Mining Investment

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GUEST OBSERVER
Based on current indicators, Australia appears to be about 30% of the way through the mining capex decline. The remaining downturn in mining investment will make a significant detraction from the economy, from a GDP perspective, but also from the impact on the labour market. The labour‑intensive nature of the mining investment upturn means that a major risk from declining investment resides in the potential job losses.
To date, the labour market has held up reasonably well.  While the unemployment rate has increased by 0.1ppts over the past year (as the participation rate has increased by 0.3ppts), annual employment growth is running at a solid 2.1% (or 220K).  This outcome is a noticeable step up from the 1%pa employment growth a year ago.  Job gains in construction areas (related to the residential construction upturn) along with parts of the services industry (health, professional services, tourism) are more than offsetting mining‑related job losses. 
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The questions now are how many more mining‑related job losses will flow through the labour market? And will the labour market be strong enough to absorb these potential job losses?
Resource construction versus resource production employment
One of the offsets to declining resource construction jobs is the pick up in production/extraction jobs created as the mining boom enters the final (or third and operational) phase of the mining boom cycle.  But, the operational stage of the mining process requires much fewer jobs compared to the workforce required in the construction phase.  
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RBA research indicates that the ratio of construction to operational workers is:
·         2‑3:1 for coal and iron ore mines (8% of capex);
·         10:1 for WA LNG projects (around 51% of capex) and;
·         5:1 for QLD LNG (as per our research).  QLD LNG accounts for around 32% of capex.  
QLD LNG is based on coal seam gas and requires an ongoing investment in drilling wells and pipeline construction, therefore requiring an ongoing construction‑related upstream workforce.
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Diana Mousina is economist for CommonWealth Bank of Australia. You can follow her on Twitter <a href="https://twitter.com/dianamousina" target="_blank">here</a>.
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How far through the mining jobs decline are we? Diana Mousina

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GUEST OBSERVER
The rotation in economic activity towards the non-mining states is continuing, while conditions in mining states have become more challenging as commodity prices have fallen further.
• In terms of domestic demand, NSW and Victoria will be the most solid performers, with growth gradually improving. 
Both will receive less impetus from housing activity and prices in FY 2016-17. 
Notwithstanding this, our central case remains for solid (though unspectacular) employment growth and lower petrol prices to sufficiently support household incomes and consumption (despite ongoing subdued wages growth). 
• The AUD is acting as a stabiliser, although the troubled global backdrop presents downside risk to all states and territories. 
Further depreciation of the AUD to USD66c will continue to improve the competitiveness of export-oriented and import-competing firms to varying degrees. 
This will be particularly helpful for services sectors, including those benefiting from tourism and international student arrivals such as hospitality, retail and education. 
States for which tourism-related activity makes up a large proportion of the economy such as Tasmania and Queensland will be particularly supported. 
Tourism and education are also bright spots for NSW, Victoria, South Australia and the NT. 
While not our core view, a sharper global slowdown could lower demand for travel to Australia, education exports and Australian property, particularly if the household sectors in China and East Asia come under stress. 
Queensland and the Northern Territory will outperform in terms of overall gross state product in coming years as LNG export volumes ramp up.
However the outlook for associated income and government revenue has deteriorated as commodity prices have dropped further, and any residual mining-related investment in the pipeline is unlikely to proceed. 
Western Australia is more advanced into the mining investment downturn, with broad-ranging effects to continue across the states’ economy in 2015-16, before LNG export volumes come through in subsequent years, but to a lesser extent than previously forecast. 
A restrained approach towards non-mining business investment is likely to persist across all states in coming years.
Recent equity market volatility and uncertainty about future taxation arrangements are likely to add to this air of caution, particularly given firms continue to demand a restrictively high rate of return on investment. 
 
• An overview of the outlook for each state and territory is in the attached document. Links to individual handbooks for each state and territory are available at the links below. 
• <a href="https://business.nab.com.au/wp-content/uploads/2016/01/NSW_Jan16.pdf">New South Wales</a> will remain the standout in terms of domestic demand. Robust employment growth will be supportive of household spending, while business conditions and capacity utilisation remain elevated, particularly across services sectors. The challenge for NSW will be maintaining robust growth as momentum from the housing sector begins to fade through 2016.
• <a href="https://business.nab.com.au/wp-content/uploads/2016/01/VIC_Jan16.pdf">Victoria</a> will also continue to experience solid domestic demand growth, and is also well positioned to take advantage of the lower AUD in its tourism and education sectors. Strong employment growth will support consumer spending, although there will be less impetus from the housing sector through 2016. 
