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Jobs data wrong-foots market

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Is the economy really as hot as the unemployment rate says it is? Nup.

So everyone was all cock-a-whoop about the jobs data last week.

(Yeah, I just wanted an excuse to use ‘cock-a-whoop’. New favourite expression.)

But they were. “Astounding”, “Dazzling”, “Impressive”.

And look, on the face of it, it was a very strong result. The unemployment rate took a bit lurch downward, from 5.5% to 5.1%. Massive.

What’s more, that came with impressive jobs growth – not in part-time work either – but in full-time work.

So it looked like a very strong result.

And at 5.1%, we’re now very close to the all important 5% threshold.

The RBA have said they need to see unemployment with a four in front of it before they even start thinking about raising rates. Frydenberg wants to see something in the mid-4s.

So we’re almost there right? Job done. Put the pandemic recovery kit away. Right?

But not so fast.

You see, it seems that immigration is playing havoc with the numbers.

Or the lack of immigration to be precise.

Net immigration has gone negative.

And we’ve now lost 73,000 people since Covid began:

With the majority of those exiting Victoria.

(Aw, c’mon guys. It’s not so bad. Come back!)

This fall in immigration has coincided with a big fall in the number of non-resident workers. We’ve seen a sizeable 334,000 non-residents leave the country and leave the workforce.

Their share of the workforce has fallen from around 4% to under 2%.

And it seems that the jobs these non-residents are giving up are being filled by locals.

That’s good for locals, but it does mean it’s making the jobs data look better than it is.

Because with these jobs, we’re not talking about a growing economy generating new jobs. Or a recovering economy recreating lost jobs as new jobs.

Rather we’re talking about old jobs being made vacant by exiting immigrants, and locals filling the spot.

And that means that our current unemployment rate might be making the economy look better than it is.

How much better? That’s hard to say.

Chris Joye at the AFR crunches the numbers and he reckons that if we hadn’t had this non-resident exodus, the unemployment rate might be stuck around 7.5%:

If one assumes the 333,900 non-resident jobs are all placed with locals who were looking for work (and not folks who are sucked into the labour market), this has the effect of temporarily reducing our unemployment rate by 2.4 percentage points.

Put another way, if borders open and non-resident workers return and take these jobs, the unemployment rate would increase from 5.1 per cent to 7.5 per cent. Although this is a very crude upper bound, it gives a sense of the influence of the non-resident worker exodus on the jobless rate.

So this takes quite a lot of gloss off the jobs numbers. Where we had been thinking that the economy was tearing along and creating new jobs everywhere, it might not be exactly like that.

The recovery may in fact be a lot more modest than all that.

So this should give the markets and the RBA pause for thought.

The recovery is still going well, but let’s not be too hasty to turn the garden hose on it just yet.

JG

Commodity boom = property boom?

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Huge government spending around the world is thought to also be behind the expected commodity bull market. The Wall St. Bull remains a symbol of aggressive financial market prosperity. | Reuters/Carlo Allegri photo

If the commodity supercycle is all puff, what’s the outlook for property?

So yesterday I told you why many investment banks and economists think we might be on the cusp of a “commodity supercycle”.

That is, they reckon demand has gone ‘new paradigm’ – there’s been a level shift in demand, and supply is going to take years to catch up.

Until it does, commodity prices are going to keep booming, which is awesome for commodity exporters like us, and it will probably feed through into house prices because that’s what always seems to happen.

Yesterday I gave you the four arguments the investment banks are making, but I’m not sure I’m totally buying.

I mean, sure, Commodities prices are booming right now. Absolutely.

But we were always going to get a bit of a rebound as the world recovered from the Covid lockdowns.

And I’m not so sure we’re transitioning into a new paradigm.

I mean, we’re all on the same page in recognising that China’s voracious appetite for commodities cause prices to boom.

China account for 50-60% of iron ore and base metal demand, so whatever they do is going to move the market.

And what they did was go on a massive spending spree to help insulate the economy from Covid. They launched a massive 6 trillion yuan ($1.2 trillion) stimulus package, the equivalent of around 6 per cent of the country’s GDP.

Much of that flowed into the construction sector, helping China’s industrial output – a good indicator of commodity demand – to quickly return to pre-COVID-19 levels.

