Markets
Local:
The ASX200 index performed well in November, rising by 5.03%
Global:
The S&P 500 was up 8.92% in November, bringing its YTD return to 18.97%.
The Dow Jones Industrial Average rose 8.77% for the month and was up 8.46% YTD.
The European STOXX Europe 600 Index ended November 1.35% higher, as a steep decline in inflation and falling bond yields lifted investor sentiment.
Gold:
The spot price for Gold continued to trend higher, finishing the month at US $2,035.
Iron Ore:
Iron Ore price in November averaged US $130.5/Mt, up by US $11.5/Mt month-on-month, as sentiment remains positive from more funds being poured into the Chinese economy.
Oil:
Brent Oil price continued to trend lower finishing the month at US $80.86/bbl, down from US $85.02/bbl in October.
Property
Housing:
CoreLogic’s national Home Value Index (HVI) rose 0.6% in November, the smallest monthly gain since the growth cycle commenced in February. Despite the slowdown, the national HVI reached a new record high in November. After falling -7.5% from a peak in April 2022 to a trough in January 2023, housing values have bounced 8.3% higher over the past 10 months.
Economy
Interest Rates:
Reserve Bank governor Michele Bullock has left the cash rate on hold at 4.35%, but warned she may be forced to lift interest rates next year if domestically driven inflationary pressures remain strong.
Retail Sales:
Australian retail turnover fell 0.2% in October 2023, according to seasonally adjusted figures released by the Australian Bureau of Statistics (ABS). This follows rises of 0.9% in September 2023 and 0.2% in August 2023.
Bond Yields:
Australia’s 10-year government bond yield rose above 4.3%, rebounding from 11-week lows and tracking a rise in US Treasury yields as investors continued to assess the global economic and interest rate outlook.
The U.S. 10-year Treasury yield finished November at 4.37%.
Bitcoin:
The average closing price for Bitcoin (BTC) last month was $36,596.16. Leaving it up 8.8% for the month and the latest price is currently sitting at $42,194.
Exchange Rate:
The Aussie dollar remained steady in November against the American dollar, at $0.665, and against the Euro at $0.606.
Inflation:
Australia: The monthly Consumer Price Index (CPI) indicator rose 4.9% in the 12 months to October 2023, Leigh Merrington, acting ABS head of prices statistics, said: “The 4.9% increase is down from 5.6% in September and below the peak of 8.4% in December 2022.”
EU: Euro area annual inflation is expected to be 2.4% in November 2023, down from 2.9% in October according to a flash estimate from Eurostat. Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in November (6.9%, compared with 7.4% in October).
US: The annual inflation rate in the US slowed to 3.2% in October 2023 from 3.7% in both September and August, and below market forecasts of 3.3%. Energy costs dropped 4.5% (vs -0.5% in September), with gasoline declining 5.3%.
Consumer Confidence:
The Westpac-Melbourne Institute Index of Consumer Sentiment declined 2.6% to 79.9 in November, down from 82 in October. The RBA’s November rate hike has put renewed pressure on family finances and reignited concerns about both the rising cost of living and the prospect of further rate rises to come. Previous months had been showing some tentative signs that sentiment was starting to lift out of the deep pessimism that has prevailed since the middle of last year. That rally looks to have been cut short before it even really began.
Employment:
Australia: The unemployment rate increased by 0.2 percentage points to 3.7% in October (seasonally adjusted). Bjorn Jarvis, ABS head of labour statistics, said: “With employment increasing by 55,000 people, and the number of unemployed people increasing by 28,000, the unemployment rate rose to 3.7% in October. This was back to around where it had been in July and August.
USA: Total nonfarm payroll employment increased by 150,000 in October, and the unemployment rate changed little at 3.9%. Job gains occurred in health care, government, and social assistance. Employment declined in manufacturing due to strike activity.
Purchasing Managers Index:
The headline seasonally adjusted Judo Bank Australia Manufacturing Purchasing Manager’s Index™ (PMI) posted 47.7 in November, down from 48.2 in October. The latest reading signaled a ninth monthly deterioration in manufacturing sector conditions and at the quickest pace since May 2020. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.
US Services PMI:
The seasonally adjusted S&P Global US Services PMI Business Activity Index posted 50.8 in November, matching the earlier released ‘flash’ estimate and little-changed from October’s reading of 50.6. The latest data signaled the fastest expansion in output since July, albeit only marginal and slower than the long-run series average.
US Global Manufacturing PMI:
The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI) posted 49.4 in November, unchanged from the earlier released ‘flash’ estimate, but down from 50.0 in October. The fall in the headline figure signaled a renewed decline in the health of the manufacturing sector and one that was the strongest since August.
Sources: ABS, AFR, AWE, BLS, CoreLogic, Eurostat, Macquarie MWM Research, RBA, TradingEconomics, UBS, Wealth Data.
Comments
The Housing Affordability Report
The recent report by ANZ and CoreLogic has highlighted many of the challenges we are currently facing in terms of home buying, as well as some of the small opportunities that still exist despite the highly inflated market.
CoreLogic’s national home value index (HVI) rose 0.9% in October, up further from a 0.7% rise in September. Since finding a trough in January 2023, the national HVI has increased by 7.6%, leaving the index only 0.5% below the previous historic high recorded in April 2022.
This has shown that home values are still rising even as interest rates continued to rise through the start of the year, this has created a dual challenge for the next cohort of buyers.
The average new occupier mortgage rate across all lenders has been reported at 5.9% in June this year. Historically, increases in interest rates have put downward pressure on housing prices, but strong net overseas migration, constraints on housing supply, and the recent fall in the average number of people per dwelling, have all pushed prices higher.