• In <a href="https://business.nab.com.au/wp-content/uploads/2016/01/QLD_Jan16.pdf">Queensland</a> , the sharp decline in mining investment will be offset by exports, although lower LNG and coal prices will reduce the export earnings, profitability and government revenue. Meanwhile, key tourist destinations are benefiting from the lower AUD (with interstate visitor arrivals particularly strong). Domestic demand growth is slowly improving. More attractive rental yields and housing affordability than in NSW and Victoria are driving dwelling investment in Brisbane.
• <a href="https://business.nab.com.au/wp-content/uploads/2016/01/WA_-Jan16.pdf">Western Australia</a> is well into the throes of the mining investment downturn, which is having a dramatic impact across many segments of the economy. Offsets from stronger mineral export volumes helped to prop up Gross State Product (GSP) growth in 2014-15, but big declines in state final demand have had a major impact on the state’s labour market and asset prices. These trends are expected to continue given the lack of momentum in non-mining sectors. A ramping-up in LNG exports in subsequent years should see growth lift, but by less than previously forecast.
• <a href="https://business.nab.com.au/wp-content/uploads/2016/01/SA_Jan16.pdf">South Australia</a> continues to underperform, challenged by unfavourable demographics and the structural decline of its manufacturing base. Business conditions remain weak, with the retail sector and some improvement in tourism rare bright spots.
• <a href="https://business.nab.com.au/wp-content/uploads/2016/01/TAS_Jan16.pdf">Tasmania</a> – while the outlook has improved over the last year, thanks in large part to a pick-up in business investment and strong domestic tourism, recent data suggest that the recovery may be losing a little steam. 
• <a href="https://business.nab.com.au/wp-content/uploads/2016/01/ACT_Jan16.pdf">Australian Capital Territory</a> – the economy is gradually recovering from the recent fiscal tightening and public sector job cuts. The labour market has shown promising signs of improvement, and together with a modest pick up in population growth will support household consumption and dwelling investment. 
• <a href="https://business.nab.com.au/wp-content/uploads/2016/01/NT_Jan16.pdf">Northern Territory</a> - Growth will remain strong in coming years as the Icthys LNG project commences export. Medium-term the economy will struggle to replace this source of income and employment, despite the lower AUD supporting tourism.
 
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A delicate re-balancing act: NAB's Alan Oster

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GUEST OBSERVER
It wouldn’t be too unkind to suggest that Western Australia is not considered as the national benchmark of sophisticated public policy.
Indeed, the state has recently attracted much attention – and derision – for the way its policy making elite squandered the wealth generated by the resources boom.
True, we now have more sports facilities than you can poke a stick at, not to mention a major makeover of the city foreshore – albeit noticeably empty of the promised high profile developments that were supposed to succumb to its irresistible allure. But you can’t accuse the Barnett government of not having big ideas. 
Funding them has been another issue. Quite how WA managed to emerge from the once in a lifetime mining boom with an estimated debt burden of $40 billion by 2020 and a projected budget deficit of $4 billion is one of the West’s great mysteries. Or not, if you bother to look at what happened to all the <a href="https://www.academia.edu/27612380/Booms_busts_and_parochialism_Western_Australias_implacable_political_geography">riches the boom generated</a>.
WA Nationals leader Brendon Grylls certainly has, and that’s why he’s launched a rather lonely campaign to make the miners pay more tax. Even though this fiscal horse has long since bolted, he’s got a point. Not only did the big miners pay a measly 25 cents per tonne royalty to the WA government – a rate fixed in the early 1960s – but the WA government actually subsidised the miners throughout the boom.
According to the Australia Institute, taxation revenue across Australia in 2013-14 (before the collapse in prices) only accounted for about 5% of government revenues. In WA this situation was made worse by a subsidy regime that gifted the big miners some $6 billion at the height of the boom. No surprise that Grylls is on the warpath given his signature ‘Royalties for Regions’ program has been an early casualty of a more austere era.
Was this wasted opportunity and fiscal failure inevitable? Absolutely not. Not only have we been here before and should have learned similar lessons from the boom and inevitable bust of the 1970s, but other countries have been much cleverer in the way they have handled their good fortune.