But now that IP has returned to pre-Covid levels, the Chinese government is taking the foot off the accelerator.

In that sense, much of the stimulus boom has already happened, and it’s not likely to be continued or repeated.

And it’s kind of the same story when you look around the world. Industrial production in the US and Europe has largely recovered all the ground it lost.

So short term stimulus demand may have already peaked.

And the point here is that if the economic recovery really takes off, as a lot of people expect it will, then that will see government stimulus packages start to tapper back.

So you can’t bake in strong recovery demand AND strong stimulus demand. One cancels out the need for the other, and what you get is demand substitution, not demand aggregation.

And when you look at it longer-term, we heard a lot about the Chinese Century a few years ago, but no one really thinks that’s a thing now.

It is true that China went on a massive building spree, and that saw the first mining boom in 2012 to 2014.

But the consequence of that building spree was a high-rise ghost-tower over-supply that ran well ahead of the nation’s urbanisation needs.

And those urbanisation rates are falling from here on out.

If we assume China reaches 70% urbanisation in 2030 and 80% in 2040, the urbanisation numbers look like this:

So in terms of our supercycle thesis, the urbanisation impulse is waning, not strengthening.

And on the supply side, it might not be so much about limited or fixed supply side capacity, as it was about short-term supply side shocks.

The ongoing trade war with Australia is driving commodity prices higher, but that won’t keep driving them higher. And the price of copper spiked on the back of protests in Peru, and iron ore exports out of Brazil (the number two supplier after Australia) still haven’t recovered from dam collapses and Covid lockdowns.

But the point is, we’re talking temporary rather than permanent factors here.

So I’m not sure we’re talking a permanent level-shift in the supply and demand balance for commodities.

It more looks like a cyclical relfation story, as governments drive the recovery through strong stimulus packages, which just happened to coincide with some shocks to the supply side.

So I’m not sure I’m buying the whole ‘supercycle’ story.

But either way, the next couple of years are looking pretty hot for commodities.

And that in turn will continue to throw heat into the Australian housing market.

Not that the Aussie housing market needs any extra heat right now.

But that’s what we’ve got.

Supercycle or not.

JG

Best business conditions… ever?

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Everything is lining up for the biggest economic boom in a generation.

So, I’m picking up on something.

The talk in the economic commentary I follow (which is a lot) has shifted. We used to be talking about whether we would recover, or whether we could keep the recovery on track.

Now, it’s about how big the coming boom is going to be.

This is almost across the board. The only dissenting voices are the ones saying that things are too hot, and some asset markets are too bubbly, and they’re at the point of breaking.

But there isn’t anyone I’m reading who doesn’t think economic conditions are hot.

But pictures paint a thousand words, so here’s a ten-thousand word essay of why Australia might be on the cusp of the most incredible economic boom in a generation.

Let me lay it out.

1. The Recovery is V-shaped

It’s now pretty clear that the economy is bouncing back quickly, and the Covid downturn will be deep but brief:

2. Unemployment is Contained

Unemployment never got anywhere near what was feared, and is already trending downwards.

3. Jobs market is heating up

With unemployment contained, the jobs market is picking up. Job ads are now higher than they were pre-Covid…

… and the number of people on Jobseeker has already fallen by 7%.

4. Household Income is Up

With employment income holding up, and with the surge in government benefit payments through 2020, household incomes are up 14% year on year.

5. Expenses are Down

At the same time, with the interest rate cuts, expenses are down, and household disposable income is booming.

6. Households are Flush

With disposable income booming, households are saving at a strong pace, and have got a stash of cash at the bank:

7. Consumer Confidence is High

With all that money in the bank, and having held on to their jobs, consumer confidence is booming:

All that gives the Australian consumer plenty of capacity to support economic growth in the years ahead.

8. The RBA will Run the Printing Press Hot

Despite improving economic conditions, the RBA will continue to run the printing presses hot, maintaining their current $5bn a week pace right through the year. (They’ve already committed to September, and I expect it to be extended.)

They don’t really have a choice. Out money printing program is small compared to the rest of the world, and if we don’t print as well, the Aussie dollar will go to the moon.

8. Businesses are Flush…

Coming into this ‘recovery on steroids’, thanks to the RBA, business conditions are already solid. Businesses are reporting the best cashflow conditions in years:

9. … and Bullish

Business confidence is also already at some of the highest levels in recent memory:

So you put all that together, you have a fantastic outlook for profits and share prices, and a fantastic outlook for the economy in general.

