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

Easter 2021 Reading + Listening

Twice a year – at Easter and Christmas – I share a list of books which I think are worth reading/listening to plus some music that I have recently enjoyed.

I am from the mixed tape era, so my musical tastes are what my adult children, call ‘old fart tunes’.  So often I am sharing a musical back catalogue rather than something or someone new.

Anyway, here are my Easter 2021 suggestions.  Back to normal programming next week.

Interest rates

Three charts this week.

Some comments

Chart 1 shows that falling interest rates do help instigate house price growth.  And as one might expect, rising interest rates halt price growth.  Also, of interest (pun intended) the cash rate has fallen from 17.5% to 0.10% since the start and end of this chart!

Chart 2 is the yield curve, which shows the difference between the cost of long term and short term money.  It is a good predictor of the future direction of interest rates.  The chart suggests that interest rates are likely to rise.

Chart 3 outlines Australia’s annual change in CPI inflation by quarter.  The overall trend is down.  And if you compare chart 2 with chart 3 – other than a period in the mid-2000s – you will find that a rising yield curve is inflationary.

My synopsis

The macroprudential regulations are very loose at present.  This coupled with record low interest rates plus HomeBuilder, are the reasons for the housing market’s current heat.

I expect that the financial rules will be tightened soon, followed by interest rate rises.  Several banks are already starting to lift their medium term rates.

A short period of inflation is very likely.  It is unlikely to coincide with meaningful wage growth.  The RBA may have to increase the cash rate, maybe several times and before 2024.

The timing of such things is increasingly political.  No financial austerity is likely to be applied until after a federal election.  If it was just up to the economic tea leaves, we would probably be going to the federal polls this calendar year and my call would be in early to mid-October.  But other parliamentary pressures most likely mean that the Liberal Party will run its full term.

How well APRA and the RBA manage the current housing market’s heat over the next 12 months will determine if we have a boom/bust or boom/slump property cycle.

And for mine the longer we delay the financial stick the more certain a boom/bust cycle becomes.

Snapback

I have posted several missives in recent months about regional population growth.

These communiques claimed that the move from the capital cities to regional locales due to Covid-19 is a short-term occurrence and are even overstated when you have a closer look.

It seems that others share that view too, with some calling the current trend a “sugar hit to the regions”.

A colleague has also suggested that the real reason why the regions have seen an increase in net internal migration over the last 12 months is because people who would normally have moved to the capital cities are (for now) staying put.

Interesting.  And the ABS statistics suggest that this is true.

Net internal migration to the regions (as defined by the ABS as those areas outside of their definitions for the capital cities) was 36,500 last year, which was up 14,000 or 62% on the year before.

Yet net migration is worked out by comparing those that move into an area against those that leave the same place during the same time frame.

Charts 1 and 2 below outline what is really happening across regional Australia.

Chart 1 shows a few things.

Firstly, that the overall level of arrivals to, and departures from, regional Australia has fallen over the last 12 months.  This is because there are very few overseas migrants arriving in Australia at present.  This impacts both the capital cities and regional Australia.

Secondly it shows that there has been little change in the number of people moving from the capital cities to the regions, whilst there has been a big increase in the number of regional residents who haven’t moved to the bigger smokes.

Chart 2 shows that this trend increased during 2020 as certain Australian States implemented increasingly draconian covid-related lockdowns and other restrictions.

End note

Some 70% of Australians live in the six main cities.

I think that is will not change because of the pandemic.

In short, the capital cities are where the majority of the jobs and services that people want are located.

Many regional residents have put their move to the capital cities on hold last year, and as a result, I believe we will see a big snapback to positive net migration to the capitals (and their surrounding conurbations) once the covid vaccines roll out and travel-related restrictions cease.

Unless major monies are spent on regional infrastructure and this quantum rivals the amounts being spent in the capitals, any population movement to regional Australia will be modest at best.

And the decision makers must think that too.

Ask yourself, if we were truly going to see a regional resurgence, then why is almost all the existing, and proposed, infrastructure projects focused on the major capitals and mainly in the inner city areas within those cities.

Regional Australia will remain exactly that, provincial at best.

Price growth

Westpac has joined the growing ranks predicting big increases in dwelling values.

