Thursday, August 30, 2012

A normal patchwork

The RBA Guvnor was before the House Standing Committee on Economics last week where Andrew Leigh put a query on whether the RBA placed enough emphasis on regional variations in the labour market.

The RBA does apparently take note of regional variance as well as broad averages and perceive the current 'patchwork' as normal or even less than expected. The response to whether some heat coming off the mining boom may reduce issues of a patchwork economy is rather vague.

I guess it means Cairns has just happened to find itself in the wrong patch in recent times. Some prominent business identities have previously suggested the RBA didn't give enough consideration to the problems of the Far North economy which would be like the tail wagging the dog so to speak.

Leigh was formerly a prominent economist before spiralling downwards into politics. 
Dr Leigh: In terms of thinking about the labour market, I am always struck when I read the statements. I feel as though you place a little bit too much emphasis on averages and not enough on variance. I guess one of the things that naturally concern us is the variance in unemployment rather than simply the average rate. What do we know about it? The decline in the terms of trade should also reduce the patchwork economy issues, shouldn't it? It ought to bring down, say, the variance in unemployment over time.
Mr Stevens: Yes, I think it is fair to say that, to the extent that the impetus for growth shifts away a bit from where it has been to be more broadly focused, that is probably right: you might get some reduction in the so-called patchwork. In saying that, I think it is important to say as well that it is always a patchwork. It is not and never has been a seamless garment. There is always a patchwork nature. 'Patchwork' is a new word we have coined and it is a reasonable description, but it has always been there.
I am searching in this pack here for the figures on the variance of the unemployment rate. We do track the dispersion of the rate of unemployment. There are quite a large number of regions where you can get this. One of the datasets that you can get—you know this, I know. At the moment, on the basis of the figures I have here, about half the regions have unemployment at five per cent or less; 90 per cent of them have unemployment less than seven per cent as measured; and there are very few, if any, with double digits on the most recent data. Even those numbers are themselves averages within an area, but there are no figures more detailed than that. I suppose my conclusion is that there is regional variation. If anything, I would say I am very slightly surprised that it is not bigger than we presently see. That is not to say that it might not get bigger, though, as you say, some things are happening which could lessen that tendency. So I think it is always a patchwork. On the basis of the metrics we can come up with to measure this, it is not really more of a patchwork than is normal.

Wednesday, August 29, 2012

Missed it by how much?

Another stoush has broken out between State and Federal Governments over environmental approvals for the highly promised dredging of Trinity Inlet to allow larger cruise ships into Cairns. What can one say except to note that the $40 million promised in the election has blown out to a cost of $85 million to $110 million before even any kind of economic or environmental report has been released?

It is noted that being wrong by more than 100% on cost is apparently no justification to require further analysis with the State committed to the project? The report commissioned by the previous Government has been acknowledged but remains unreleased!

As Maxwell Smart would say .......
Many previous links on this and there could be a good opening for another rant on multipliers if I can find the postings on the suggested economic benefits of this v the magnificent multipliers also suggested for just $8 million for the entire state in airline incentives!

Cairns Post report:
Previous post at Cairnsblog is also noted:

Tuesday, August 21, 2012

Gross yields not so grand

Property Observor has placed Westcourt at the top of high yielding rental suburbs in Australia: Suburban Cairns unit investors reaping the highest yields amid Australia's most active 50 rental suburbs. This is based on research from RP Data which placed two Cairns suburbs in the top 50 rental suburbs list, the other being North Cairns at #10 with 66.8% of homes rented. Westcourt is at #27 with 62.4% of homes rented. 
In Westcourt, an inner suburb of Cairns, 62.4% of homes are rented, and the median price for units is $145,000 – the lowest median price in the list.

However, LJ Hooker Cairns Edge agent Jason Edwards says in real practice he hasn't seen yields like this in Westcourt."The figures [for] the rental yields sound high. If we were getting yields that high property would be selling like hot cakes."
Edwards is currently selling unit four at 8 Ascot Avenue for $139,000 with a current rental income of $200 per week. Without taking any outgoings into account this is technically a yield of 7.5, though Edwards says outgoings quickly eat away at this.
"[The apartment earns] $10,400 for 52 weeks. With body corp fees of $3,200 and council rates of $2,200 that leaves you with $5,000. That doesn't add up to 7.48% to any investors I talk to relative to $149,000 purchase price."
Body corporate (including insurance) and Council rates quickly slash that gross yield in half. That would still not include other costs such as management, maintenance, depreciation or acquisition expenses. The resultant net yield would be quite skinny in comparison with the big banks currently selling on yields of 6% fully franked. Perhaps intending investors should also consider the previous post differentiating the risk of an individual property with the overall market.

It also provides an interesting comparison between that modest Westcourt unit and more salubrious CBD apartments. There is currently a three bedroom sub-penthouse for sale in the Centrepoint building, next to the library, asking above $800,000. There is also a three bedroom unit on level 5 at $600,000.

The Centrepoint land is valued at $1.2 million for 1,437 M2 with 35 units in the building. That works out an average $34,286 land value for each unit. The land valuation for which the minimum rate cuts in for strata units is $62,845 so Centrepoint is way below that.

The way the land value is distributed between units is determined by the interest schedule in the strata plan which I don't have for Centrepoint. There are also commercial premises at ground level so how that has been factored into the schedule is also unknown.