10. Rebounding Trading Partners

You can probably add to that the impact a rebounding global economy could have on the Australian outlook as well.

Many countries, particularly the US, haven’t had the easiest run of things when it comes to Covid.

If the vaccine roll out goes well, and their recoveries gather pace, that just adds further upside to the Australian outlook.

BOOM

It’s actually hard to see much downside risk from where we stand right now. The economic conditions are stacking up favourably, and the Australian economy is set to boom.

It’s not a question of if.

Now it’s a question of how big.

JG

Proof: money printing is a boom on steroids

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How exactly will all this fresh money spark a boom in property? I tell you.

So this one is for the folks who want to understand just how epic the money-printing madness is right now, and just how it’s going to make asset markets explode.

So last week the RBA committed to print another $100bn – at a pace of $5bn a week.

Yeah. Like it’s nothing.

Which it actually is. It is literally nothing to the RBA because they just press a button on the computer and BRRRR – brand new money.

Hooray!

Anyway, this means that the RBA is further expanding their balance sheet. So when the RBA prints money, it uses that money to buy assets (typically government bonds), and so their balance sheet ‘expands’.

(Don’t you wish you could do that?)

Anyway, this is what their balance sheet looked like before the most recent announcement:

So the RBA’s balance sheet was already looking bloated, even before the most recent announcement.

Since Covid struck, the RBA’s balance sheet has doubled, from $160bn to over $320bn.

Pew.

On top of that, you can add what’s left on the current printing program, which ends in April, and the fresh commitment of another $100bn, which will take us through until September.

All told, we’re looking at a tripling of the RBA’s balance sheet.

It’s massive.

What impact does this have on the economy?

Well, that’s where I thought this chart was interesting. This is the American story:

This comes from Lyn Aiden Investment Strategy, via Twitter. The point Lyn is making is that when money printing happens without huge government spending, then it just sort of gets mopped up by the financial sector.

Huge demand for government bonds drives down their prices, which suppresses interest rates across the economy.

That obviously has a real impact – particularly on financial assets (remember the US stock market tripled between 2010 and 2019) – but it mostly ends up being contained to financial markets.

What happens though when there’s massive government spending to go with it, is that that freshly printed money escapes the financial system, and gets into the real economy.

The government takes the money they get for their bonds, and spends it, on roads or schools or trips to Thailand or whatever.

When it enters the real economy, it pushes up the money supply.

And that’s what the most recent episode shows us. Massive money-printing, combined with massive government spending, has caused a massive expansion in the money supply.

That, in theory, should bid the price of everything up, but hard assets in particular. (That is, it’s super bullish for property.)

So what’s happening in Australia? We’ve got the expansion of the balance sheet. We’ve got the money printing. Do we have the spending?

Yes. Yes we do.

On current estimates, the government (state and Federal combined) are spending the equivalent of 15% of GDP in 20/21 alone!

It’s huge!

That means, that we’re going to see a huge expansion in the money supply.

Which means an explosion in prices, and particularly hard asset prices.

This is where we’re going.

So hold on to your assets folks. The RBA’s is printing and printing hard. This is going to get wild.

JG

Have we over-cooked the economy?

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The RBA has thrown a lot of cash at the market. Was it too much?

I’m finding it hard to find a reason not to pile back into the markets right now.

I’m definitely talking about the property market (though there was never any reason to get out!) but I’m also talking about equity markets.

Everything is looking pretty bullish right now.

Remember, at the beginning of the month the RBA dropped rates to just 0.1%, and announced they were going to print $100bn and pump it into the economy.

It’s a massive display of firepower.

And it would be just what the economy needed… if the economy was actually struggling.

But it’s not. It’s now looking like, on most measures, the economy is kicking along pretty well.

Take the NAB business survey for example. On their headline measures, trading and profitability are already back where they were pre-Covid.

Employment is still considerably lower, but that’s ok. Employment typically lags business conditions, and bosses work their existing staff harder before employing new staff.

So I’d expect that to bounce back in due course.

We have also seen a rebound in both business and consumer confidence, again back to pre-Covid levels.

And even conditions in Victoria have rebounded much more quickly than anyone expected.