Every policymaker in Australia should be made to read Paul Cleary’s excellent analysis of the way Norway handled its boom: <a href="https://www.theaustralian.com.au/arts/review/norway-resources-the-good-oil-on-a-trillion-dollar-miracle/news-story/02c157d020b2e26aa506323ae07803d4">Trillion Dollar Baby</a>. The experience could hardly be more different and the comparison would be laughable were it not for the fact that future generations will come to rue the folly and myopia of our current leaders.
The key lesson that emerges from Cleary’s analysis is that even small states can have a big say in determining what happens to the windfall revenues booms generate - but only if they understand what is happening at present and have a plan for the long term future of the country.
Norway had both. First, they had a capable government and skilled bureaucrats (yes, they are valuable and important) who quickly realised that Norway’s oil boom had to be managed for the benefit of Norway, not the multinational oil companies. This meant not being intimidated by powerful multinational corporations and recognising the inherent bargaining strength of national governments. You can only exploit resources where they are. Host governments can - and should - determine how they are developed.
In contrast to successive state and federal governments in Australia, this is precisely what the Norwegians did. First, they compelled the oil majors to build their required oil platforms in Norway, developing a world class manufacturing capability in the process. Secondly, and in another unflattering and revealing contrast to Australia, they ensured 90% of the windfall revenues derived from the oil boom in Norway remained there. 
Norway’s “problem”, unlike ours, has been what to do with the astounding amounts of wealth generated as a direct consequence of its activist and enlightened policies. A third critical innovation was establishing a sovereign wealth fund.
Sovereign wealth funds serve two purposes. First, they put aside the windfall revenues of today for future generations – a possibility our own leaders seem incapable of contemplating given their truncated political horizons. Second, by investing most of the wealth overseas, they put downward pressure on the domestic currency, allowing other domestic industries to survive.
At a time when we are collectively waving farewell to much of the manufacturing sector, this is another sobering lesson – especially for the young who will not benefit from all that squandered wealth and may wonder where they will actually work. 
The current debate – such as it is – in the West will likely go nowhere. Kevin Rudd’s demise is a reminder of what happens to politicians in this country who dare to take on the miners. The WA Labor Party is unlikely to be any braver or far-sighted on these issues than its federal counterparts. In short, don’t look to the West for a revolution in public policy. But if you want somewhere spacious and well equipped to kick a footie around.
Mark Beeson is professor of International Politics, University of Western Australia and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/mark-beeson-60300" target="_blank">here</a>.
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Western Australia provides a masterclass in what not to do with a resources boom

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GUEST OBSERVER
Construction work, having trended lower in recent years, stabilised over the past half year. The drag from the mining investment downturn has diminished and public works is providing a boost.
In the March quarter 2017, construction work declined by a relatively modest 0.7 percent, following a 0.6 percent gain in the final quarter of 2016 (revised up from -0.2 percent). By comparison, over the year to September 2016, construction work declined by 10.7 percent, to be $5.6bn below a year earlier.
The March quarter 2017 result broadly met expectations, (market median -0.5 percent and Westpac -0.2 percent).
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In NSW and Qld, activity in the most recent quarter appears to have been disrupted by wet weather and flooding.
The wet weather impact is evident in the private home building segment, where work nationally on new dwellings fell by 4.8 percent and renovations were down by 6.3 percent. In NSW, total residential building activity fell by 4.9 percent in Q1, while Qld experienced a sharp 13.6 percent decline. These outcomes are weaker than suggested by earlier strength in approvals and the sizeable pipeline of work.
Home building activity is likely to rebound in the June quarter. Beyond that, there is a looming downturn in home building activity. Notably, private new dwelling approvals in Q1 2017 were 12 percent below the level of a year earlier.
The drag from the mining investment downturn has clearly diminished. Private infrastructure activity surprisingly rose in the March quarter, up 1.8 percent. We still expect some further modest downside over coming quarters.
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In the mining state of WA, where work on gas projects under construction is nearing completion, total infrastructure activity is declining at a slower rate. Over the past half year, work fell by 12 percent, down $0.7bn. For the year prior to that, work fell by 51 percent, a decline of $5.5bn.
Public works is a growth driver as governments commit to additional projects. Public works increased in each of the past seven quarters, up a cumulative 21 percent. That is the longest run of consecutive gains since 2008 to 2010, associated with the post GFC fiscal stimulus package.
Victoria is performing strongly, with construction work in Q1 up 3.4 percent/qtr, 9.2 percent/yr. Strength is evident in building activity, +12 percent/yr, both residential and non-residential.
