The Australian housing market has shown some important differences to the US cycle. Although our combined capital cities index doesn’t extend back as far historically as the US index, it can be seen from the above trend lines that the Australian housing market showed a fairly similar rate of growth over the late 90’s, albeit with some movement, prior to 2001.  The ‘boom’ in Australian values between 2001 and 2003 far exceeded the rate of the growth being recorded in the US, however the corresponding cycle post 2003 was much weaker than what was recorded across the US market, with Australian values recording virtually no growth over the next two years.

Both the US and Australian housing markets are now on a recovery path, however once again there is a significant difference in the rate of growth being recorded.  In the US, based on the CoreLogic House Price Index (HPI), the market bottomed out in February last year and since that time prices have increased by 10.5% (an annual growth rate of 11.0%).

The rate of recovery across the Australian housing marked has been more measured.  The local market bottomed out at the end of May last year, with values recording a 4.2% increase between the market trough and the end of April 2013 (an annual growth rate that equates to 4.5% per annum).

US house prices have now been increasing for 13 straight months.  It’s worth delving a little bit deeper in the US housing market data to see what is driving the recent substantial upwards movement in home prices.   Some of the reasons CoreLogic points to are:

• The US economy is getting close to its fourth year of expansion.   The US economy grew by 2.5% over the first quarter of 2013, largely fuelled by residential investment (ie dwelling construction) which was up 14% over the second half of 2012.
• The strongest recovery trends are being recorded in those areas that have either recorded a more significant correction in dwelling values or a high level of new housing construction.  The graph below is taken directly from CoreLogic’s recent ‘The Market Pulse’ newsletter (anyone who is interested in the US housing marked should subscribe… it’s free and packed with the best housing market analysis available in the US), the Census Divisions that have recorded some of the largest losses are now showing some of the largest price bounces. 

• The number of mortgages in delinquency (mortgages that are more than 90 days in arrears) are drying up.  According to CoreLogic the number of delinquent mortgages has fallen by a third since arrears peaked back in January 2010.
• Distressed sales, as a proportion of all sales, have improved over the past couple of years which is also helping to improve housing market conditions.  CoreLogic estimate that 22% of all sales in March were distressed, which is still very high, but better than the 26% being recorded a few years ago.
• Buyer demand is increasing also, with the number of dwelling sales 9% higher in March compared with the same time last year.  Importantly, REO sales (real estate owned (REO) properties are dwellings that are owned by a financial institution which they have acquired after an unsuccessful short sale or foreclosure auction) were 24% lower compared with a year ago and short sales (ie where a home is sold for less than the mortgage amount on the property) were 28% higher than a year ago, which suggests that both owners and banks are more willing to accept a loss on the property in order to move on.

Overall, the housing market in the US is recovering at a significantly faster pace than what we are experiencing here in Australia.  Keeping in mind though that we still need to see US prices increase by a further 26.5% before the market broadly returns to the pre-crash peak. The US dynamic is quite different to what we have here in Australia and many of terms used in the US are foreign to our market due to the differences in our financial systems, regulations and availability of data.  The Australian market recovery is more measured and consumers largely remain cautious and conservative, a fact which is reflected in the most recent consumer sentiment date released by Westpac and the Melbourne Institute.

From the budget paper:

Just as the resources boom will transition from its investment phase to the production phase over the next two years, the broader Australian economy is also expected to begin its transition to non-resources drivers of growth. Growth in the non-resources parts of the economy is expected to be underpinned by solid growth in household consumption, a recovery in the housing sector and a modest recovery in business investment outside the resources sector. While this transition may not be seamless, Australia starts from a position of strength and resilience.

…

There are also early signs of a recovery in the housing sector. In the December quarter National Accounts, dwelling investment recorded its second consecutive quarter of positive growth, growing at its strongest quarterly rate in over two years. After a decade of lacklustre growth in housing construction, conditions are favourable for a sustained recovery. Low interest rates, favourable demographics, low vacancy rates, rising house prices and high rental yields are all expected to support demand in the housing construction sector over the forecast period.

Industry groups were seeking guidance or support around incentivising prospective buyers, reforms relating to infrastructure charges to encourage more development, and support for training and jobs for housing construction and related industries.  None of these issues were addressed.  There was no guidance on population growth targets either, which has featured in earlier budgets.