There’s still a little bit of ground to make up on NSW, but not all that much.

And in case you’re wondering if this is an isolated picture, it’s not. We’re getting a similar read from the spending data.

The CBA have started releasing a weekly spending tracker, which tracks money coming out of CBA accounts.

And what they’ve found is that while there has been a boom in online spending since Covid began, in-store spending is also mounting a comeback.

Look at that, would ya? Total spending now growing at almost 15% year on year.

That’s huge. That’s a boom time story.

It’s possible it’s partly due to a shift to credit cards over dirty, disease-ridden cash. That’s possible. But I doubt it would explain all that much.

As I’ve noted elsewhere, most Australian households have seen their incomes go up since Covid started.

And it seems that a good chunk of them just decided to take the cash and spend it.

And again, if you look at the state-by-state breakdown, the comeback in Victoria has been phenomenal.

Pow! Look at that.

Victorians are bingeing hard!

So look, put it all together, and it’s looking like an economy that has pretty much fully recovered, just as we have pretty much eliminated Covid from the country.

It’s definitely not looking like an economy that needs interest rates at 0.1%, and $100bn cash injection.

But that’s what we’re getting.

And so it’s off to the moon we go.

JG

No BS: My hot take on the budget

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The shape of the country of Australia in the colours of its national australian dollar currency recessed into an isolated white surface

The Budget was massive, but I think we have more in store.

What do I make of this week’s budget?

It’s massive. But there’s more coming.

That’s what I reckon.

First up, the headline numbers are huge. We’re looking at a budget deficit of almost half a trillion dollars. We are still well and truly in unchartered territory here. No one could have ever imagined that the Australian government would be handing down that kind of deficit a year ago, let alone a “debt and deficits disaster” Coalition government.

But this is where we’re at.

It’s a huge amount of money.

But I still think there’s more coming.

And I say that because the two key centre-pieces of the budget – the wage subsidy for young workers, and the instant asset write-offs for business investment – are activity generated.

That is, they rely on the private sector doing stuff for them to come into effect.

So if you’re going to give companies a subsidy if they employed a 19-35 year old from the ranks of the unemployed, that requires firms to actual go out and hire people.

While this measure is estimated to be worth billions of dollars, it is theoretically possible that if no firms employed no new workers, that the total cost to the budget would be a doughnut $0.

Same story with the asset write down. If firms invest, there might be a certain tax advantage for that. But if no firms invest in no new things, then the measure is worthless.

That means that this free-spending budget actually needs a catalyst before it become active.

And what’s the catalyst?

Economic activity itself. It needs firms to hire and invest. If they don’t, then there’s nothing.

So this epic budget positions itself as a rocket pack strapped to the top of an economy that’s already moving.

But what if the economy isn’t moving?

It’s possible.

The government’s projections for growth and jobs were characteristically over-optimistic, but not wildly so.

But still, there’s a lot of money exiting the economy right now, as the governments front-line support measures – particularly JobKeeper and the JobSeeker supplement – are already being wound back.

This chart from the AFR shows you what the ‘fiscal cliff’ we’ve been hearing about for so long is now looking like:

And that’s at a time where private demand has already fallen through the floor, and public spending is the only thing propping up the economy.

And so what you’ve got is about $30 billion worth of direct government spending being replaced by a wage subsidy worth $4bn, and an asset write-down worth $27bn.

So it kinda balances out, right?

Well, no, not exactly.

It’s a bit apples and oranges because you’re replacing a direct cash injection, with indirect support that’s conditional on firms taking the risks involved in hiring and investing.

What it means is that if the economy is already recovering and continues to recover, and firms are happy to hire and invest, then we should get a reasonably smooth transition.

But if they don’t – if firms and households are still spooked – especially as JobKeeper winds up – they we might end up with a very bumpy transition.

In the short term, that will lead to two things. The first is that the government will decide it needs to support the economy more directly, and it will go back to mainlining money straight into the economy.

The second is that it will call in the RBA artillery, and we’ll get further rate cuts and reduced mortgage rates.

My guess is we’ll get both.

My hunch, based on what I know about animal spirits, is that everyone will want to take a wait-and-see approach, and the government we’ll be forced to intervene more aggressively.

In the long run, that means even more money finding it’s way into the system, and we’ll have an even bigger rebound boom baked into the outlook.