In NSW, construction work consolidated over the past year, with a Q1 outcome of -1.7 percent/qtr, +0.8 percent/yr. While infrastructure work moved higher, +6.6 percent/yr, building work eased, -2.2 percent/yr, led lower by a pull-back in commercial work.
In Qld, construction work has stabilised, printing at -1.9 percent/qtr, -1.0 percent/yr in Q1. This follows falls of 22 percent in 2014 and 24 percent in 2015 associated with the mining investment downturn. Over the past year, infrastructure work rebounded by almost 14 percent.
In WA, construction work fell by -4.8 percent/qtr, -37.4 percent/yr in Q1.
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Andrew Hanlan is senior economist for Westpac and can be contacted <a href="https://www.linkedin.com/in/andrew-hanlan-4302223/" target="_blank">here</a>. 
 
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Construction work stabilised over the past half year: Andrew Hanlan

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GUEST OBSERVER
After showing some tentative signs of lifting, non-mining business investment has dropped back again as a share of GDP.
The capex survey and non-residential approvals data signal only a modest lift non-mining investment this year.
However there are some more positive signs for business investment.
These include high levels of business conditions and confidence, rising capacity utilisation and a lift in company profits.
The strong pipeline of infrastructure spending and the revival in the manufacturing sector are also supportive of stronger investment. 
Non-mining business investment remains the missing ingredient in the successful transition from mining to non-mining led growth. A pick up in non-mining business investment would be a welcome driver of growth in the short-term. It also boosts productivity in the medium to long-term, which is essential for maintaining growth in the face of an ageing population and a potentially slower population growth rate. 
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Mining sector investment seems to have stabilised for now. However non-mining business investment is yet to show a meaningful lift. In fact, as a share of GDP, 8 non-mining business investment has fallen back close to the recent lows in late 2013. This is despite record low interest rates and a relatively stable, and lower, Australian dollar.
In the past we have discussed some of the reasons for weak non- mining business investment (see here). These included unrealistic hurdle rates and slower growth in consumer spending which has dampened business’ expectations of future demand. Many of these factors are still relevant. 
In this note, we take a fresh look at what the forward indicators of business investment are telling us. We find that the “hard” data such as non-residential approvals and capex spending intentions point to only a very modest increase in business investment in the year ahead. However the background conditions for business investment have improved. In particular there has been a strong lift in business conditions and confidence and a lift in capacity utilisation. Other positives for business investment include the revival in the manufacturing sector.
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And also 208 the big lift in public infrastructure spending underway. The note concludes with our outlook for non-mining business investment in the years ahead. 
Non-residential building approvals: Non-residential building is one component of business investment. The approvals data tells us the amount of building activity that is likely to enter the pipeline. This data suggests that there should be some pick-up in non-residential building activity this year due to a large spike in approvals in September 2016.
The lift in approvals was in the retail, entertainment, recreation &amp; accommodation, and office sectors. However since the spike, approvals have been running broadly in line with their average of recent years. So we need to see a further pick up in the approvals data in order to see this component of business investment lift meaningfully.
Capex survey: The ABS capital expenditure survey includes business’ estimates of new capital expenditure. And the results are not encouraging. Early estimates for spending plans can vary significantly from actual spending. However at this stage, based on the historical relationship between estimates and actual spending, it looks as if non-mining capex spending for the 2017/18 financial year will be similar to 2016/17 (see here). 
However it is possible that these estimates could be revised sharply upwards (or downwards) if the economic landscape changes. Another caveat is that the capex survey also excludes some sectors including health, education and agriculture. Investment in health and education tends to be structural rather than cyclical and demographic factors suggest that it should remain firm.
Business conditions and confidence: Survey measures of business conditions and confidence have generally been on an upward trend for several years now. Business conditions are at their highest level since the GFC. Business confidence is the highest since 2010. Both are well above long run averages
Business conditions are buoyant for most industries, with the exception of retail and more recently construction. Conditions are have improved in most States. The exception is the mining State of WA where conditions remain very weak.  
Capacity utilisation: Capacity utilisation is rising. However it is important to consider in which industries it is rising as some businesses are more capital intensive than others. Research from the RBA finds that goods-related industries plus transport tend to be more capital intensive than services-related industries. So high levels of capital utilisation in the goods plus transport industries are more likely to result in additions to capital stock. Whereas for services industries, high capacity utilisation more often prompts additional labour hire.
Capacity utilisation has trended higher in recent years for these more capital intensive industries and is now around its long run average. This has historically been consistent with a higher level of non-mining business investment than is the case now.