The themes that were very relevant for the housing market were:

Pensioners who have owned their family home for at least 25 years can now sell their home and direct the proceeds of the sale into a special banking account that is exempt from pension means testing.  The dollar amount of the deposit is capped at $200,000 and the means testing exemption expires after ten years.  The other string attached to this pilot policy is that the home owner must be downsizing to what the budget describes as a ‘retirement village or granny flat’ (those people downsizing into aged care accommodation aren’t eligible for the pilot) .  Both of these terms are open to interpretation, so clearly before the pilot kicks off in July 2014 there will need to be a lot more clarity around what a retirement village or granny flat is.  The other point of little clarity was around the tenure of ownership.  This policy states that the home must have been owned for at least 25 years.  Based on sales over the past twelve months, less than 5% of all dwellings that transacted were owned for 20 years or more (I don’t have the 25 years or more figure at hand… but it is likely to quite a bit lower than 5%).  Most home owners hold their home for about 7-9 years before selling – either for upgrading or moving for work reasons.  The lifecycle of property ownership suggests there aren’t going to be a large number of home owners who have held the same home for 25 years or more which suggests to me this pilot may be a bit of a dud unless there are some tweaks or clarifications to the rules.

Non Residents buying Australian property with a price tag of more than $2.5 million will be required to pay a 10% withholding tax.  The new tax for non-resident buyers aims to insure the risk of capital gains flight.  Basically, the Government is collecting a bond from the purchaser at the time of sale in case they ‘forget’ to pay capital gains tax when they ultimately sell.  The new tax essentially makes premium properties ten percent more expensive for foreign buyers, however considering the new tax only applies to properties worth more than $2.5m, the effect will be confined to the premium sector of the housing market.  It may be enough to put off some foreign buyers, however it is likely many will simply comply with the new tax as another cost of purchase.

There is a BIG infrastructure spend in the budget that is particularly relevant to areas of Queensland and Melbourne.   Infrastructure spending typically has a very positive effect on local property markets that directly or indirectly benefit from the new infrastructure.  An additional $24 billion in infrastructure spending through to 2018/19 was announced within the budget as part of the Nation Building Program.  The key projects to receive federal funding were:

• $4.1 billion is devoted to upgrading the Bruce Highway along Queensland’s eastern seaboard
• $3 billion is being dedicated to the Melbourne Metro Rail program
• $1.8 billion is being provided for Sydney’s M4 and M5 extensions
• $715 million is provided for Brisbane’s Cross River Rail project
• $500 million for the Midland Highway in Tasmania
• $448 million for the South Road upgrade in Adelaide
• $418 million for the Swan Valley Bypass in Western Australia
• $400 million is dedicated to Sydney’s F3 to M2 connector project

The string that is attached to the funding pledge was that State Governments need to match the Federal spend and form alliances with the private sector to deliver the projects.  Considering the limited capacity of most state budgets, matching the proposed spend might be one of the biggest challenges in seeing this funding come to fruition.

The Budget announcement, as it relates to the housing market, is pretty much steady as she goes.  The housing market recovery this time around is much more organic than what we saw in 2009 and 2010 (more free from Government stimulus) which is arguably a healthy state of affairs.

A lot of faith is being placed on the housing sector and to date there has been firm evidence that buyers are returning to the market and values are starting along a recovery path.  What is not as evident is how the construction sector is going to respond.  Dwelling approvals are up almost 4% over the year but the month-to-month data has been volatile and overall growth could be described as sluggish at best.  One thing that is looking quite certain is if we are to see a sustained improvement in housing investment a low interest rate environment is likely to be a necessity.  Low rates are here to stay for the foreseeable future.

The data indicates that 14.3% of individuals that lodged a tax return owned investment properties while a greater 19.2% of individuals that reported a taxable income owned investment properties.  This indicates that despite the fact 1,811,174 individuals own investment properties, the vast majority of Australians don’t invest in residential property.

Of the 1,811,174 individuals that reported to the ATO as having an investment property, 1,213,595 of these individuals, or two out of every three investors, were recording a loss on their rental income.  The total value of these losses over the year was $13.285 billion.  Obviously negative gearing of investment properties allows owners to claim a tax deduction on these costs.  The average annual loss for these property investors with negatively geared properties was $10,947 or $210.50/week.

There were 597,577 individuals that made a profit from their investment property in 2010/11.  The total value of this income was $5.423 billion.  These investors have no losses to claim a tax deduction on and would have to pay tax on their investment property; of course they would have more money in their hand each week as a result of the positive gearing.  The average annual profit earned from these positively geared investment properties was $9,075 or $174.50/week.

The data shows that on average, the losses made on investment properties that are negatively geared are larger than the profit on the positively geared propertied.  What negatively geared investors sometimes lose sight of is the fact that a loss is a loss.  What I mean is that although the loss is tax deductible at the end of the financial year they have to carry the cost of that loss throughout the year at a sometimes significant cost.  For some it would undoubtedly be preferential to have that extra money on hand throughout the year rather than getting a larger tax return at the end of the financial year.