So that’s my take on the budget.

It’s huge. It’s massive.

And it’s only round one.

JG.

Aussies cop $24bn windfall

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When you look at how Aussie households are actually doing, you get a very surprising story…

Are Australian households actually building up a massive war-chest?

Are they about to unleash a surge of cash onto the asset markets?

Maybe.

WE’re getting pretty used to all the bad numbers. The scary numbers. The Australian Bureau of Statistics has numbers. Lots of numbers. Most of those numbers are scary.

Sad.

So sure, we’re hearing a lot about how stuffed the economy is.

But on the other side of that ledger sits the government.

And while Covid has torn a path of carnage through the economy, the government has also rushed in to try and patch that up with cash. Mountains and mountains of cash.

Happy.

And how is it all balancing out?

Pretty well actually. Australian households are actually in a better financial position than they were at the start of the crisis.

Wait, say what?

No seriously, that’s what the data says.

And look yes, some individual households are doing it tough. They’ve lost jobs or lost businesses, and they’re hurting. Absolutely no denying it.

But for every household that’s gone backwards, another has gone forward, and averaging it out over the entire population, you’ve got a net positive.

We’ve got a few data sources telling us this now.

First there’s analytics firm AlphaBeta:

Analysis of household cashflow by analytics firm AlphaBeta, a part of Accenture, shows the slump in wages suffered by households due to the pandemic (plus and the fall in unincorporated business income flowing to households) was more than offset by government payments, superannuation withdrawals and private sector hardship support between April and June.

It reveals a net increase in household cashflow of nearly $24 billion over that period.

Yep. You read that right. Aussie households have picked up a windfall $24 billion!

$24 billion! That’s not nothing. That’s a long way from nothing.

Happy.

The CBA are telling a similar story, based on the flows they’re monitoring into customer accounts. They reckon that on the back of government support programs and the early access to super, households are in a stronger financial position.

The income of the average household rose by 4.2% over the year to Q2 20, up from 2.4% over the previous year. Salaries have fallen due to coronavirus job losses. But investment income and government benefits have increased sharply. Investment income is capturing the early withdrawal of super which is part of the COVID-19 response

That investment income is a doozy, but remember it’s all about the super withdrawal.

Still, in aggregate and on average, households are substantially better off.

And at the same time, they’re spending less. Spending has fallen by around 9% over the year to Q2 2020.

So if they’re earning more and spending less, that must mean that households are saving more. That’s a good thing. That’s shoring up their long-term financial position.

So this is a story about households having more money.

It’s also a story about households putting that money aside for a rainy day.

But what if the rain never comes?

What if things get back to normal pretty quickly, and Aussie households just find themselves $24 billion better off?

Where does that money go then?

It goes into Jet skis obviously, and then into asset markets after that.

Boom.

JG

Is this wages boom too late to change the election?

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In six months, Morrison could have crushed it in. Shame the election is now.

So the election has been called. What’s going to be the deciding factor?

We like to think it’s about big-picture vision and value positions. It’s about the issues.

But it’s not. It’s the economy, stupid.

I don’t think Bill Clinton ever expected that that little quip would be one of the most lasting contributions of his “legacy”, but it is exactly right. People need to feel secure first and foremost. The economy has to be delivering real jobs and a decent standard of living.

If it’s not, everything else is a side-show.

And on that front, you’d have to think the economic tides are with Morrison.

And they are to a degree. The economy continues to perform reasonable well, especially on the most important metric that matters – employment.

Employment growth is easing, but it remains decent. And most importantly, the number of jobs is growing faster than out labour force population, and the unemployment rate continues to fall. 

At 5%, it’s a pretty decent outcome, all things considered. By itself, it’s certainly not a ‘turf them out’ type number.

But there are problems for Morrison that are hidden behind this headline number.

The first is that employment growth is uneven. Some sectors, especially the public sectors, are doing well. Others, particularly mining and construction, less so.

That patchiness can create ‘pockets of pain’ in the economy. It can create segments were unemployment is concentrated, and political venom starts to pool. Think the mining communities of Far North Queensland, for example. It’s not possible for a miner who’s lost his job in Townsville to just go and become and community care worker in inner-city Melbourne, for example.

