing – that is, increasing sales – whilst the stock listed for sale is falling, and sharply in many cases.

This mismatch is very likely to keep the upward pressure on dwellings prices across south east Queensland for some time to come.

Australian economy

I left this post until the latest gross domestic product figures came out earlier today.

I don’t want to add to the economic growth noise.  Far from it.

I want to outline the broad indicators I like to look at when trying to work out what is really going on with our economy.

I have included five charts.

Five charts

The March quarter growth in GDP was a surprising 1.8% as many economists expected a 1.5% quarterly lift.

And whilst the Australia’s economy grew by just 1.1% over the past twelve months to March 2021, it is the fastest recovery from a recession in 45 years.

Tomorrow’s headlines will shout “Rebound” or similar, but that is really only half the story.

Chart 1 outlines Australia’s quarterly economic growth against a trend line of what the size of the economy would have been without Covid and our response to that virus.

This chart shows the real effect of Covid: it has left a massive hole in our economy and one that will be unlikely filled.  Of course, in addition we incurred a huge debt too.

The size of this economic hole is currently $104,000 million or the equivalent of six months’ worth of economic growth.  A simpler way to put it is that we lost $4,100 per person, so far, since the beginning of 2020.

And chart 1 shows that we haven’t plugged this hole yet.

Chart 2 shows me that new private expenditure remains lacklustre, and it has been this way for some time.  Australia’s economy, of late, has been largely driven by government spending.  Rising capex is needed to genuinely drive a capital economy.

Chart 3 tells me that public service is doing okay and that the private sector borne the brunt of the Covid ‘recession’.  A whilst things are improving on the private front, there is still a ways to go before many of us are back to working at full capacity.

Of course, the hours not worked over the last twelve months has the same negative impact on the community has suggested in chart 1.  No doubt government measures such as Job Keeper helped but they have gone now.

Chart 4 shows you what most of us know to be true; that there is stuff all wage growth.  And for mine it will take a lot more than falling unemployment to turn this trend around.

And finally chart 5 shows that we weren’t too confident last year, and many saved every cent they could.  We seem to have reopened our purse strings a bit and hence we are seeing a lift in retail consumption.  But many still remain hesitant and are still saving for a rainy day.  A smart move.

End comment

I must admit I am quite over all this economic growth stuff.  I typically don’t include GDP or other similar stuff in my reports or presentations.  I like to know what is happening with jobs, hours worked and rates of pay, but not the often-cited ‘cure all’ such as GDP or similar figures.

As I get older, I think that having a single overriding ‘economic’ health measure such as GDP is flawed.  New Zealand is leading the change – like many things it seems these days – and they have taken a more comprehensive stance measuring a range of indicators which they have called Living Standards Framework – to better judge their ‘economic’ wellbeing.

Another smart cookie is Kate Raworth who has written a great book called Doughnut Economics.  This work also outlines the need to have more comprehensive set of economic measures and much more sustainable growth-related economic goals.

Internal migration again

I knew that I would be writing about internal migration several times this year as I expected that there would be a lot of talk about Covid’s impact on domestic population movements.

Well, that talk is happening and much of it is noise.

So, please bear with me.  This is my third post about this stuff so far this year and to save you some pain this missive is somewhat short and sweet.

Well, I think they are all sweet!

Synopsis

If you believe the media one would think that we are witnessing a massive lift in internal migration.  But the official statistics show otherwise.

Last year – that is during calendar 2020 – some 354,000 people moved around the country.  As it should be expected, given the circumstances, this internal population movement was down from 396,000 during 2019.  But on average over the last decade some 365,000 moved internally around Australia each year.

And for those who like to quote the latest statistics rather than a trendline, there were 109,000 internal movements during the last three months of 2019 compared to 105,000 similar travels during the December quarter last year.

So last year – or the most recent quarter – wasn’t anything really special at all when it comes to overall internal migration volumes.

Yes, there were some winners and losers in the internal migration mix.

Table 1 shows that the winners were NSW and NT (with fewer people leaving the state) and in terms of positive migration Qld, SA, WA and the ACT were also winners.

The big loser was Victoria and, also to a much lesser extent, Tasmania (despite many commentators suggesting otherwise) as the Apple Isle also went backwards in terms of interior migration last year.  I might have had something to do with that!

