January 11, 2016

Australia’s Long-Term Bet On China

The Sunshine Coast Daily reports from Australia. “Opening up more land for urban development can only be justified if the State Government identifies a reversal in the declining interstate migration rate, an increase in wages and the return of a strong stock market. That’s the view of Local Government of Queensland chief executive Greg Hallam. He said, if anything, the current oversupply of land was suppressing prices. The Sunshine Coast, which has the most concentrated broad acre ownership in South-East Queensland, provides an example of how developers restrain the release of new lots until they see the rise.”

“‘The rate of release is determined by price,’ Mr Hallam said. ‘What we hear often is that there is a land shortage. That may be true for small to medium developers, but that’s not to say there is not enough land. There is enough but 70% is held by two or three major national companies.”’

From ABC News. “In great news for renters, but a bind for property investors, a new report shows Australia’s capital cities have posted the lowest rate of annual rental growth in records going back two decades. According to CoreLogic RP Data’s Rent Review report, weekly rents were unchanged in December, while rental growth nationally was a feeble 0.3 per cent over 2015. ‘You only have to drive around the inner-city areas of Sydney, Melbourne or Brisbane to know that there’s a huge amount of unit construction activity going on,’ CoreLogic RP Data research analyst Cameron Kusher told ABC News. ‘Now units are twice as likely to be rented as houses, so much of that stock does end up back in the rental pool.’”

“Renters in Darwin and Perth have reaped the biggest benefits, with rents there falling by 13.3 per cent and 8 per cent respectively over the past year. ‘Perth is still approving a lot of new housing for construction as well, so that’s going to continue to weaken the market,’ Mr Kusher said. In further bad news for many heavily indebted landlords, CoreLogic said it expected rental growth to slow further before it starts to improve. ‘Obviously that’s not great news for people who own investment properties but, for renters, it means they’ve got a lot of choice out there in the market,’ Mr Kusher said.”

From The Advisor. “Almost all major markets are likely to become oversupplied during 2016, a leading forecaster has claimed. BIS Shrapnel managing director Robert Mellor told Mortgage Business, The Adviser’s sister title, that Sydney is likely to be the only capital city that remains undersupplied at the end of 2016. Mr Mellor also highlighted Western Australia, which he said is ‘moving into substantial oversupply’ because of reduced net overseas migration and slower population growth. Local investor demand is expected to “fall off significantly” in markets that are facing an oversupply, particularly inner-city apartments in Brisbane and Melbourne.”

“‘If you want to isolate the inner-Melbourne and inner-Brisbane markets and look at the high-density component of those markets, at some point construction has to fall by 50 per cent and maybe as much as 60 per cent, because we are at incredibly high levels – unsustainable levels – and ultimately it must lead to significant excess supply,’ he said.”

From Domain News. “People wanting to buy a home have reason to celebrate at last with 2016 declared the first buyers’ market of the past four years. As property prices soften and auction clearance rates are tipped to remain close to a modest 55 per cent, eager sellers are racing to cash in before prices slide further, triggering a buying bonanza. ‘The market has finally reached a point where it’s no longer a sellers’ market where buyers were forced to meet their ridiculously inflated prices,’ Jalil Wakim, managing director of finance broker Lendfin, says.”

“Home owner Peter Svoboda,​ for instance, put his three-bedroom plus studio house in Mascot on the market just before Christmas, hoping to pick up a buyer over the quiet period. Having lived in the home for 24 years, retired potter and occasional Elvis impersonator Svoboda, 69, feels it’s now or never to sell for a good price before downsizing elsewhere. ‘We feel it’s a good time to sell now to take advantage of the market that’s been so strong recently,’ says Svoboda. ‘We don’t know what will be happening with prices in the future.’”

“His agent, Veronica Perez of PRDnationwide, says the home is for sale at about $1.4 million but will be put up for auction if it doesn’t sell beforehand. ‘It’s in a great location, so should attract lots of interest,’ she says.”

The Daily Telegraph. “Sydney has become Australia’s weakest major real estate market after starting 2015 as the strongest. Core Logic RP Data’s latest figures show property prices in the Harbour City fell further than in any other capital over the three months to December, with the average home losing 2.3 per cent of its value. The median price of a Sydney home is now $800,000, down from just over $820,000 in September.”

“‘[Regulatory changes] have made it more expensive and difficult for investors to access housing finance. Added to this are higher mortgage rates and more restrictive credit policies and loan servicing requirements,’ said Core Logic head of research Tim Lawless.”

The Guardian. “Over the last couple of decades, China has undergone profound change and is often cited as an economic growth miracle. Day by day, however, the evidence becomes increasingly clear the probability of a severe economic and financial downturn in China is on the cards. This is not good news at all for Australia. The country is heavily exposed, as China comprises Australia’s top export market, at 33%, more than double the second (Japan at 15%).”

“As of the second quarter of 2015, China’s household sector debt was a moderate 38% of GDP but its booming private non-financial business sector debt was 163%. Added together, it gives a total of 201% and its climbing rapidly. This may well be a conservative figure, given it is widely acknowledged the central government has overstated GDP growth.”

“Australia’s long-term bet on China was and still is conceptually simple – an incredibly flawed assumption that the country would never cease to consume increasingly more iron ore. For a time, the Australian bet looked good. The banking and financial system collected all the debt they could source from overseas wholesale lenders, underpinning increasingly greater expansion into Australia’s already grossly overvalued residential housing market.”

“The current downturn in China is smashing the Australian mining industry via lower demand for commodities amid increased global supply, especially in iron ore. As well as hitting Australia hard, the mining export-driven states and territories (Western Australia, Queensland and the Northern Territory) will suffer the most.”

“Population growth rates are falling in these regions, growth is softening and underutilization (unemployment and underemployment) is steadily rising. Spillover effects into the other states are likely, which could impact the country’s largest and most leveraged asset class: the housing market. Government and industry have managed over the last decade and a half to instill severe complacency in Australia, hoping policymakers’ two big bets on the finance, property and mining sectors would continue to pay dividends far into the future.”

“With the Chinese economy beginning to falter, the fear is Australians must now figure out where their economic future lies for the next generation who have been brainwashed into believing that digging up rocks and flipping houses by accumulating a gargantuan mountain of private debt is how a modern western country builds its future.”

Bits Bucket for January 11, 2016

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