The capital stock has also aged which provides further impetus for new investment. However while business hurdle rates are still high we may need to see capacity utilisation rise to high levels before businesses are willing to investment in more capital. 
Return on investment/Tobin’s Q: In addition to demand conditions, the expected rate of return on investment is also an important determinant for business investment. On that score there appears to be plenty of scope to increase non-mining business investment.
The rate of return on the non-mining capital stock is running around 12% and well above most business borrowing rates. However unrealistic hurdle rates are preventing businesses from undertaking some profitable investments.
Also, according to Tobin’s Q theory of investment, growth in non-mining business investment should also be higher than current rates. Tobin’s Q measures the market value of capital relative to its book value. A ratio greater than one suggests that companies should invest more in capital because it is valued more than its replacement cost. Tobin’s Q is hard to measure in practice. But our proxy shows the Q ratio has been on an upward trend since early 2009 and is now well above one.
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Revival in the manufacturing sector: There is somewhat of a revival going on in the manufacturing sector (see here). Employment in manufacturing has picked up. Exports have risen too and are not too far below their pre-GFC levels.
A lower and relatively stable Australian dollar in recent years has helped. RBA research shows that a 10% depreciation in the real exchange rate will boost manufacturing exports by more than 15% three years later. The lift in infrastructure spending has also contributed, lifting demand for building materials, metals and transport equipment.
These stronger conditions have seen manufacturing capital expenditure lift 12% over the two quarters to Q1 2017. Although according to the capex survey estimates of future capex spending are still subdued. They imply roughly a 5% fall in capex spending for 2017/18 compared to 2016/17. But given the lift in conditions in the manufacturing sector we may see an upgrade to intentions as the year goes on. 
Positive rural conditions are also pulling out more agricultural capital expenditure. Farm capex spending has picked up with annual growth running at around 13%.
Consumer spending: Current household spending patterns and the outlook for future spending are also important factors to consider when thinking about future business investment. Firms in the RBA’s liaison program have indicated that they are reluctant to commit to a substantial increase in investment until they see a sustained pick up in sales.
Consumer spending growth has been slower on average than before the financial crisis. However spending growth has run ahead of income growth as households have cut their savings ratio. Household debt levels are elevated which means household may be reluctant to cut savings further. We think that we will need to see further improvement in the labour market, particularly a fall in the unemployment and underemployment rates, or a lift in wages growth, to lift growth in spending.
Public infrastructure spending: Increased public infrastructure spending can “crowd in” private business investment. For example, new transport infrastructure can make previously undesirable land, more desirable. This attracts new spending on dwelling construction, which in turn attracts businesses to set up in the these new areas. Private sector businesses also provide inputs into the building of infrastructure so stronger demand can enable these businesses to expand.
Australia is about to go through an infrastructure boom. The State governments have ramped up infrastructure spending. In particular there are many large transport infrastructure projects underway in NSW and Victoria. The Federal government is also planning on a large infrastructure spend. The latest Budget includes $75 billion in transport spending over the next ten years.
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Studies by the IMF find that an increase in public infrastructure spending in advanced economies increases private business investment in both the short and long term.1 They find the effects are largest when spending occurs in periods of economic slack and easy monetary policy, when it is invested efficiently, that is where public spending is allocated to projects with high rates of return, and when spending in financed by debt rather than tax increases.
You could argue that Australia meets these conditions. Firstly, interest rates are at record lows and are likely to stay there for some time yet. There is also a degree of economic slack in the economy.
Over the year to Q1 the economy grew at just 1.7%, below our estimates of potential growth of around 23⁄4%. While we expect growth to lift to above potential in 2018, a decent share is coming from net exports due to the ramp up in commodity exports following the earlier surge in mining investment. Gross national expenditure, which excludes net exports, doesn’t look quite as strong.
Secondly, in the 2017/18 Budget the Federal government has committed to provide funding for four of the seven projects considered to be “high priority” by Infrastructure Australia. A further three projects on the “priority” list will also receive some funding. And thirdly, these projects will be funded by debt with the Budget not expected to return to surplus until 2020/21.
Sources of funding: Business lending remains soft. Commercial lending growth is in negative territory. Business credit growth is showing a similar lacklustre picture, with soft monthly growth rates since early 2016. Over the year business credit is up just 3.1%. Weak lending is consistent with lacklustre investment.