It is also a yes when it comes to regions getting a higher share of the recent population count when compared to the recent past.

That regional population count was up 45% over the last twelve months, with a 19,000 net increase during 2019 versus 43,000 net lift last year.

Furthermore the 19,000 net regional increase made up for 5% of the total internal population change across Australia in 2019 and the recent 43,000 net rise accounted for 12% of the nation’s interior tally during 2020.

Yes, this is a big change, but as I outlined earlier this year one of the main reasons for this is that many young people living in regional Australia – and who would normally have done so – didn’t move to a capital city last year.

Population movement is a net result.  Regional arrivals have remained largely steady over recent years, whilst regional departures have fallen.  Hence there has been a lift in the regional population count between 2019 and 2020.

Also masking the real extent of any recent ‘regional’ population movement is the fact that the ABS includes many of the outer urban/suburban areas in our larger city conglomerations as being a ‘region’ rather than a part of that wider metropolis.

Think the Gold Coast, Sunshine Coast, Newcastle, Wollongong and Geelong for example.

In addition, table 2 shows that the has been little change in the age structure of internal migration across much of the country last year.

The only noticeable change – which ironically is in contrast to the recent front-page headline grabbing images of young couples with a bub having a brew in the provincial trendy café and waxing lyrical about living in a regional hub – is that a higher proportion of older people are moving to our regional centres.

The portion of young people moving to a regional centre is actually declining.  Again, revisit table 2.

Two tables

End note

And of course, actions speak louder than words.

If regional centres were seeing a massive influx of new residents and especially those of working age why is the likes of the Queensland government offering cash incentives for people to move and work in a regional town?

To visit my two earlier posts about internal migration, go here:

Internal migration

Snapback

I think I have given this topic a good shake and unless something contrary to my thesis jumps out in coming months, I will stay silent on this subject for a while.

House prices

We know that much of the housing market’s current heat is being driven by cheap money, easy finance and recent government incentives.

Owner residents and especially first home buyers have led the charge, with investors now joining the fray.

New construction has been the big winner and, in this space, detached houses are beating attached dwellings.

House prices have been rising, with median values lifting by 10% on average across the country over the last 12 months.

What we don’t know is will this price growth continue?  And if so, then by how much?

I am often asked these questions.

I use two charts to help explain the short-term future direction of house prices.

Two charts

Chart 1 shows the relationship between the annual change in housing finance (brought forward by six months) and the annual movement in house prices.  This chart suggests that house prices are likely to surge over the next six months.

Chart 2 really brings home the bacon.  If the past relationship between housing finance and house prices plays out over the next six months, then it is possible that Australian house prices could rise by 14% for the 2021 financial year and the annual increase could be as high as 25% for the year ending September 2021.

Again, if the past relationship between finance and prices remains true then Perth is likely to experience the most growth over the next six months.  In order of magnitude of growth, Adelaide, Melbourne, Sydney, Brisbane, Darwin, Hobart and Canberra follows.

End note

Without much wage growth and persistent local unemployment (and underemployment) one wonders how long this can last.  Also, one must ponder when APRA and the RBA will step up to the plate and slow this down.

Inflationary pressure – and ‘demand-pull inflation’ at that – is building and several preemptive strikes will be needed to bed it down.

But for mine this won’t happen this side of a federal election.

All things being equal the timing of the next national poll looks increasingly like October or November this year.

With house prices surging, vaccinations well under way by then (well we can hope), tax cuts delivered, summer in the air (but before bushfire season kicks off) and early to mid 2022 likely to be finalised as the date to reopen our borders, any sitting government would be stupid to waste such a pentafecta.

I could add further to this list as to why late 2021 is probable federal election time but Morrison’s Man Shakes would trump anything I might add.

If this plays out, then APRA and the RBA will start to rekindle some tough love in early 2022.

Despite weasel words to the contrary, the first lift in the RBA offical cash rate, I reckon, will be in the first half of 2022.  But the banks aren’t waiting for this cover and between now and that first lift they will continue to increase their mid-to-longer term mortgage rates.

Happy 53rd Birthday Scotty, enjoy the ride while it lasts.

Job vacancies

Apparently, there are some 290,000 job vacancies across Australia.