Furthermore, a 20% deposit on the median home value in Australia currently represents 148% of median household income, compared with a historic five-year average of 136%. Taking inflation into account, real incomes fell through the June quarter, meaning there is less left over for servicing housing costs after other necessary expenditures like energy bills and groceries.
This presents a particular challenge for many first home buyers. Home owners often benefit from gains in home values to put toward their next purchase, while first home buyers must accumulate a deposit in an environment where home price growth is again outpacing growth in income. This ‘deposit hurdle’ was the biggest affordability challenge throughout the 2010s.
Now, first home buyers who are able to clear the deposit hurdle and serviceability assessment must dedicate more of their income to housing costs. The national estimate of median income required to service new mortgage costs are at a near-record high in the series (45.5% of income), while the years to save a deposit is estimated to be 9.9 years. For prospective first home buyers in the rental market, the portion of income to service rent at the median level pushed to record highs in the June quarter, at 31.4%. Combined with other increases in the cost of living and limited wage growth, more savers are likely to see a slowdown in how quickly they can build their deposit. This is also reflected in the household savings ratio derived from ABS data, which fell to 3.5% in the June quarter.
First home buyer activity has been declining fairly consistently since a peak in January 2021. ABS housing finance data (figure 2) shows the number of monthly first home buyer loan commitments over time. First home buyer activity often becomes concentrated under periods of government incentives.
Looking at the larger regional cities within Australia, there were 52 house or unit markets that remained serviceable, at 30% or less of median income required to service a new mortgage. The 52 markets represent around 30% of the 174 markets analysed.
There are several reasons these markets are affordable, though not all of them will be appealing to prospective home buyers. The cheapest three markets by median value are in the Australian outback, and income measures in these markets can skew higher because of employment across highly compensated sectors like mining and construction. These areas are often cheaper to service a mortgage in than rent because the temporary nature of work on mining projects often makes temporary accommodation more desirable.
Other markets are in major cities and are on the periphery of the greater capital city region. These include Sydney’s South West, Adelaide North and Mandurah in Perth, which are among the lowest ranked regions by median household income in each city. There were many locations identified across Perth and Brisbane where 30% or less of median household income was required to service a mortgage, though these were all unit markets. The relatively affordable nature of these markets may also explain the very positive internal migration trends seen across Brisbane and Perth in the past couple of years.
Looking ahead, the multiple challenges faced by prospective first home buyers may start to ease from mid-2024 onwards. ANZ forecasts the official cash rate will move lower from late 2024, and though the fall in rates will be modest over the medium term, this could help relieve ongoing housing costs for home owners. In the meantime, regional analysis of affordability metrics suggests there are markets where deposit hurdles are relatively low, and serviceability is manageable, though this may come at a compromise on the size and location of homes relative to some first home buyer’s expectations.
Sources: ABS, ANZ, CoreLogic
The Return of High Migration Levels
Permanent and long-term arrivals are exceeding levels last seen in 2019, reflecting the strength in net overseas migration. This momentum continues to build across several components:
- 11,850 permanent arrivals in September 2023 compared to 7,520 in September 2019 (up 57%) and 8,690 in September 2022 (up 36%)
- 55,590 long-term overseas arrivals in September 2023 compared to 40,170 in September 2019 (up 38%) and 43,930 in September 2022 (up 26%)
- 45,090 international student arrivals in September 2023 compared to 45,290 in September 2019 (down 0.5%) and 35,560 in September 2022 (up 27%).
Short-term arrivals have not risen at the same pace as permanent and long-term arrivals. In September 2023, there were 584,620 short-term overseas visitor arrivals compared to 694,960 in September 2019 (16% lower) but this is up 371,850 from September 2022 (+57%).
New Zealand topped the table of short-term visitors with 128,820 arrivals (22% of total arrivals). Notably, there was a sharp increase in short-term visitors arriving from China following the reinstatement of Australia as an approved country in their Approved Destination Status scheme. There were 59,080 short-term Chinese arrivals in September 2023 compared to 37,330 Chinese arrivals in June 2023.
Migration is a longstanding source of growth for Australia. The ABS has estimated that migrants constituted 29.5% of the total population in June 2022, totalling 7.7 million individuals.
However, there have been some significant shifts in the profile and background of migrants over the last decade. In 2022, the leading birth countries for migrants were England (3.7%), India (2.9%), China (2.3%), and New Zealand (2.3%). Despite England consistently holding onto the top spot, there is a noticeable decline in the proportion of English migrants – falling from 4.4% in 2012 to now 3.7%. In contrast, there has been a rapid increase in migration from high-growth Asian countries like China and India. Between 2012 and 2022, India, China, Nepal, Philippines, and Vietnam emerged as the fastest-growing source countries for migrants, with the number of Indian-born migrants more than doubling during this period.
At the state level, Western Australia boasts the highest proportion of migrants among states and territories at 34.1%, although it recorded a decline from 35% in 2016, likely attributed to stringent COVID-related border policies. Conversely, Tasmania witnessed the most robust growth in the proportion of migrants, rising from 13.1% in 2016 to 16.3% in 2021.
The shifting profile of migrants is particularly evident at the state level. While English migrants remain the majority in smaller states, larger and more diverse states like New South Wales (NSW) and Victoria have become home to substantial Chinese and Indian migrant populations, respectively. This reflects the role of NSW and Victoria as primary entry points for migrants and the presence of well-established migrant communities in these states.
Sources: ABS, AFR, Macquarie