The $13.285 billion in rental losses over the 2010/11 financial year was 24.7% higher than the 2009/10 financial year however, it remains -0.2% lower than the historic high value of losses recorded over the 2007/08 financial year.  The number of negatively geared property investors rose by 4.8% over the year however, the number of investors was also below the historic high of 2007/08 by -1.8%.

According to the ATO data, 72.8% of individuals that owned an investment property owned just one.  Meanwhile, 18.9% of individuals owned 2 properties while just 0.9% of individuals owned 6 or more.

No doubt the total value of the losses and the proportion of total investors claiming a loss on their property are quite alarming.  From an investment perspective you’d assume that it is generally preferential to make a profit than it is to carry a loss for 12 months of the year.  Where negative gearing works is when it reduces an individual’s taxable income to such an extent that there is a greater financial windfall from claiming that loss than there would be if that property made a profit.  Of course investors using a negative gearing strategy also expect the value of their asset to rise, offsetting the shortfall. These benefits are usually more likely to accrue to those earning higher incomes and this is where you have to wonder if many investors really are benefiting from the negative gearing of their investment properties.

The ATO data indicates that 72.3% of individuals with a loss making investment property have a taxable income of less than $80,000 a year, with 32.3% having a taxable income of less than $37,000 per year.  The total value of the losses for individuals earning less than $80,000 equated to $9,756.25 a year or $187.62 per week.  Assuming that they all had a taxable income of $40,000 per year, which represents the middle of the range, the $9,756.25 annually is 24.4% of their annual taxable income.  That is a significant proportion of their taxable income and a significant cost to the individual throughout the year just to secure a tax deduction at the end of the year.  If we assume the average income earner that has a taxable income of $51,342 owns an investment property, that investment property is costing them 21.3% of their taxable income throughout the year.

There have been many calls for negative gearing to be removed from residential property however, I believe it is extremely unlikely that either side of politics is likely to go down that path.  Negative gearing of residential property saw the ATO forego $13.285 billion in taxation revenue over the 2010/11 financial year.  What it did allow for, because it is so ingrained in the psyche of those who invest in property, is for private residents to cater to demand for rental properties from those residents that don’t own their own home.  It is clear that the provision of rental accommodation is not a burden that Governments wish to bear however, one has to wonder if foregoing more than $13 billion in tax revenue is a cost that the federal Government can afford to give up.

The data also shows that many lower income earners are investing in negatively geared properties, perhaps many are doing so without understanding what, if any, the true benefits are.  The goal of investment should ultimately be to make a profit not a loss and with capital gains in housing much slower over the past five years and this trend anticipated to continue perhaps some investors should re-assess whether their current negative gearing strategy is truly working for them.

The Shire of Bruce Rock and its townsite are situated in the heart of the Wheatbelt, 254km east of Perth.  It has a population of approximately 700 people, with 1200 people in the shire.  Bruce Rock ‘leads the way’ to open spaces and an agricultural experience to be enjoyed by all.  We welcome visitors to enjoy the picturesque main street, gardens, amphitheatre and sculpture park, historic buildings, museums, federation style verandahs and great facilities.

Unfortunately, it’s also one of two council’s recording the fastest rate of population decline over the past year.  According to the recently released regional population statistics from the Australian Bureau of Statistics, the population of Bruce Rock fell by 2.7% over the year to June 2012.  In raw number terms that equated to a loss of only 27 people; but when you have a population of less than 1,000 people to begin with, I’m guessing you would want to retain as many people as possible.

The council region of Hay, located in the Riverina region of NSW, also recorded a decline of 2.7% in population over the year to June 2012.  Hay is quite a bit larger than Bruce Rock with an estimated residential population of 3,013 residents (that’s taking into account the 84 fewer people over the year).  Hay Shire is noted as being one of the flattest places on earth.  More importantly, the region is part of one of the most important agricultural centres in the country.

Looking across the council regions that have recorded the most significant rate of population decline it shouldn’t come as a surprise that they are generally rural locations and more often than not, they have an economy centred around agriculture with tourism often cited as a secondary industry.

I suspect the challenge for these regional communities is retaining the younger cohorts of the population.  A quick look at the Census data for the top five council regions based on the largest percentage fall in population shows an average age which is considerably higher than the national average which supports this notion. There has been plenty of research done on the regional population drain across Australia which a Google search will uncover.

As an aside, I thought this article from Computerworld titled ‘NBN to stop the rural brain drain’ was quite an interesting perspective on one of the benefits of how high speed internet access may help to sustain populations across regional communities.