Chart 1 shows that the number of jobs available have skyrocketed since the middle of last year.

These days I spend one week in five away from my home office.  I have travelled to several states already this year and tripped interstate for seven weeks last year.  I am well over home lockdowns and the whole Covid palaver!

During those work-related travels and also in my master class sessions and during Q+A time after presentations, peeps often asked me what I think about the high and rising number of job vacancies and its misalignment with my general job thesis.

Chart 2 best illustrates my reply.

A quick summary

There is a mismatch between the work available and the potential local labour force.

This link has been fragile for some time and it looks like Covid’s impact has further strained any past connection.

In short too many unemployed (and underemployed) Australians are not suited or qualified to undertake many of the jobs available.

A retrenched airline host cannot become an electrician, plumber or carpenter unless they go to TAFE.  This takes time and money.

Most mid-aged or older accountants – or housing market analysts for that matter – are unable to work for long as a labourer on a construction site.  Most of us wouldn’t even get the chance to be paid to use our hands let alone pick up a tool.

Many who have been in work for some time – but now find themselves working less or worst still, retrenched – will discover that the employment application algorithm won’t like you very much when you apply for new work.  A human is increasingly unlikely to see your job application or CV.

And the amount of take-home pay one gets for picking fruit (or similar agricultural endeavours) or waiting on tables is really slave labour and the contractural agreements are something from the Book of Leviticus.

Two charts

Some comments

I believe that the world – well ‘the west’ at least – is facing a world with less work.

One of mankind’s future challenges will be what people will do with their time.

There has been a lot of serious conversation and many overseas trials regarding Universal Basic Income or UBI.  Yet this concept hasn’t had much debate in Australia.

Yes, there are issues to be resolved about what ‘universal’; ‘basic’ and ‘income’ actually means.  Yet for mine ‘income’ – being a capitalist mindset – is much better than ‘services’ which is a more socialist ideal.

Despite what detractors say, the world’s Covid spending largesse suggests that we can afford it.  The success of JobKeeper illustrates that the concept is likely to be very popular.  The implementation of UBI could help reshape Australia’s broken taxation system and remove most welfare payments.

Regardless if we implement something like UBI or not, Australia faces a growing number of citizens with less full-time work.  Many more Australians will remain underemployed.  Those that can find work are likely to see little wage growth.  A lot of people will have to work several jobs to help make ends meet.

For those that work for themselves, riskier ‘portfolio’ employment will dominate rather than being on a retainer.

These trends will have a big impact on the housing market, what type of homes will be in demand and where these digs will be needed the most.

End note

Of course the return of Big Australia and the visa slaves will fill a lot of these empty jobs.  Problem fixed many will say and especially those in industries increasingly reliant on growth for growth’s sake and those hooked on the easy fix.

The housing industry, these days, is near the top of that list.

The rise of the causal workforce should shoulder some of the blame, but too many employers don’t pay a decent wage, train their staff or have fair work contracts.

Those industries currently crying the most foul should take a good long look in the mirror.

For mine employing Australian citizens first should be a major pillar of government.

Affordable housing

There is little doubt that for many Australians housing is increasingly unaffordable.

Whilst interest rates are low and the lending criteria loose, getting the deposit together is a struggle.  Hence the big HomeBuilder uptake and the rise of the Bank of Mum and Dad.

In addition, state and territory first home buyer schemes – which are focused on new construction – has resulted in first timers being the largest buyer segment of new builds in recent years.

The New South Wales government’s decision to allow buyers to opt between paying stamp duty on purchase or paying a higher rate of land tax throughout their tenure is also an attempt to help reduce the initial cost of housing.

Those that cannot raise such support often rent.  Some also choose to rent rather than own.  Regardless of motivation, many tenants also face accommodation stress.

To help make ends meet a lot of tenants now live in group households.

Many are also returning to live with family or friends.  Those returning include both the young and old.  Multigenerational living is on the rise.

In additional an increasingly number of people are moving to where housing is cheaper.  This shift is now across many demographic segments, yet there has been a marked increase in the baby boomer cohort.

Sadly, too many are living without permanent shelter.  This has also increased markedly in recent years too.