The other headache for Morrison is that while people have jobs, wages growth has been… what’s the economic term? Piss poor.

Wages growth has been hobbling around 2%, which means that people probably feel they’re going backwards in real terms. Technically, it’s still outpacing inflation, but I think that’s probably only a technicality. Ask around and I don’t think people will tell you that they’re keeping pace with the cost of living – especially with energy prices becoming a real pain point.

So that’s a headache for Morrison. It’s something that can shift the electoral dial.

The real irony here though is that wages are actually starting to pick up. Take a look at the chart and you can see that yes, wages growth is relatively low by historical standards, but it has definitely ticked up in recent months.

And the NAB survey is showing that more and more firms are reporting difficulty finding suitable labour.

So wages pressures are building. We’re still six months to a year away from this feeling like things are really on the up and up for everybody, but it’s coming.

So Morrison must be spewing. If only the election could have been called six months later. He probably could have ridden a growing sense of optimism to victory.

But instead, people are still grumbly, There’s not a lot of gratitude in the community.

And if Morrison loses and Labor wins, they’ll enjoy a very sweet honey-moon period as wages continue to pick up and households enjoy the boost in confidence. Even though they’ll have done nothing to deserve it.

That’s just how the cards have landed. Tough break, ScoMo.

Is the credit crunch already over?

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The data says that APRA’s restrictions have done their job. Time to let the market run free again.

It’s looking to me like the credit crunch might be about to ease up.

Let’s remember how we got here. Right now, the national property market is in the midst of an orderly and mild consolidation.

And consolidations are expected. The property market moves in cycles, up and down.

Most times that’s driven by dynamics in the cycle itself. Left to it’s own devices, the property market, just like the broader economy, will run hot, then cool and then run hot again.

But that’s the thing. The property market wasn’t left to its own devices. Since 2016, APRA has been getting involved, creating limits, particularly on investor lending. It started with making sure lending to investors wasn’t growing too quickly, and then became about cutting back the pace of Interest Only (IO) lending.

This clamp down on IO lending was across the market, but was particularly focused on investors.

Predictably, as the credit taps were squeezed, price growth began to stall, and over the past year or so, prices actually started to come-off, little by little.

And that’s where we are today.

So obviously if we’re interested in finding out when the market is going to start growing again, then the first question is really, ‘when will APRA back off?’

This is a little hard to predict. One of the things that came out of the Royal Commission was that APRA – who is responsible for regulating the banks – seems to have been a bit asleep at the wheel.

Given the huge list of crimes, misdemeanours and affronts to human decency that emerged from the Royal Commission, you do really have to wonder what APRA were doing.

APRA has been made to look a little silly. But what worries me now is that they might over-compensate – try to play the tough wild west sheriff. And that might mean that conditions remain tougher for longer than they need to.

And the truth of it is that right now, I’m seeing a case for letting up on the restrictions.

Take a look at this chart here from the RBA. It shows what has happened to IO lending since the restrictions came in in 2016.

The orange lines – new lending – is the one to be watching here. As you can see, IO lending pretty much fell off a cliff when the restrictions came in, particularly to investors in the bottom panel there.

But what you see here is the banks very quickly bringing themselves into line.

And after the initial adjustment, things just sort of levelled out – the share of new lending has remained fairly constant in recent months.

If it remains constant, the share of outstanding lending – the blue line – will keep trending lower, and until it re-joins the orange line.

And the structural change in the market that APRA was looking to create, will be complete.

Mission accomplished.

The thing I would note is that once this transition has been made, then the normal cyclical dynamics should start to reassert themselves.

That is, even if the share of new lending remains at around 30%, after a year, that will be the new reality we’re working with – so our annual growth rates (which compare this month with the same month 12 months ago), there won’t be any impact left in there at all.

And so that should mean that we should see price growth should realign with the cyclical trend.

It is possible that these restrictions have caused the cycle to turn. There’s a good chance of that. So I don’t think we’ll see positive growth numbers this year or in the first half of next, but after that, I’d be looking for things to start moving again.

But I’d also be saying to APRA, since you’ve caused the cycle to turn, and you have done what you set out to do with IO lending, maybe it’s time to cut investors some slack.

We certainly don’t need any more restrictions. We don’t need no sheriff out there shooting from the hip.

Here’s hoping cool heads will prevail.