Looking at areas where population growth has been the fastest, the regions tend to be across the outskirts of the capital cities and to a lesser extent the inner city areas where densification is driving population growth.  The fastest growing council region in the country is the Shire of Serpentine-Jarrahdale located on the outer southern fringe of the Perth metro area.  In fact, thirteen of the top 20 fastest growing council regions are located in Western Australia.

From a wider perspective, comparing the capital cities and regional areas across the country, the four largest capital cities (Melbourne, Perth, Sydney and Brisbane) are recording the vast majority of Australia’s population.  In fact, 69% of the national population growth over the year to June 2012 was centred within these four cities.

In percentage terms, the Greater Perth region is punching well above its weight, recording population growth of 3.6% over the year to June 2012.  The other regions recording a rapid rate of population growth are the regional areas of Western Australia, Darwin and Brisbane where the growth rate is higher than 2%.

Just like a declining population poses challenges, so too does a rapidly growing one.  Delivering sufficient infrastructure is always the pain point for regions where population growth is strong.  Pressure for new roads, bridges, public transport, schools and hospitals are high on the agenda in any of these regions and State and Local Governments are constantly challenged to deliver what is required.

If you’re interested in what is happening with population growth trends, I’ve put together a series of thematic maps based on SA2 boundareis that highlight where population growth is occurring and where are the areas experiencing a population drain.

The RBA prefers to look at measures of underlying or ‘core’ inflation which strip out some of the more volatile measures such as some agricultural products and fuel prices.  Underlying inflation is measured via the trimmed median or weighted mean CPI measures.  Over the quarter, both measures were slightly stronger than headline inflation, recorded at 0.6% and 0.5% respectively.

Over the 12 months to March 2013, headline inflation was recorded at 2.5% while the underlying measures were recorded at 2.2% for the trimmed mean and 2.6% for the weighted median.  All inflation measures show that annual inflation currently sits at the lower to middle range of the RBA’s target range for inflation.

The CPI calculation is made up by measuring the change in the cost of a basket of goods. These 11 ‘components’ make up the headline CPI reading and they include a number of sub-groups that make up their overall value.  Over the 12 months to March 2013, costs associated with: health (6.1%), education (5.8%), housing (5.1%), alcohol and tobacco (3.7%) and insurance and financial services (2.9%) recorded the greatest increases.  On the other hand, clothing and footwear (-1.5%) and recreation and culture (-0.5%) costs fell while furnishings and household equipment (0.6%), transport (1.4%), communication (1.5%) and food and non-alcoholic beverages (1.6%) recorded low levels of increases.

The housing component of CPI provides the greatest contribution to the overall CPI result, with an overall weighting of 22.3%.  As mentioned, housing costs have increased by 5.1% over the year which is a much greater increase than the 2.5% increase in headline inflation.  Electricity (17.1%), gas and other household fuels (16.8%), utilities (13.5%) and property rates and charges (5.8%) costs have all increased by more than the growth in the overall housing component.  No housing sub-group has recorded a fall in CPI over the year however, water and sewerage costs have risen by the lowest percentage at just 2.6%.  Annual growth in new dwelling purchases by owner occupiers and maintenance and repair of the dwelling (both 2.8%), rents (3.5%) and other housing (3.9%) have each been much lower than the headline figure for the housing component of CPI.

The ongoing trend we have noted for a number of years now is that it is not the cost of the mortgage or rents which have been climbing sharply; rather it is the cost of those regular gas, rate and electricity bills which are continually increasing.  Electricity costs have risen at an average annual rate of 8.3% over the past 10 years, followed by utilities (8.0%pa), water and sewerage (7.6%pa) and gas and other household fuels (7.2%pa).   On the other hand, maintenance and repair of the dwelling cost have increased by 2.6% annually over the decade followed by; new dwelling purchase by owner occupiers (3.5%pa), other housing (3.7%pa) and rents (4.4%pa).

Overall the data indicates that inflation in the Australian economy remains at low levels and that the calls for interest rate hikes will likely now dissipate.  In fact, with home value growth slowing in April, commodity prices falling and mining investment expecting to peak throughout 2013 there may be a need for further interest rate cuts this year.  Specifically for housing, the data shows that the growth in those regular quarterly household bills has gotten out of hand to some extent over the past decade and certain costs continue to grow significantly each year.  Cost escalation associated with house purchases and rentals although above headline inflation are quite contained relative to other housing costs.

As at February 2013, domestic banks had a total of $1.147 trillion in mortgages on their books; at the same time rpdata estimates that the total value of all housing in Australia was around $4.85 trillion. Over the month, 66.9% of all outstanding mortgage debt was for owner occupier homes compared to 33.1% for investment homes.  Outstanding loans mortgage debt accounted for 63.1% of all outstanding loans of domestic banks.

