The Trend is Your Friend / by Adam Howard

Welcome back to the second session here at The Rookie’s home ground.  After reading last week’s Update (note I am assuming everyone read last week’s Update) I hope everyone came to a similar conclusion that things aren’t that bad right now.

A weakening Aussie dollar makes our exports cheaper, which means more of them are sold as they become more competitive, meaning more money flows into domestic industries.  Just want to insert a little bit of pointless detail here.  Australia’s top 10 exports by dollar volume in 2012 were:

                                             Australia Top Ten Exports By Dollar Volume 2012

                                             Australia Top Ten Exports By Dollar Volume 2012

Low inflation means our hard earned bucks go almost as far this year as they did last year, unemployment is well below the long term average meaning most of us have jobs, and finally, the cost of debt for those who need it is FAR lower than the long term average.

All seems quite rosy, really….

BUT (there are always buts), there are of course things to think about.  Think about and think “I don’t think that seems right.”  Things that make you go “Hmmmm…”

Firstly, of the above top 10 exports, only two are not primary industry.  That probably needs to change a bit as one of the things I learned as a banker was to watch out for “concentration risk”.  It’s a bit risky for your revenue to be generated by either sales to one debtor, sales of one product, sales of one class of product or exposure to one region.

From last week’s Update the other reason for a bit of caution is that the trends of our 4 variables are in the wrong direction.

Yes, the Aussie dollar is weakening, which is good.  But it’s weakening because the economy is slowing down and international capital (big, big piles of cash) is being sent elsewhere to earn better returns.

Unemployment is low, but is rising as the economy slows.

Inflation is low, but this is probably more due to low demand and consumer spending than anything else.  People aren’t that confident and neither are business owners (just to clarify, business owners ARE NOT people) and they are saving rather than spending.  Hence GDP growth AND CPI growth are flat.

Finally, interest rates are low and look like staying low as the RBA watches the economy for signs of further weakness.

Wow, that’s all a bit grim isn’t it??

But, it’s not that bad…the above is the way the media reports on the broader economy as if it’s all doom and gloom.  What it is, is a change from the trends of the past 20 years, and people hate change.

This week I want to provide some more pretty graphs I have shamelessly pillaged from the internet that show some of the other trends within our economy.  Once again, not doom and gloom; just some trends.

Might also show that you can make things appear anyway you want, depending on which variables you choose to discuss.

So, our variables this week are:

  • wages growth;
  • house prices;
  • household debt;
  • household balance sheets; and
  • GDP per capita.
Wages Growth vs Underlying Inflation

Wages Growth vs Underlying Inflation

Wages growth.  If you listen to the Australian Chamber of Commerce and Industry or Business Council of Australia commentary, or in fact any business-centred commentary, you might be forgiven for thinking wages are growing at an out of control rate.

Not the case.  Wages growth is flat as a tack at the moment, so when commentators bemoan a lack of consumer confidence, this might be one of the reasons.

That said, that’s only the CURRENT trend.  A quick look at the above graph shows wages have been growing faster than inflation for over a decade.

This might be the reason Australia is seen as such a wealthy nation.

Real House Prices

Real House Prices

House prices.  The trend for the past 15 years appears to have been relentlessly upwards, doesn’t it?  Once again, that’s the message we are sold by the media, that Australia’s property market is overvalued, that we have some of the most expensive real estate in the world?

But there really hasn’t been much upward movement since 2006, has there?  Anywhere….except Melbourne.

The surprising city is Perth, which experienced stratospheric growth to 2006 but appears to have actually dropped a little in value since then.

Strange…. not what I have read elsewhere.

What about that old rule of thumb that property prices double every 10 years?  If you look at the next graph you can see that’s not the case, at least not for the Australian property market.

Maybe it’s us?  Maybe we are the exceptions to that rule….or maybe the rule is bogus.

Regardless, almost all of the growth in value has occurred since 1990.

Australian Constant Quality Real Housing Price Index 1880 - 2012 (1880 = 100)

Australian Constant Quality Real Housing Price Index 1880 - 2012 (1880 = 100)

Australia House Price to Annual Household Income

Australia House Price to Annual Household Income

Here is another interesting way of looking at property prices; as a multiple of household income.

Currently a ratio of around 4.5 times, so if your household income is $200k, then, on average, your house is worth about $900k.

Once again, flat until 1990 and then a sharp upward trend until just after 2000, and then flat again.  Same as property prices.  Same as the property price index.

So, what have we got so far?  Are things good or bad?  Because that’s what readers are looking for when they read.

Strong wages growth for the better part of a decade, but now flat.  I would say that’s been good and is now just so-so.

Strong growth in property values for over half a decade, and now flat.  Once again, just so-so.

These trends are supported by the long term property index, and the ratio of household income to house value.

All appears OK to me.  So why the concern?  Why the drama?

My suggestion would be because the good times have come to an end.  We aren’t going backwards, but we aren’t going forwards at the same rate anymore.

And this is illustrated by the next couple of graphs.

Household Debt (% of Income)

Household Debt (% of Income)

Household Net Wealth, % of Household Disposable Income

Household Net Wealth, % of Household Disposable Income

Yes, that’s right.   The data seems to indicate we are living beyond our means.

At around the same time as wages started to level off, and property prices started to flatten out it appears our borrowing started to grow, and this has eaten into our household’s balance sheets.

Once again, maybe this is why business AND consumer confidence is flat.  After all business owners do have their own households, and their balance sheets may be amongst those that are losing value.

Maybe secretly a lot of us know we are living beyond our means and we are trying to stop doing so?

Just an idea.

But before I get carried away with negativity, let’s not forget how lucky we are….seriously.  All irony and sarcasm aside.

The final graph shows exactly this.

We are 23 million people on a planet of 7 billion and somehow we perform better based on real GDP per capita than most of our contemporaries.

Also check out the following links that show where Australia stands worldwide in GDP per capita and overall liveability.

List of countries by GDP per capita

The ten most livable countries

Not too bad really.  So, what’s all the worrying about?