Three charts

Despite the rapid fall in the cost of money and record low interest rates, one of the reasons why housing has become unaffordable is that the average mortgage and housing prices have risen much more than wages and inflation over the past decade.  See chart 1.

Over the medium to long term wage growth is one of the strongest causations of sustainable property price escalation.

Whilst there are many other reasons why people move to a new area – with work being a major one – affordable housing is progressively pulling residents from Sydney, Melbourne, and to some degree Canberra, to other Australian capitals and their surrounding urban areas.

Chart 2 shows that Brisbane (and much of the rest of Queensland) is an affordable alternative to many other major urban areas across Australia.

Chart 3 shows that there is a strong connection between high housing costs in Sydney (for example) and positive net interstate migration to Queensland.

Chart 3 suggests that an elevated number of people from Sydney and Melbourne are likely to continue to move north – and to some degree west and south across Bass Strait – for the next couple of years at least.

End note

My main comment with regards to the current interstate movement is that it is often better to be pull towards a new destination rather than be pushed out of the place you are leaving.

Relative poverty isn’t always nicer in a different climate.  New scenery doesn’t help pay the bills.

Attracting an older demographic – over a younger and more energic group – often doesn’t help invigorate a local economy.

A cynic might say it is like importing holes in one’s bucket.

HomeBuilder

The federal government advised last week that over 121,000 people had applied for grants under its $2.5 billion HomeBuilder scheme, which closed at the end of March.

It is estimated that around 80% or just under 100,000 of these grants we issued for new builds.

The government has now given builders until 30th September 2022 to commence work on dwellings contracted under the scheme, with the deadline having previously been 30 September 2021.

My comments

For mine HomeBuilder was a very successful incentive.  It helped the building industry immensely.  The time extension is a wise move, but the scheme shouldn’t be reinstated given the current economic conditions and outlook.

The scheme has brought land sales and building activity forward during a period of falling underlying demand.

We are very likely to see an oversupply of new housing stock over the next couple of years.  This will even be the case when we see immigration return to Australia.  This oversupply could be significant if immigration is delayed or is returned at lower numbers than the recent past.

Trades and materials are now in short supply.  The official statistics suggest that cost of building labour and materials hasn’t yet increased, but anecdotal evidence suggests that we are likely to see a surge in building costs this year and maybe next year too.

Three charts

I have included three charts in this post.

Chart 1 shows the past and current interplay between underlying housing demand and new housing supply.

Chat 2 is a new housing demand versus new supply forecast.  It assumes a return to immigration to a similar level as the recent past starting in calendar 2022.

Chart 3 shows the annual change in total building costs (for single and double storey dwellings) versus CPI inflation.  I think we will see a surge in building costs over the next 12 months similar to what saw in 2012.  The high-rise apartment construction boom drove up building prices in 2012.  This time it is detached housing.

Bust?

I am showing my age but when I read about rapidly rising house prices, I ­think here we go again, more BS about a housing bubble.

In recent months house price rises have paralleled those that occurred in the late 1980s – the monthly rise of 2.8% in March was the strongest jump in house prices we have seen since October 1988 – and there are suggestions that house prices could rise by as much as 20% this year alone.

Whilst periods of rapid house price escalation essentially come down to the forces of supply and demand – albeit with varying quantities of exuberance – the precise details of these housing booms are not the same.

Past booms

In the late 1980s a credit boom helped lift housing demand.  Also, at that time, high and rising inflation – despite very high mortgage rates – helped reduced the real cost of mortgages, further lifting demand.  New housing supply was also tight.

In the late 1990s/early 2000s the mining boom and strong investor demand drove up prices.  Many regional towns overshot.  The changes made to the capital gains tax regime (and the introduction of FHOG) at the time poured petrol onto the fire.

In the mid-to late 2010s, overseas immigration was an important driver of rising house prices, particularly investment by residents born in China.  Favourable changes to FIRB rules plus numerous interest rate falls helped create a housing boom.  Again, investors drove demand and apartment construction soared.

The current boom

The current boom is somewhat different as owner residents, especially first home buyers, not investors are driving demand.

Monies that usually would have been spent on going out and travel, especially overseas trips, has now been focused on the home.  Given owner occupiers are the driving force, demand is strongest for detached houses and smaller infill products rather than high rise apartments.