The housing finance data published by the Australian Bureau of Statistics (ABS) each month includes the aggregated data published each month by APRA for banks however, it also includes figures for all authorised deposit-taking institutions (ADI’s).  ADI’s include banks as well as building societies and credit co-operatives.

As mentioned, the total amount of outstanding mortgage debt to banks as at February 2013 was $1.147 trillion, to all ADI’s it was $1.2 trillion.   The data shows that banks are overwhelmingly the most popular institutions for mortgages in Australia, accounting for 95.8% of all outstanding mortgages. Of course the banking sector in Australia is dominated by four major players; ANZ, Commonwealth Bank (CBA), National Australia Bank (NAB) and Westpac.  These four major banks, excluding CBA’s subsidiary BankWest but including Westpac’s subsidiary St George, hold 85.1% of all outstanding mortgage debt by banks operating in Australia and 81.5% of all outstanding mortgage loans to domestic ADI’s.  These figures indicate that more than four out of every five mortgages in Australia are to either ANZ, CBA, NAB or Westpac.

Over the past 12 months, the total value of outstanding mortgage debt to Australian ADI’s has increased by 6.0%.  This data set has been published from March 2002 onwards and this is close to the slowest rate of growth in outstanding mortgage debt on record.

Across all ADI’s, 67.5% of outstanding mortgage debt is for owner occupation purposes compared to 32.5% of mortgage debt being for investment purposes.  What this data indicates is that investment borrowers are slightly more likely to go to a bank for a mortgage than they are to go to a credit union or building society.  Over the 12 months to February 2013, the total value of outstanding mortgage debt to Australian ADI’s for owner occupation purposes has increased by 5.5% which is the slowest growth on record, compared to investment mortgage debt growing by 7.1%.  The higher rate of growth in outstanding mortgage debt for investment purposes reflects the broader ABS housing finance data which shows the value of finance commitments for investment purposes rose by 15.4% year-on-year to February 2013 compared to a 5.3% increase in commitments for owner occupation purposes.

The Reserve Bank (RBA) published some information in their recent Financial Stability Review which supports the notion of slower growth in outstanding mortgages.  In the report they specifically noted: ‘Contributing to the slower pace of credit growth is the fact that many households have been taking advantage of the lower interest rate environment to pay down their debt faster than required. Mortgage buffers – balances in mortgage offset and redraw facilities – are now estimated to be equivalent to around 14 per cent of the outstanding stock of housing loans (see graph below). When interest rates fall, not all borrowers reduce their mortgage payments, resulting in an increase in prepayment rates. The increase in the rate of prepayment as a result of the decline in mortgage lending rates since late 2011 is estimated to have reduced the growth rate of housing credit by around ½ percentage point over 2012. Measured a different way, in aggregate, households’ mortgage buffers are equivalent to around 20 months of scheduled repayments (principal plus interest) at current interest rates. This provides considerable scope for many borrowers to continue to meet their loan repayments even during a temporary spell of unemployment or reduced income. As with housing loans, households have also been paying off credit card debt; net repayments on personal credit and charge cards have been above average in recent years and balances on personal credit cards have also slightly declined since mid-2012.’

With borrowers paying off their loans quicker and having a greater ‘buffer’ sitting in their off-set account it is no surprise growth in outstanding mortgage debt is at historic low levels.  Add into the mix, the fact that households continue to save around 10% of their disposable income and that the household debt to disposable incomes sits at around 150%, having plateaued over the past six year, and it is difficult to see how credit growth will return to previous levels in the foreseeable future.  This is despite the fact that we currently have a low interest rate environment and capital city home values have increased by 2.8% over the first quarter of 2013.

The challenge for the banking sector will of course be how can they attract new customers to lend to when this air of caution exists surrounding spending and high levels of debt?  The caution and aversion to credit is further highlighted by the fact that the RBA’s credit card statistics for February 2013 show that the average outstanding loan balance on credit cards fell by -2.5% over the year, the greatest year-on-year fall on record for that series. Regulators will have to continue to ensure that lending practices and policies don’t deteriorate over coming years as banks seek new ways of attracting lending, particularly to the housing sector which accounts for 63.1% of the total value of outstanding loans to the domestic banks.

While the recovery is demonstrable across each city, the only city to reach a new historic high is Sydney, where values are now 0.1% higher than their previous November 2010 peak.

Interestingly, the Sydney recovery has largely been driven by higher unit values rather than detached house values.  Looking at the Sydney recovery by dwelling type shows that Sydney unit values actually reached a new high way back in May last year while house values remain -0.4% lower than their 2010 peak.  Based on the combined ‘dwellings’ index, Sydney values are now broadly 0.1% higher than their November 2010 peak.

