Tag Archives: housing boom

Capex holds up

The results of the private capital expenditure survey for the September quarter were released by the ABS this morning, showing a seasonally-adjusted .2% rise, in volume terms, on the June quarter. This solidly beat expectations for a 1.9% drop.

In dollar terms, capital spending by the mining sector dropped 3% over the quarter and manufacturing fell 1.3%, with these falls offset by a 5.6% jump in ‘other selected industries’. Total capital spending was down 4.6% ($1894m) on the same quarter last year, mining was -14.2% ($3475m), manufacturing -10.5% ($253m), and ‘other selected industries’ +12.8% ($1833m).

TotalCapexSept14

The main driver of capital spending by ‘other selected industries’ over the past year has been the ‘rental, hiring and real estate services’ industry grouping, which has risen by 40% and contributed $838m of the $1833m in additional spending by that sector. Contributions have also been made by businesses in ‘retail trade’, ‘construction’ and ‘financial and insurance services’.

CapexOther1

CapexOther2

Those industry groupings cover businesses benefiting from the last monetary easing cycle and the consequent boom in house prices. Unsurprisingly, seeing as it’s the nucleus of the boom, NSW has accounted for over half the increase in capital spending by ‘other selected industries’ over the past year.

Here’s the division of total capital spending by state.

CapexState

Evidently, the cyclical boost emanating from the Sydney property sector and the resilience of mining investment in WA have cushioned the overall blow to capital spending in the past year. The latter of those points is important. If capex holds up in WA, it’ll come at the expense of the iron ore price, since capital spending in WA is almost entirely constituted by iron ore capacity expansions.

Here are the expectations for capital spending this financial year:

Mining 

Screen Shot 2014-11-27 at 4.49.33 pm

Other Selected Industries 

Screen Shot 2014-11-27 at 4.49.43 pm

Manufacturing 

Screen Shot 2014-11-27 at 4.49.37 pm

Manufacturing is all but dead so we can ignore that until we see the dollar fall 20-30% in real terms.

Without further cuts to interest rates, the cyclical upswing in NSW is likely to run out of puff over the next 6 months or so, in which case I wouldn’t be surprised to see expected spending by ‘other selected industries’ moderate somewhat by the time the full year’s spending has been recorded. Activity in this interest rate-sensitive space reflects the RBA’s strategy for ‘rebalancing’ the Australian economy as the resource sector slows. This is bubbly economics: papering over a structural downturn with a cyclical upturn in borrowing, asset speculation and consumption. The US famously tried this strategy after the tech wreck early last decade, and it ended up with a catastrophic housing bust.

Thankfully, Australians have mostly kept their heads so far, and the bubbliest segments of the economy are confined to Sydney property speculation and manic Melbourne apartment building. Credit is not growing too rapidly and household savings rates remain reasonably healthy (bearing in mind, of course, that households are already heavily indebted). Nevertheless, the bubbly segments have lately caused enough consternation within the RBA and APRA for these institutions to move forward with ‘macroprudential regulations’, specifically aimed at reducing macroeconomic risks in the property sector and banking system. Despite having cheered it on, the RBA finally grew wary of the housing beast.

It remains to be seen how stringent macpru ends up being in Australia, but it is a welcome move. Some commentators will be inclined to regard this upturn in housing-related activity as healthy rebalancing, but in my view a structural downturn needs a structural remedy, not a temporary sugar hit. We need a lower real exchange rate and productivity-enhancing reforms and infrastructure spending to boost investment in non-mining tradable goods industries. Until we get that, it’s hard for me to get excited about any purported ‘rebalancing’.

As to mining investment, there’s little doubt that we’re going to see it deteriorate sharply over the next two years, particularly given the recent carnage in iron ore and crude oil prices (which LNG prices are linked to). The BREE recently published its forecasts for mining projects.

Screen Shot 2014-11-27 at 5.02.32 pm

It’s safe to say that ‘possible projects’ are extremely unlikely, and also that many ‘likely projects’ will fail to break ground as well, without big rebounds in oil and iron ore prices, or a sharp fall in the Australian dollar.

Bonus Chart

CapexMining

Advertisements

Retail Details

It may not be apparent from its serene outer appearance, but a constant battle rages at Strayanomics between thoroughness and brevity. I would like any argument I make to be as well-supported as possible, but the detail this demands can be excessive. Unfortunately, attempts to keep a post as short and timely as possible risk inaccuracies, especially as this blog is a personal learning exercise as much as anything.

So it was with my shallow treatment of consumption spending in the interest rates update for October. In it, I wrote:

A large part of the why the housing boom has not had the wider economic impact one might have expected is that households have been reluctant to respond to higher net worth in the usual manner of saving less and spending more.

Whatever the cause, consumers have chosen to remain stubbornly parsimonious in the face of rising wealth. Until they throw caution to the wind, there is little in the outlook for consumer spending to recommend higher interest rates.

I based this observation on two pieces of evidence: the national savings rate and retail sales data, which at first glance wasn’t unreasonable. The savings rate remains elevated:

Screen Shot 2014-10-22 at 6.54.48 pm

And, notwithstanding a jump into Christmas last year, national retail sales growth has been notably weaker than in previous periods of strength in the housing sector (2001-2004, for instance). Momentum has also clearly been lost in 2014, despite ongoing strength in housing.

RetailSales

The problem was that I extrapolated out some mysterious shift consumer behaviour from these data, which wasn’t really justified.

I have highlighted a number of times that the housing boom has largely confined itself to Sydney and Melbourne.

Screen Shot 2014-10-20 at 8.19.19 pm

It should have come as little surprise then that consumption spending in NSW and Victoria has outpaced the nation as a whole. NSW has seen the largest increase by a long shot, mirroring the outperformance of house prices in Sydney.

RetailsSalesNSWVIC

In contrast, the mining states, along with perennial laggard, SA, have drifted below the national figure.

RetailSalesRest

If we take a longer-term view of spending in NSW, we can see that the housing boom in that state has indeed had the impact one would expect.

RetailSalesNSW

There really isn’t anything mysterious about the apparent frugality of Australian households, nor what looked like their reticence to spend out of rising housing wealth. The national figures merely mask regional differences. In states that are experiencing the winding down of the mining boom first-hand, households are considerably more sparing in their purchases. In NSW and to a lesser extent Victoria, the booming capital city housing markets are raising consumption spending, pretty much in line with what you’d expect. Thus, the reason the housing boom has not had “the wider economic impact one might have expected” is simply because the boom has not been especially wide

I might add, this doesn’t alter my narrative on interest rates, at least not at this stage. Firstly, it reinforces the picture of our bipolar economy (cyclical strength versus structural weakness, as outlined in the October rates post). Furthermore, it reminds us that low interest rates are critical to keeping Australia from sliding ever-closer to recession (or what will feel like a recession; substantially higher export volumes may shield us from recession in a technical sense). If the RBA hikes, we not only lose the momentum of housing construction, but we’re also likely to see growth in consumer spending cool materially as housing slows. Such is the bind our monetary technocrats find themselves in.