Another way companies can fund new capital expenditure is by using profits. After five years of lacklustre growth, non-mining profits have begun to lift and are around 17% higher over the year to the March quarter. The lift in profits has been broad based with seven out of nine non-mining categories posting an increase in profits over the year. Mining sector profits have also surged which has positive flow-on effects for industries that service the mining sector.
So what’s the outlook for non-mining business investment?
At this stage we are expecting only a very modest lift in non-mining business investment over the remainder of 2017. This is consistent with the capex survey of business’ intentions and relatively subdued non-residential approvals data. Weak business lending data also points to subdued investment ahead.
However the background conditions for investment are improving. Business conditions and confidence are high and business balance sheets have improved due to stronger profits. Capacity utilisation has lifted and the capital stock has aged.
Other positives for business investment are improving conditions in the manufacturing sector. The strong pipeline of infrastructure spending may also work to “crowd in” business investment. One significant hand brake on stronger capex spending is the fact that business hurdle rates are high given the low interest rate/low yield environment we are in. As a result we have a moderate pick up in non-mining investment in 2018 in our forecasts. 
Kristina Clifton is economist and financial market analyst for CBA and can be contacted <a href="https://www.commbank.com.au" target="_blank">here</a>.
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The outlook for non-mining business investment

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GUEST OBSERVER
Growth was considerably weaker in the third quarter of 2016 than was expected, with real GDP falling on the quarter for the first time since Q1 2011. 
However, the fall appears to reflect the coincidence of a number of one-off factors, including a temporary disruption to coal exports and inclement weather affecting construction activity, rather than the beginning of a more significant downturn. Recent numbers for retail sales, business conditions and international trade already suggest a solid pick-up in GDP growth is likely in Q4 2016. 
In addition, there has been a substantial pick-up in coal and iron ore prices recently. Although this rise did not arrive in time to support the Q3 2016 GDP numbers, it should flow through to a significant boost in income growth in Q4 2016 and beyond. Australia’s commodity price index has risen by 20% in AUD terms since Q3 2016. Our estimates suggest that the pick-up in commodity prices should add around 2.0pp to nominal GDP over the coming year.
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Overall, the strong rise in commodity prices and end of the mining investment decline are changing the local growth story. For the past five years, the Australian economic story has been about rebalancing growth away from being driven by mining investment at the end of the commodity prices ‘super-cycle’. Lower interest rates and the fall in the AUD over recent years have supported a housing boom and rising services exports, which have rebalanced growth. The mining sector is now stabilising and is no longer set to drag on growth and incomes. 
Given the recent downside surprise to GDP growth, we now expect growth of 2.4 percent in 2016 (previously 2.9 percent), rising to 2.8 percent in 2017 (previously 2.9 percent) and 3.2 percent in 2018 (unchanged). 
Although local inflation is currently below the RBA’s 2-3 percent target and wages growth is sluggish, we expect both to rise gradually through 2017. Supporting this, we see the rise in commodity prices as likely to lift national incomes, tax revenues, corporate profits and wages growth. Non-mining business investment is also already showing signs of rising modestly and, although the labour market has spare capacity, it is worth keeping in mind that job creation tends to lag the cycle, rather than lead it. We retain our view that the RBA is likely to keep its cash rate on hold at 1.50 percent through 2017 and have recently shifted our call for 2018, with 50bp of RBA hikes now pencilled in. 
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Policy issues 
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The Australian government has passed legislation to re-instate the Australian Building and Construction Commission, which is an indication that there has been some progress on labour market reform. This legislation was difficult to pass and was the trigger for the July 2016 ‘double dissolution’ Federal election. 
The government has also passed a number of fiscal reform measures, including the ‘backpacker tax’, with the measures set to save the government AUD21bn over the next four years. Tax revenues are also expected to get a boost from rising commodity prices. Offsetting these measures, slower-than-expected wages growth has weighed on the personal income tax take. The government’s focus on fiscal reform has become more pressing since one of the major rating agencies, Standard &amp; Poor’s, put the Australian government on ‘negative outlook’ for its triple-A sovereign rating in July 2016. 
Financial stability concerns remain an ongoing issue for the central bank, given a further recent pick-up in housing prices and a modest revival in investment activity in Australia’s housing market. The pick-up in housing market activity has occurred despite local prudential settings having been tightened over the past two years. The pick-up in investor credit growth adds to the case for the RBA to keep its cash rate unchanged over the next few quarters. 