Melbourne values recorded a more severe downturn, with values peaking in October 2010 and finding a low point at the end of May 2012.  The recovery to date hasn’t been enough to offset the decline, with values remaining -6.2% lower than their 2010 peak.  The recovery has been greater across the detached housing market (+5.2%) compared with units (+3.6%).

Of all the capital cities, Brisbane’s housing market is showing the largest gap between peak and current dwelling values.  The correction across the Brisbane housing market has been more significant than other cities and values remain -9.5% lower than when they peaked back in November 2009.

Adelaide dwelling values remain -5.5% lower compared with their September 2010 peak.  Additionally, Adelaide is recording the smallest level of dwelling value recovery to date, with dwelling values increasing by just 1.5% between the June 2012 trough and the end of March 2013.

Perth’s housing market recovery has been substantial, with values rising 9.4% since they bottomed out in late 2011.  The market trough in Perth was much earlier than most other capital cities, with Perth’s housing market responding to the strong state economy and population growth that can be attributed to the local resources sector as well as an exceptionally tight housing market and rapidly rising rents.  House values have recovered much more than unit values, rising by 10.0% compared with a 6.8% recovery across the unit market.

Hobart’s housing market has seen a recent improvement, with values now -8.7% lower than their November 2009 peaked.  Brisbane and Hobart were the two capital cities that recorded a market peak the earliest (both in November 2009) and it is no coincidence that it is these same two cities that are recording the largest gap between peak and current dwelling values.  The Hobart market bottomed out only recently (October 2012) and since that time values have risen by nearly 7%. 

Darwin’s housing market has recorded both the largest correction (values were down nearly 20% from peak to trough) and the strongest recovery with values having increased by 13.9% since they found an early low point back in January 2012.  Growth rates in Darwin have recently levelled however, suggesting the market may be starting to level.  Rents continue to rocket higher though, rising by close to 15% over the past year which suggests that yields will continue to move higher as well which could drive further value growth on the back of investor demand. 

Canberra’s housing market bottomed out quite early compared with other capital cities, in January 2012.  Since that time values are up 5.1%, which is a surprisingly strong recovery considering the local uncertainty that comes with a federal election and the recent softness across Canberra’s rental market (rents are down nearly 2% across Canberra’s house market). 

At a combined capital cities level, values still need to recover by more 3.0% before they reach a new historic high.  Based on the rate of recovery to date, it won’t be long before the housing market moves to a new historic high.

At a national level, population growth is fuelled by two factors: the rate of natural increase (births minus deaths) and overseas migration.  At a state level interstate migration is also a factor in population growth.

On a state-by-state basis population growth has been strongest in absolute terms within Victoria (94,837), Queensland (91,389), New South Wales (86,033) and Western Australia (81,694).  These four states have accounted for 92.5% of total population growth over the 12 months to September 2012.

Across the individual states, only Queensland (12,104), Western Australia (11,091), Victoria (1,296) and the Australian Capital Territory (755) have seen a net gain in population from interstate migrants (ie more residents arrived over the state/terriroty border than left for other states/territories).  Over the year to September 20123, the net number of interstate migrants arriving in Queensland  was at its highest level since the 12 months to December 2009 and Western Australia’s net interstate migration figure was its highest level on record since the time series began in June 1982.  On the other hand, 18,448 more residents left New South Wales than arrived over the year followed by 2,748 net residents leaving Tasmania, 2,541 net residents left South Australia and 1,509 net residents left the Northern Territory

As the above chart shows, the resource states are currently the largest beneficiaries of interstate migrants from other states.  Queensland has always been a significant beneficiary of population growth from other states, particularly New South Wales and Victoria, however, the rise in prominence of Western Australia is a relatively new feature.  This is likely to be a result of the resources sector boom which has occurred in that state over recent years.

The other side of the equation of course is overseas migration and which states reap the benefits of these new arrivals.   Over the past 12 months, 91.8% of all overseas migrants or 209,403 persons have settled in one of New South Wales (59,432), Victoria (53,996), Western Australia (50,613) and Queensland (45,362).

As the above graph shows, most overseas migrants to Australia have initially settled in either New South Wales or Victoria and based on this you can assume they tend to settle in Sydney or Melbourne.  Given this, the benefits (and costs) of overseas migration are not being felt right across the country but are mainly concentrated in the major population centres of New South Wales, Victoria , Queensland and Western Australia.