That expensive sub-penthouse may have a higher interest (another issue), however on these numbers would likely be paying the minimum rate. Certainly the apartment on level 5 would be. So they would likely be paying the same Council rates as that modest Westcourt unit? Also consider that the unit is paying the same garbage and sewage charges as a five bedroom house!

Related posts:
Triinity Beach: Rates ranting revisited
Which unit will pay the highest council rates?

Saturday, August 18, 2012

Ocean Spirits local cardholders fund Macro gains

There has been some interesting stock market action recently in Macro Corporation. Macro was previously the owner of the Ocean Spirits cruise business. Last August Macro announced the sale of the Ocean Spirits business to Jai Tourism from Sydney, and a move into coal mining. It attracted media attention at the time when the Ocean Spirits locals cards were cancelled as part of the transaction. The card offered unlimited reef trips for a year subject to availability on the boat.

The chart below shows increased interest in Macro in recent months for an illiquid company previously  rarely traded. Macro emerged from a trading halt on Friday and announced the acquisition of Indonesian coal exploration permits. Macro jumped a further 18% with more than 2 million shares traded for the day out of 92 million on issue. Sale of the remaining Ocean Spirits IV dinner cruise vessel has also been announced at a healthy premium to book value.

Macro share register is dominated by Malaysian interests with 66% of shares held by Entrepreneur Development Capital. The companies share a registered address in Carlton, Vic, although the ASX don't seem to have been notified and still retain the Cairns Shangri La address on their website? ASX announcements from Macro are a long trail of halts, suspensions, delayed accounts and director rotations. Detailed analysis could be interesting weekend relaxation!

However, having noted the recent activity KS fired off an email earlier in the week to Fair Trading on the status of an outstanding complaint. Macro were reported to have offered a refund to those who had made no use of the card at all. KS requested a pro-rata refund for the unused 6 months. There was no response to a formal direct request from the company so a complaint was lodged with Fair Trading last year.

Further enquiry back in March brought a response from the Cairns office that "Fair Trading has been in negotiations with the solicitors for Ocean Spirit Cruises in an endeavour to resolve your complaints.  Although the process has not reached a rapid resolution there has been some progress made in negotiations". This weeks email enquiry has not yet resulted in any response. Perhaps the Cairns Fair Trading office has been closed and the staff sacked?

The market capitalisation of Macro has increased from less than $2million to more than $20million over the past year which has certainly outperformed the Loose Change portfolio! However all that was really wanted were a few reef trips .......

Thursday, August 16, 2012

Unemployment moves!

The fact that the unemployment rate for the Far North actually changed this month is the only thing of interest. The rate nudged down from 9.1% to 8.5% however the estimate of people employed is below the equivalent period last year. That is despite anecdotal reports and observations of a strong tourism season. Loose Change heard yesterday of a local recruitment agency which previously had close to 100 temps on their books for the public service who are now gone! Conus Consulting has posted an update on the latest numbers and reminded that the ABS regional stats are not seasonally adjusted:

As we constantly remind people, these are un-seasonally adjusted figures and are therefore extremely volatile. Our own Conus Trend series shows the trend unemployment rate at 9.0% (from a revised 8.9% in June) and we have now seen 10 consecutive months without a reduction in the trend unemployment rate since its low in Sept last year at 7.9%.
This months most volatile activity was in female employment with the male unemployment rate actually up on a higher participation rate. ABS estimates for number employed by sex:


Tuesday, August 14, 2012

Worst public policy debate in 25 years?

Former Treasury Secretary Ken Henry, on what looks like a cold Canberra morning, laments the quality of current policy debate in the context of our policy challenges and opportunities .......

I can only agree with him on that, certainly the lowest standards I can recall.

Friday, August 10, 2012

How risky is your home? (updated)

Indefatigable blogger and twitterer Christopher Joye is now a regular contributor at the AFR. This weekends contribution includes comparison of an individual property with the broad real estate measures usually reported by  the media. This will likely be paywalled is open access and recommended weekend reading: Housing risk: it's greater than you think?

Academics, policymakers and the media almost always confuse the risk profile of a well-diversified house price index, which proxies for millions of homes, with the probability of loss that you are exposed to when you acquire an individual asset.
They are worlds apart.
Another worrying flaw in analysis of housing risk is that researchers assume we are “ungeared”. That is, they tend to overlook the direct impact of leverage (i.e., home loans) on investment outcomes. So they measure the variability of a house price index and suppose this can be used to represent an individual owner’s “equity’ risk”. They are wrong.

Research of this kind has been common for equites but missing in real estate. Media reports frequently misrepresent increases in simple broad median prices as reflecting capital gains. Median prices are a crude and distorted measure compared to more sophisticated measures now available such as the RP Data hedonic index or the Case-Shiller index in the USA. There are several related themes here that I will hold on for now.

Not close to being as sophisticated, but related to the Loose Change jihad on land valuations, strata property, and council rates in Cairns is a quick chart based on land valuations from the Valuer-General over the last decade. This is not a property market value but compares changes in land valuation only of my own bohemian Esplanade strata abode with the Cairns Council region, also related to CPI.

Guess when differential rating for strata units was introduced to boost Council rates revenue from units?