The most recent stats suggest that owner-occupier loans made up more than three-quarters of all home loans approved.  There were more than 16,000 first-home buyer loans approved in February this year compared to about 7,000 during the same month 5 years ago.

First-home buyers have been assisted by various federal and state government initiatives plus the Bank of Mum and Dad.  Home-owning parents are helping their kids bridge deposit gaps.  It is ­estimated that the average value of such gifts/loans is now close to $90,000.

Covid also saw the implementation of the HomeBuilder incentive which – despite low population growth – brought forward the demand for new builds whilst exhausting new land supply.

Covid related travel restrictions has also placed a brake on the amount of resale stock usually on offer, with national listings currently down 17% on this time last year.

State of play

An increase in supply and/or a reduction in demand does mitigate price growth.

Some are now calling that house prices fall next year with the most common denominator being an increase in supply.

According to UBS some 40% of JobKeeper recipients own a home and their recent survey suggests that 70% these homeowners plan to sell their home in the next 12 months.  If this happens it would double the number of homes for sale which would take some heat out of the housing market.

Demand could also be cooled by tightening lending criteria or rising costs.

However, housing markets aren’t uniform because people have strong preferences about where they want to live and/or what type of home they want to live in.  Many desirable areas are effectively built out, short of the intrusion of high-rise and in-fill developments to which many residents object.  Many still prize detached housing over an attached dwelling. Releasing more land in the outer burbs doesn’t really affect the price of homes in the inner or middle-ring suburbs.  More downtown apartments rarely results in nearby house values falling.

In addition, once house prices have risen, there’s a serious policy dilemma for governments.  For those in the market, particularly recent purchasers, there’s a lot riding on prices not falling.  Plus, there are more home owners than ­potential purchasers or renters.

For this reason, neither the federal nor state governments are likely to introduce any policies, such as new housing taxes, that could push prices (or rents) down significantly.  This is especially the case in the lead up to a federal election.

For mine, New Zealand’s raft of new taxes on investors won’t be repeated here and they are likely to be withdrawn there soon too.  Paul Keating (late 1980s) Mark 2.

Moreover, I believe that the Australian government will lift housing demand as soon as possible by resuming immigration and its initial return is likely to be higher than recent intakes.

Past busts?

So, what actually happened back in 1988?

House prices rose by about 12% and then they rose by close to 24% in 1989, bringing the cumulative lift to more than 35% in two years.

And between 1990 and 1991 prices fell by around 10%, then they did stuff all for much of the 1990s.

The chart below suggests than past busts have really been slumps. 

For now, all signals suggest that national residential property prices are likely to keep rising for the rest of this year.

Forecasting further out is harder, except to say the longer the current exuberance is allowed to continue, the more likely we will see house prices fall next year.

More pertinently I believe that once this current boom runs its course, we are likely to see a long period of price stagnation.  I am thinking a decade not years.

Wage growth

Much is said about wage growth and the expectation that it will increase once unemployment falls.

Many dismal scientists have been claiming a return to half decent wage growth for yonks, yet it remains lost, allusive at best.

I have been writing for some time that wage growth is likely to remain low and many of the new jobs created are likely to be lower paying ones.

The fact that Uber is now Australia’s top employer – behind Coles and Woolworths – speaks volumes.

Also, the regions are likely to see more lower paying jobs in the future than the capital cities.

The reason for less wage growth is that unemployment remains persistently high and so does underemployment.  The underemployed want to work more hours.

The ABS measurements here are next to worthless.  Roy Morgan’s regular surveys paint a more realistic picture.

At present annual wage growth is higher than CPI.  Actually, it has been like that for some time.

Yet for many – most really – it doesn’t feel like we are getting ahead.  That is because many non-discretionary items are increasing in cost – think petrol, insurance, school supplies and fees, rates and utility bills – whilst many discretionary things such as cars, electrical goods, holidays for example are often getting cheaper.

And Lord help you if you enjoy a brew or two or pull on a durry.

So, wage growth, for mine, is very likely to remain lacklustre.  There are opportunities in this predicament .  My master class sessions outline what they are and how best to implement them.

Two charts and a table follow and these help support my thesis.

Table 1: Past + forecast wage growth by income level across Australia