Based on all these figures, outside of New South Wales, those states which tend to lose residents to other states (or see a low inflow) also fail to attract a significant proportion of new arrivals to the country.  This has repercussions for the overall economic performance of these states as they lose many of their young and educated to the larger states which arguably have more abundant education and job opportunities.  On the other hand, a number of these states and territories are also failing to attract overseas migrants.  The reason being that these migrants also tend to be more attracted to the areas with better educational facilities and job prospects.  Perhaps some of the smaller states should be looking at ways that they can better attract new migrants to their state, surely factors such as cheaper housing in states like South Australia and Tasmania could be an attractive lure but there must also be the jobs and wages available to both attract and then keep these new settlers.  It may also help to stem the flow of residents that leave these smaller states.

• Global financial conditions have improved over the past six months (despite the recent Cyprus fiasco). The Eurozone is making the hard decisions required to dig themselves out of an economic hole although the region continues to face significant challenges. Even though conditions are improving, it is probably safe to say that the Eurozone remains the biggest risk to global financial stability.
• The US economy is gathering momentum and the Asian nations are generally in good health.
• Global equity markets are trending higher indicating growing confidence.
• Australia’s banks also remain in a healthy position, with global wholesale funding costs easing. Despite the cheaper wholesale finance, banks are continuing to attract domestic deposits, so reliance on global money markets has been reduced. Australia’s banks are very profitable despite low levels of credit growth, which provides a strong global position when it comes to meeting the Basel III capital requirements.

• Domestic business failure is at a historically high level, a factor related to Australia’s high exchange rate and the high rate of household savings (consumers are spending less). Even though more businesses have folded, the vast majority of businesses continue to meet their debt obligations (business loan arrears peaked in 2010 at around 3.6% and were below 3% in December.

• The net wealth of households has been rising on the back of higher dwelling values and improving equity markets together with a general aversion by households to take on more debt. The debt servicing capacity of households is also improving thanks to lower interest rates.

• The arrears rate for home loans peaked in 2011 and is now moving lower with just 0.5% of Australian mortgages more than 90 days in arrears. The arrears rate is moving lower despite some softening in the labour market with the rate of unemployment edging higher over the past year.
• Importantly, as interest rates have fallen, most households have continued to repay the same level of principal and interest when servicing their mortgages. Additionally, the proliferation of offset facilities is allowing households to accumulate savings that can be offset against their mortgage debt. This has resulted in a substantial buffer being built up across mortgage holders, to the extent that the aggregate mortgage buffer is now nearly two years (around 20 months) ahead of their repayments schedule. Given such a large buffer, households have some flexibility in their repayments if further softening in the labour market does eventuate. The growing mortgage buffer is also one of the reasons why housing credit is growing at historically low levels.

• The RBA points out that although financial stress across households remains low, household debt and gearing remains very high. The Bank goes as far as to imply that households should continue to save and reduce debt to further strengthen their financial resilience. This statement is probably the biggest hint that interest rates aren’t going to fall further in an effort to stimulate consumer spending and household activity. Rather, any further rate cuts are likely to be in response to a weakening labour market or a global shock.

The RBA’s comments with regards to the Australian housing market were overall very positive. The fact that mortgage arrears peaked at about 0.6% in 2011 and have now slipped to 0.5% of all mortgages is a solid sign that households are adequately coping with their mortgage repayments. The RBA has relied on the RP Data-Rismark hedonic indices to comment on the recovery in dwelling values to date. Based on the RBA analysis, dwelling values are up by around 4% since the May 2012 trough.

Using a more up to date measure, based on the RP Data Rismark daily five capital city aggregate index, dwelling values have recovered by 4.7% through to March 27th.

Where the RBA has expressed a specific concern though is with the Melbourne housing market. The Bank has singled out Melbourne, expressing concern about the build-up of housing supply across the inner city apartment market and detached housing markets across the outer suburbs.

“Although housing loan arrears rates are currently low across most parts of Victoria, the outlook for the Melbourne property market appears to be softer than for other large cities and some banks have signalled that they will be alert to any signs of deterioration in asset performance. The current stock of land for sale is at a high level and building approvals data point to increases in the stock of housing, and potential oversupply, in some parts of Melbourne, particularly the inner-city apartment market (Graph 3.20). This is on top of previous strong supply of detached housing in the outer suburbs. The increase in the stock of housing is consistent with Melbourne dwelling prices declining further and recovering less of their earlier decline than prices in most other capital cities have done.”

The RBA makes a fair point, and I have said on a number of occasions that Melbourne’s resilience to date has been surprising. The multi-graph below from the RBA highlights the key issues.

Another weakness for the Melbourne housing market is the fact that transaction volumes have stabilised at a low level; the city isn’t seeing the same upwards trend in sales activity that has been noticeable across recovering markets such as Perth, Brisbane and Sydney. The low rate of sales activity has seen listing numbers mount across Melbourne, to the extent that there are currently about 10% more homes being advertised across Melbourne than there were a year ago.

