Another month, another weak inflation print, with the TD-MI gauge recording inflation of 0.2 percent for the month, now equating to 2.3 percent year-on-year in October.
Following on from a number of soft prints since May, this suggests that we will see the inflation gauge sagging towards the bottom of the 2 to 3 percent target range in due course, particularly as a temporarily strong 0.7 percent reading – partly caused by the easing in the exchange rate – will soon drop off the annual reading as soon as December.
Given that inflation is traditionally weak on this gauge in the fourth quarter of the year (only ~0.3 percent is expected in Q4) it seems fairly likely that by the time the Q1 data rolls around the notion of another interest rate cut could feasibly tabled once again.
Adding to the case for a further cut in this long, drawn out easing cycle will be the fact that after a strong run the Building Approvals data now seems to have passed its peak, as we’ll now consider in three short parts below.
Part 1 – Building Approvals roll over
Firstly, the headline data was weak.
While a seasonally adjusted 9134 houses were approved in September (+9 percent year-on-year), which looked decent enough, only 5685 unit approvals were recorded in the month.
This represented a substantial seasonally adjusted 34 percent decline in unit approvals year-on-year and a 22 percent decline from the August figure.
The monthly data is unavoidably lumpy, no question about that, but on a rolling annual basis the trend in total approvals has slunk back to below 193,000 from above 195,000 and the peak for apartment approvals appears to have slipped past in recent months.
Part 2 – Capital city data shows no Sydney oversupply
There has been a lot of punditry discussing an oversupply of properties in Sydney.
Some of the information we provide on this blog is available elsewhere, but parts of our analysis reveal findings that contradict what you will hear from other expert sources or mainstream media (usually, it seems, because they simply don’t analyse the data), and on this point in particular we’ve found something quite different to the consensus.
By analysing all of the available data series, we have found that a combination of soaring population growth (in part caused by the lowest interstate migration away from Sydney ever recorded) and apartment approvals having long since passed their peak, this suggests to us that there is no looming oversupply of stock in Sydney.
Instead we believe that the big players in the developer space will be looking to have their Greater Sydney apartment stock off their books by Q4 2015, and the apparent construction boom will gradually ease back in due course.
Looking at the capital city house approvals data, we can see that Greater Sydney has approved fewer than 13,000 houses on a rolling annual basis, which has been a nice enough uptick, but is hardly the sort of stuff of which an oversupply is born.
If you want to talk about potential oversupply in this sector, check out what Greater Melbourne has been approving for construction over the past decade, which is to say, a lot.
Greater Perth is really beginning to ramp up its house approvals now, too, so watch this space.
On the units front we have no doubt that the release of new plans for an extra 50,000 apartments to be constructed along the Parramatta Road corridor will inevitably lead to assumptions that Sydney will become awash with units.
Naturally if all of these apartments are eventually approved and then in turn are built this could result a glut of apartments in the Homebush area, which may be unwelcome news…if you own a flat in Homebush.
But we still don’t see there being a huge oversupply of units in Sydney for several reasons:
(i) the very poor “substitutability” of units located along the woefully congested thoroughfare that is Parramatta Road, which simply are not comparable dwellings to properties with genuine owner-occupier appeal;
(ii) even in the event that 50,000 units are ultimately approved, they probably won’t all be built; and
(iii) by far the most pertinent point, through the “next few decades” that it takes to push these plans through to their final completion, the Greater Sydney population will have soared by a number that will be better measured in millions rather than thousands.
The big picture is that such a level of stock will quickly be absorbed given the rapid rate of increase in the Greater Sydney headcount.
Below we have charted what we are actually seeing in terms of supply, which is that Sydney unit approvals hit their cyclical peak activity way back in September 2013.
As reported here previously, since that time we see the number of rolling annual unit approvals in Sydney gliding back down towards a comfortably manageable 20,000-22,000 per annum, which will easily be accounted for by the harbour city’s burgeoning levels of population growth.
Greater Melbourne, on the other hand, even now has continued to approve apartments at a ~24,000 per annum pace over the past four months, which will do little to easy oversupply concerns in the Victorian capital.
Some promising news was to be found for Greater Brisbane in today’s figures, with the Queensland capital taking its foot off the gas pedal a little with regards to its unit approvals. This is a welcome outcome since Brisbane has been approving apartments galore over the past 18 months.
Overall, there was a huge drop in unit approvals in the month on a nationwide basis for the capital cities, which suggests that any forthcoming oversupply will be confined to a few (mainly inner-city) pockets.
Part 3 – State level – DYOR on regional property
Our analysis published here previously has shown that, with the honourable exception of Queensland, regional jobs growth in Australia has almost totally stalled, and a titanic gulf is opening up between capital city employment and what is being seen in regional Australia…or, more accurately, what is not being seen in regional Australia.
By implication, therefore, with regional unemployment and under-employment rising by stealth, due caution should be exercised when acquiring or investing in property outside the capital cities.
We don’t have the space here to look at every region on a case-by-case basis, but the headline data does suggest that some parts of regional Victoria and regional New South Wales in particular may be vulnerable to overbuilding.
DYOR here, and caveat emptor.
A similar point applies for regional apartments, which in the most general terms can be a more volatile and risky proposition in any case, since demand in the regions tends to be largely focused on detached housing stock.
Our analysis has continued to show that we don’t believe that there is an oversupply of Sydney property outside of a few obvious pockets, but as a form of due diligence you would probably want to see this backed up by other data series.
On that very note, the Real Estate Institute of New South Wales (REINSW) released its vacancies data for the month of September in the past week, and it showed vacancy rates actually declining in Sydney to only 1.7 percent, rather than rising, which would normally be something of a surprise at this stage in the real estate cycle.
The reason? Population growth – while declining in the mining states, it is soaring in Sydney.
It has often been that an “market in equilibrium” ought to have a vacancy rate of around 3 percent, so in that context the Sydney vacancy rate declining to just 1.7 percent further debunks the oversupply theory, although of course as noted there will continue be a few pockets where a surplus of units does exist.
These include, the Central Business District (CBD), the Ultimo/Chippendale/Broadway corridor, North Sydney, Mascot/Green Square/Wolli Creek, and a few others (but not Pyrmont in this cycle).
Both Outer Sydney (1.4 percent) and Inner Sydney (1.8 percent) currently have relatively few oversupply issues.
On other hand some New South Wales regional areas do have elevated vacancy levels of above 3 percent, including the Hunter region, the Orana region and the state’s Central West, which leapt to 4.3 percent.
An oversupply of apartments actually appears to be a far more material risk in inner Melbourne and inner Brisbane than it is in Sydney at the present time.
Indeed, putting the basket case of Darwin to one side, if there is one capital city where sustained strong dwelling price growth appears to have surged well ahead of the market’s fundamentals at the macro level (unemployment, building approvals, stock on market, vacancy rates etc.) then in our view that capital city is Melbourne.
Finally, from a macro-economic perspective, while it has been good to see an increase in the number of houses being approved for construction, the dwindling headline data does continue to suggest that dwelling construction can hardly be a miracle solution to offsetting of the end of the mining construction boom.
One way or another, it seems, borrowing rates will probably need to fall yet further, either through a cut in the official cash rate or, of equal likelihood, via “out of cycle” interest rate cuts from lenders.