If Labor wins, buy this type of property

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I’m wondering what impact a Labor government might have on the market. I’m not the only one…

With Malcolm Turnbull actively campaigning against the Liberals in his old seat in Wentworth, and the coalition looking like it’s on the brink of implosion, I’ve been thinking about what a Labor government might mean for our property markets.

Turns out I’m not the only one – The annual Property Investment Professionals of Australia survey shows that a lot of investors are worried what impact Labor’s negative gearing and GCT reforms will have on the market:

Australian property investors are shrugging off finance issues, concerns about taxation policy changes, and the market slowdown in Sydney and Melbourne with a growing majority believing this year is a better time to invest than last, the 2018 Property Investment Professionals of Australia (PIPA) Property Investor Sentiment Survey has found.

The national survey, which gathered insights from 820 property investors, shows that more than 77% of respondents think now is a good time to invest in property, with 52% looking to purchase a property in the next six to 12 months.

However, more investors than last year (48% in 2018 versus 43% in 2017) say that changes to investor lending policies have impacted their ability to secure finance for an investment property.

Potential changes to negative gearing and Capital Gains Tax policies are also a growing concern, the survey found, with 45% of respondents indicating they would reconsider their future investment plans as a result of proposed changes.

While a majority of investors (64%) believe it’s unfair to charge investors higher interest rates compared to owner occupiers, most (61%) also indicate they will have no problem meeting higher interest rates when their loans switch to principal and interest repayments.

Even though the Sydney and Melbourne market slowdown has been widely reported, most investors appear unperturbed with almost 90% indicating that concerns about price falls in our two biggest capital cities will not slow down their investment plans.

Brisbane remains the hot favourite for investment, according to the survey, with 44% believing it was the capital city with the best investment prospects (up from 43% last year). About 26% picked Melbourne, down from 32% last year, while only 8% chose Sydney as having investment potential.

This all fits with one of the stylisations I have about the market – professional investors are generally well positioned to deal with rises in rates or anything like that. If anything, it’s amateur investors who are just blindly following the advice of their accountant – that’s who we need to worry about.

If you are self-identifying as a ‘professional investor’, then you are probably well covered.

The focus on Brisbane is interesting. Brisbane has been underperforming for a few years now, and I’m not convinced it’s about to dramatically turn all that around. So I’m perhaps not as bullish on Brisbane, but that might be because I’m not as bearish on Melbourne, or even Sydney.

There’s gems to be found wherever you look.

But it does seem clear that negative gearing reform is rearing its head as an issue.

So am I worried?

I would say I am ‘cautiously optimistic’.

I’m optimistic because I don’t see the reforms having a huge impact on the market, in and of themselves. But I’m cautious, because the market is facing a lot of headwinds at the moment, and a lot of them regulatory.

That’s the thing when you’re camel is fully laden. You just don’t know what’s going to be the straw that breaks its back.

I don’t think it will be negative gearing, but I also think Labor would be smart to wait and see what impact recent changes in the credit market have, before it goes and does anything it might regret.

The other thing to remember is that Labor’s proposal is to remove negative gearing on existing homes, but leave it in place for new builds.

That mean we might just simply see a shift in investor demand from existing to new construction.

Stockland CEO Mark Steinert sees the writing on the wall:

The Labor Party’s plan to limit negative gearing tax breaks to new housing would put a rocket under the business of residential developers because demand from investors would surge, Stockland chief executive Mark Steinert says…

“Our business will rip,” he said at the Property Council of Australia’s annual congress in Darwin.

“We’re all about new product. At the end of the day, half our buyers are first-time buyers, and 80 per cent of our buyers are owner-occupiers. If the investors are going to participate in the market like they have in the past, that means they’re all pointing at our product and other developers’ products”…

Good luck to him. He’s probably right.

And when you remember how busted our planning system is, you could see a surge in demand for new builds meet bottle-necked supply… and that means rising prices.

Hard to know how it will balance out, but it could mean that it could even be a net-positive!

I’m not sure. I’ll have to do a bit more thinking about how to balance those equations.

But I think that is how I’m thinking about it. Labor’s negative gearing reforms probably won’t have a huge impact on the market, with a reconstitution of demand price growth away from existing homes to new builds…

… provided Labor doesn’t fluff the timing.

We’ll see.