Westpac call is that dwelling values are expected to lift by 20% over the next two years (calendar 2021 and 2020) with annual growth split somewhat evenly between the next two years.

We stated last year that 2021 looked like it is shaping up to be a sweet spot for residential property.

Short-term outlook

Over the short-term dwelling values are influenced by the balance between supply and demand.

Low interest rates – with the RBA repeating that they will stay at their current ultra-low official setting over the next couple of years – and recently relaxed home loan assessment criteria have helped lift demand.

This was best illustrated to me by a recent email from a colleague.

“We spent some time yesterday with a mortgage broker and asked him why he thought the market was so hot.  He summarised it as follows:

  • A heap of the banks withdrew finance to weak clients when covid hit.
  • People who withdrew super mid last year to use it as their ‘deposit’ couldn’t as it wasn’t seen as genuine savings.  But the banks now accept it – with some low level caveats – as part of a home loan down payment.
  • In addition, the credit assessment criteria have been dramatically reduced and this lessens even further from 31st March.
  • The banks used to use a 7% to 8% interest rate setting to assess borrower’s serviceability up until mid-last year.  Now they use the actual borrowing rate plus a 2% buffer, therefore for most new borrowers it is now set between 4% and 5%.

A household’s income needs now to only be $70,000 pa compared to $110,000 pa to afford a $450,000 house.

In addition, JobKeeper has also helped stop a fall in demand, whilst HomeBuilder has brought demand forward.

Some 90,000 Australians have received the $15,000 to $25,000 HomeBuilder subsidy to buy, build or renovated a home since March last year.

On the flipside – influenced considerably by covid restrictions – supply is tight.

For example, house sales across the Brisbane region have increased by 4% over the last 12 months, but the supply of houses for sale across the same area have dropped by 16% over the same time period.

And as recently discussed, investment dwelling additions have been falling over recent years, resulting in declining rental vacancy rates.  For now.

The media echo chamber has added further demand momentum, headlining positive property media releases, in part to help boost reader traffic to their real estate digital advertising portals.

As a result, buyers are clamouring to get into the market, evident by recent weekend auction clearance rates of over 90%.

This might be good news for those households that own their home, either outright or with a mortgage.  However, it may not be so good for those trying to get into the housing market.

It also has a negative impact on ‘change-over’ owner-resident households and in particular those looking to downsize.  It is much harder to buy and sell, well, in a rising market than in a market which is flat or even falling.

Medium to long term outlook

But for mine this sweet spot won’t last.

Yes, the circumstances seem to be aligning well for 2021 and although interest rates are likely to remain low by historical comparison – however, I do think they will rise and sooner than many think – there are other factors that might cause people to wonder if dwelling prices are likely to rise as much as has been forecast.

These factors include:

  • persistent high unemployment and underemployment, which according to Roy Morgan – best Aussie poll on these statistics – is a combined 21.7%!
  • the collapse of immigration, the guesswork restart date and ongoing debate about the level of future intakes,
  • a pending plunge in the birth rate as people generally don’t have kids when their confidence is low and financial future is uncertain,
  • potential overbuilding (due mostly to HomeBuilder),
  • likely increases in dwellings listed for sale as people often put their home on the market when they think they will get a high price and a quick sale,
  • rising costs, including a lift in the mandatory superannuation contribution to 10% in July this year, and
  • limited wage growth.

This is not the recipe for a price boom.

And taking the long view, limited wage growth is the big brake on substantiable dwelling price growth.

There is a close, long-term relationship – causation not correlation – between wage growth and dwelling value increases in Australia.

Chart 1 shows that wage growth downunder is a long way from supporting dwelling price growth.

Furthermore, table 1 outlines what Westpac’s current price forecasts actually look like when it comes to increases in median dwelling values.

I cannot see how future first home buyers will be able to service such high dwellings prices given low wage growth.  Borrowing the difference only has a limited shelf life.

End note

The share of 25 to 34 year olds who own their home (or have a mortgage) has fallen from 61% in the early-1980s to be closer to 39% these days.

Our ratio of dwelling prices to household income was one of the highest in the world.  That was when the ratio was around 4.

But the recent lending criteria has lifted this ratio to 6.5 on new home loans.  That makes it a world beater.

And if this headline figure persists, it has housing bust written all over it.

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