Risks 
We view the risks to growth as evenly balanced. On the upside, the lift in commodity prices and boost to incomes could provide more support for growth than we currently expect. On the downside, slower-than-expected growth in China could weaken demand for Australian commodities or services exports. The risks to our inflation outlook are tilted to the downside. Changing patterns of employment could put more persistent downside pressure on wage growth, and thus local underlying inflation, than we have currently factored into our central case. 
<a href="https://www.propertyobserver.com.au/images/2017/01/09/Screen%20Shot%202017-01-09%20at%2012.41.15%20PM.png" target="_blank">Click to enlarge</a>
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 <a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team" target="_blank">PAUL BLOXHAM</a> IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC. 
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Commodity price rise to boost incomes: HSBC'S Paul Bloxham

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It may be the biggest mistake property investors make: once they have bought something, they stop researching.
There’s a common mentality among real estate consumers that the need to stay informed disappears once you’ve fulfilled your buying criteria.
Prior to purchase, some (not all) will spend some time and/or money on research and advice. But they won’t make the same effort, or any effort, to stay informed beyond acquisition. 
I recently hosted a webinar in which Melbourne buyers’ agent and author Miriam Sandkuhler was the guest presenter. One of the key points she impressed upon her audience was the importance of a regular review of your property portfolio and your overall goals and strategies.
Most Australians don’t do that. Set and forget seems to be the overriding philosophy. And many with that approach get caught in bad situations.
Hotspotting receives a lot of distress calls from investors who bought in locations where property values have fallen subsequently.
Sometimes they’ve bought in locations that were never going to perform. But often they’ve bought in an area that delivers growth initially, until something fundamental changes. That causes a downturn in the market – but investor owners often find out too late.
Queensland boom-bust industrial city Gladstone provides a case study. Five or six years ago, this looked like a good place to invest, with three gas projects worth a combined $60 billion (bringing tens of thousands of jobs) poised to start construction. And, for a couple of years, that promise was borne out by results. Rents and prices rose strongly.
But then big changes occurred in that market. One was that developers had flocked in large numbers to that market and too much new product was being built. The problem was exacerbated by the second fundamental shift, which was the decision by the resources companies to use primarily FIFO workforces with personnel staying in temporary accommodation camps, rather than buying or renting local dwellings.
We wrote extensively about the shift in that market and the likely consequences. The message was: stay out of that market – or, if you already own there, now might be a good time to sell before the market drops.
But many of those who had already bought in Gladstone had tuned out. They no longer had their finger on the pulse. By the time many owners realised the tide had turned against them, it was too late to sell without taking a loss.
Anyone who bought in coal-mining town Moranbah in the early part of the century would have enjoyed a decade of the most spectacular capital growth in Australian history. If they’d sold at any point before 2013, they would have made lots of money.
Then the market turned for reasons that are similar to those for Gladstone, with the added element of the big downturn in coal prices. What followed by the polar opposite of the previous spectacular growth. 
Similar, though less dramatic, scenarios are being played out regularly in markets around Australia. Two or three years ago the middle-market suburbs on Brisbane’s northside were market leaders for sales activity and price growth. Small to medium sized developers saw an opportunity and suddenly these areas are awash with development of new units and townhouses. Vacancies have risen to unacceptable levels in some suburbs. 
If you bought something in that precinct two years ago and then focused on other things, you’re probably not aware of the change in the market.
The message again and again is: you can’t stop the research process just because you’ve filled your current buying criteria. You need to stay up to date. And you need to conduct that regular review of your investment situation suggested by Miriam Sandkuhler.
Terry Ryder is the founder of <a href="https://www.hotspotting.com.au/" target="_blank">hotspotting.com.au</a>. You can <a href="https://mailto:ryder@hotspotting.com.au" target="_blank">email him</a> or follow him on <a href="https://twitter.com/hotspotting" target="_blank">Twitter.</a>
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Property price slides in mining towns Gladstone, Moranbah playing out around Australia

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Commercial property markets in the Newcastle and Hunter region have improved, however the market is suffering in the mining sectors of the region.
Valuation firm Herron Todd White suggests that the industrial market is relatively robust in strong and well sought after locations such as Beresfield and Thornton.
"While there is certainly downward pressure on market vales, we haven’t really seen solid market evidence of capital value decreases.
"Current rents have reduced slightly from the soft peak of two to three years ago," the report says.
The HTW month in review suggests however the market is suffering significantly north of Hunter Valley where mining takes over from Newcastle's city and port.