The RBA also point out that historically higher levels of home loan arrears have been recorded across particular housing markets after a period of strong value growth coupled with a large number of new dwelling commencements. For example, loans that originated in New South Wales between 2003 and 2006 and those that originated in Queensland and Western Australia between 2007 and 2008 have shown a higher proportion of arrears rates.

This profile of rapid dwelling value growth and large scale home building fits the Melbourne situation quite comfortably over the past five years. Dwelling values increased by close to 55% between the beginning of 2007 and the 2010 market peak. At the same time dwelling approvals across Victoria surged (as can be seen in the RBA graph 3.20 above).

While I concur with the RBA that the inner city apartment market and outer fringe detached housing market is facing some serious oversupply challenges, that doesn’t necessarily mean that Greater Melbourne is facing a prolonged period of subdued market conditions. If the early indicators for 2013 are anything to go by, the Melbourne market is showing some positive signals.

In Melbourne’s favour is the fact that auction clearance rates are pointing to strengthening market conditions. Melbourne is Australia’s largest auction market, so clearance rates are one of the best and most timely indicators of how well buyer and seller expectations are aligned. Last week the clearance rate in Melbourne was 69.2% and the average clearance over the year to date is 65.9%. The last time clearance rates were this high in Melbourne was August 2010.

Additionally, the broad Melbourne market has shown a reasonable level of recovery since the market bottomed out in May last year. Values are up 5.9% since bottoming out last year, with 2.9% of the growth having taken place during 2013.

Additionally, the average time a home is on the market has been reducing in Melbourne and levels of average vendor discounting have also been showing some subtle improvements.

The inner city apartment market in Melbourne and the outer fringe housing market are likely to be an underperforming segment over the coming years; at least until supply levels are absorbed which will take some time. Melbourne faced a similar scenario in the early part of the last decade when the Dockland’s precinct sprung out of the ground in a flurry of apartment development activity. The oversupply of apartments dampened conditions in that precinct for the next five years, but supply was eventually absorbed and the Dockland’s precinct gradually started to record capital gains and rental growth.

These two precincts aside, Melbourne has shown a strong start to 2013. The big question will be whether the performance across the other segments of Melbourne’s housing market will be strong enough to bolster the headline figures to maintain growth.

A key factor that will determine the outcome for Melbourne’s inner city apartment market and outer fringe will be population growth, which can be read as buyer demand. In raw numbers, Victoria is recording the largest number of new residents compared with other states (up 89,000 over the year to June 2012) and the population growth rate is 1.6%. Another key factor will be how successful the development sector is at delivering new housing stock that is competitive in pricing, design and location compared with existing stock.

Time will tell, but undoubtedly the Melbourne inner city and outer fringe housing market will under a great deal of scrutiny over the coming year.

The February labour force data published by the ABS earlier this week caught most of us off guard. The number of jobs created was nothing short of spectacular, the rate of unemployment remained steady at 5.4% and the participation rate rose from 65.0% to 65.3% in seasonally adjusted terms. The headline jobs growth figure showed 71,500 new jobs were created across Australia. At face value that’s a pretty impressive number of new jobs – the highest month-on-month number of new jobs since July 2000 (in fact month-on-month jobs growth has only been that high eight previous times across the ABS series which extends back to 1978).

At face value the figures look very positive, however drilling down shows that the vast majority of new jobs were part time. 75% of jobs growth was for part time positions over the month and over the past twelve months, 69% of new jobs have been part time roles.

The proportion of part time jobs to full time jobs is currently recorded at 32% which is an all time high based on the ABS seasonally adjusted series which extends back to 1978. If we see part time jobs creation continue at this pace it is likely the proportion will increase.

The labour force utilisation rate was measured at 13.4% in February, unchanged from February the previous year, however the age group showing the highest rate of underutilisation was the youngest age category of 15 to 24 year olds where 27.0% of the working population within this age group is either unemployed or would like to work more hours.

Another interesting factor to take into account when interpreting the headline labour force data is that 70% of all jobs created over the past year were located in New South Wales and Victoria. Jobs growth is moving away from the mining states. Australia’s third largest state based on population, Queensland, managed to comprise just 9% of the total number of jobs created nationally while Western Australia accounted for 18% of the jobs growth.

Overall, despite some of the labour market softness that I have highlighted, the recent jobs data should be seen as a positive. Viewed at a macro level, which is generally what Federal policy makers base their decisions on, the labour market is looking quite healthy and surprisingly resilient. The jobless rate is holding firm at the low level of 5.4%, the number of new jobs created over the month was historically high and more people are actively seeking work. The latest labour force data will add to the speculation that the interest rate cutting cycle is either at or approaching completion.