Trilogy Funds Update – February 2024

As Australia continues to grapple with challenges such as housing affordability and inflation, 2024 is off to a mixed start.

The Reserve Bank of Australia is still squarely focussed on bringing inflation within their 2%-3%p.a target range and while many predict interest rates to fall towards the end of the year, any easing will be contingent on promising inflationary signals.

It was reported on 28 February that year on year (YoY) CPI change to January 2024 was steady at 3.4%, still the lowest annual figure since November 2021 – so this is reasonably promising.


Labour, wages and inflation

One of the areas the RBA will closely watch is the employment market, its prospects and its impact on wages growth.

The unemployment rate remained steady at 3.9%, although the participation rate fell to 66.8% and underemployment increased 0.1% to 6.6%. During the month, wages growth for December was also reported. Wages grew 0.9% in the quarter to December 2023, and 4.2% for the year. Health Care and Education saw the biggest rises, while Construction was close to the weighted averages at 0.7% for the quarter and 4.1% for the year.

Looking forward, January job ads (reported in February) were 15.5% below the peak of November 2023. However, January is typically a quieter month and this figure is still 39.9% above pre-pandemic levels, indicating that there is still strong demand for labour.

Labour shortages are currently being experienced in many sectors. If businesses have to compete for labour resources, this compounds with pressure from individuals and unions to drive up wages and in turn inflation.


Confidence and consumer activity

Business and consumer confidence are important to support economic growth. But confidence often goes hand in hand with increased purchasing activity, which can drive inflation up.

Business confidence rose by a modest 1pt in January, but remains well below the long term average as measured by the NAB Business Confidence Index. Importantly, this index is published with a month lag, so the February result may be different.

Consumer sentiment is still pessimistic by long term standards, however, it increased by a rather healthy 6.2% to 86 in February, which is a 20-month high. This is good news and is likely being driven by the expectation of future interest rate cuts, cooling inflation and stage 3 tax cuts. There is relative calm with respect to employment prospects with the Westpac-Melbourne Institute Unemployment Expectations Index declining 2.9% to a nine-month low in February – this calm has aided consumer confidence and echoes what is seen in the job ads data reported above.

Retail sales fell 2.7% to $35.2bn in December on a month-on-month seasonally adjusted basis which is potentially a reflection of subdued confidence.

In this respect, it is promising that confidence levels on a short-term basis are heading upwards, but also promising they’re subdued enough to not translate into fervent purchasing activity.


Property – still in high demand

Dwelling approvals fell 9.5% to 13,085 in December 2023 (published in February). This kind of result makes it difficult to see a light at the end of the housing crisis tunnel. While the Ai Industry Group Construction Index rose 10.7 points it remains at -11.5, below the neutral level. Material and fuel costs, employment challenges and reduced customer orders continue to keep construction in below-neutral territory.

House lending in December 2023 was down on prior quarters but up compared to the year prior. Owner-occupied house lending fell 5.6% to $16.8bn in December but was 11.7% higher than December 2022. Investor housing lending dropped 1.3% to 9.5bn in December but was 20.4% higher than December 2022.

Meanwhile, with our estimated population of over 27,061,500 as at 28 February, rising by over 1,700 per day we can expect the demand for housing stock to continue growing, supporting property values.

Core Logic reported in February that regional markets have been outpacing capital cities in terms of both home values and rental values.  Regional dwelling values increased 1.2% in the quarter to January 2024 vs the 1.0% growth observed in capital cities. The only other time the phenomenon has been observed was during the pandemic. Of the 50 largest significant urban areas outside capitals, WA and QLD had the most stand-out performers. In WA, Bunbury home values increased 15.8% in the year to January 2024, while Rockhampton and Bundaberg both saw increases of 12% over the same period. From a rental perspective, regional areas also outperformed capital cities, with regional rents rising 2.3% for the quarter vs 2.1% in capital cities.

Overall, the Core Logic house price index rose by 0.6% in February 2024, marking the 13th straight month of increases. Without a significant increase in building activity or a cooling in population growth, it’s difficult to see this trend abating.

Recently, Trilogy Executive Director Clinton Arentz spoke with Tim Lawless about some of these trends. Tim Lawless is Executive Research Director of CoreLogic’s Asia-Pacific research division. We captured the conversation in our upcoming podcast, Trilogy Talks, which we’ll be publishing this month.


Breaking news:
An exciting development for Direct Property Fund Manager of the Year

Finally, we’re pleased to announce that the award-winning Trilogy Industrial Property Trust is making an exciting acquisition in Brendale, Moreton Bay’s premier industrial precinct. The warehouse and showroom asset has a floor area of approximately 18,000 sqm and is located just 18km from the Brisbane CBD. The tenant, who has been leasing the premises for 20 years, has a track record in their industry of almost 70 years, and is considered to be a market leader in their field. We look forward to sharing more detail about the acquisition, and how investors can get involved in this opportunity, over coming weeks.

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