"We’ve noted hard evidence during the year of both capital and rental value diminution in the Rutherford market where activity has been very limited.
"Further up the valley to areas even more heavily mining sector reliant such as Singleton (McDougalls Hill) and Mount Thorley, local agents indicate that buyer enquiry is essentially at a standstill," the report says
Herron Todd White said that they are aware of numerous indiustrial properties built in the last five years that the occupier has had to vacate.
"One of these properties has been on the market for sale and lease since construction in 2011 with only minor subleasing of office components occurring," says the November review.
Despite the negative figures posted north of Hunter the selling activity in small start titled industrial units closer to Newcastle remains relatively strong, with the sales activity being dominated by owner occupiers generally buying the property through superannuation funds, the report indicates.
"This trend remains unchanged throughout the year and has intensified marginally given the potential tax savings available under this scenario.
"The industrial market in 2015 has most definitely been affected by reductions in mining sector activity and spending cutbacks which directly influences the requirement for mining services companies in the Hunter Valley.
"We expect this trend to continue in 2016 and if mortgage stress takes hold with any increase in interest rates, the potential for further value reductions in the Hunter Valley is high."
 
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jrobinson-rf4aSBido9

Commercial property in Newcastle improving: HTW

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The Australian property market generally performed well in the June quarter, according to the Residex research group.
The Sydney, Melbourne and Brisbane markets saw strong gains over the June quarter, with the exception of Brisbane units.
The resource markets in WA and NT continued their decline, however the pace of the declines has slowed. 
Table 1: June 2016 Summary
<a href="/images/2016/08/04/700_table_1.jpg" target="_blank">Click to enlarge</a>
<img src="/images/2016/08/04/700_table_1.jpg" alt="">
Source: Residex
Australia wide, the median house increased in value by a very modest 0.03 percent during the June quarter, while units increased by 2.58 percent.
However, the strong growth in the unit market follows a 1 percent decline in the previous quarter. Graph 1 shows quarterly growth over the last 10 years.
Graph 1: Quarterly Growth in Australian Houses &amp; Units
<a href="/images/2016/08/04/Graph_1.jpg" target="_blank">Click to enlarge</a>
<img src="/images/2016/08/04/Graph_1.jpg" alt="">
Source: Residex
"Recent divergence between the performances of the different dwelling types may be partially explained by the growth cycles of houses and units being unsynchronised," Eliza Owen, market analyst for Onthehouse.com.au/Residex said.
"At times, the unit market appears to have led the house market.
"This can be seen in Graph 1 in the upswing of 2009 and again in 2012-2013.
"As property has become increasingly used for investment purposes, and units become popular amongst investors, unit investment from speculators may provide first movement in the market.
"This early signal may then flow through to other segments of the market, adding to momentum and overall demand," she said.
Other explanations for the divergence may be the relative affordability of units, or units becoming an increasingly preferred dwelling for locations in cities.
"In Sydney, the house market saw strong growth of almost 3% in the June quarter – largely driven by capital gains in June," Eliza Owen said.
Sydney houses grew 8.02% in the 12 months to June, increasing the median value by $55,000. However, this annual growth rate is down from a peak in the growth cycle of 21.95% in September 2015 when the median Sydney house increased $172,000 over the year. Growth in Sydney may ease further as dollar rents are stagnating in units and falling in houses.
A similar surge in the June quarter occurred in Brisbane houses, which had the strongest quarterly capital growth rate at 2.95%.
Quarterly growth in Hobart houses began to subside, with values falling 1.34% over the June quarter.
In Darwin, median values continue to fall with houses losing 5.16% over the year to June while units declined in value by 6.23%. However, the data suggests that the pace of losses have started to ease as the dwelling growth cycle may have entered a cyclical trough. In the short term, growth may come into a cyclical upswing, though this is somewhat dependent on the amount of investment and interest in the Northern Territory.
Graph 2: Quarterly Growth in Darwin Houses &amp; Units
<a href="/images/2016/08/04/Graph_2.jpg" target="_blank">Click to enlarge</a>
<img src="/images/2016/08/04/Graph_2.jpg" alt="">
Source: Residex
"There was a cyclical trough in growth reached in early 2011 and again in early 2016.
"The growth patterns show that a trough does not signify the end of a downward trend in these dwellings.
"With completion of the Ichthys project expected in early 2017, as well as ongoing declines in rental rates and transaction numbers, it is uncertain whether this market has fully corrected," Eliza Owen, market analyst for Onthehouse.com.au said.
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