Why CommBank is a beast + How I think property will fare this Spring Selling Season.

Hi everyone,

A big week on the sharemarket as the profit-reporting season is in full swing. This is when our listed companies report their financial results for the 12 months to the end of June.

There are way too many results to list here, but a couple of observations from me:

• CBA produced a better than expected result but some of its market share figures were just amazing. More on that in a moment.

• Leading retailers have done better than expected given the slowing economy.

While our inflation is staying stubbornly high, it seems the UK and US have it under control and this could lead to sooner-than-expected interest rate cuts.

While inflation in the UK rebounded from 2 per cent to 2.2 per cent in July, it was better than the expected 2.3 per cent. Meanwhile, US headline inflation fell below the 3 per cent mark.

In this week’s roundup of the things I think you need to know finance-wise:

• Why wages are still an issue for future inflation.

• How can jobs growth lead to higher unemployment?

• Why CommBank is the most valuable bank in the world.

• July was a good start for your superannuation fund this FY.

• How the ‘Spring Selling Season’ will shape the property market.

• Think construction costs are extortionate? You’re right.

• How technology companies suck energy from the grid.

Government wage rises drive inflation higher

Last week I wrote about how Reserve Bank Governor, Michele Bullock, was challenging federal and state governments to help fight inflation (and allow interest rate cuts) by tightening their spending belts, which is currently fuelling cost rises.

This week’s wages data is a great example of why the RBA Governor is pushing back on politicians who want to be the good guys - giving voters what they want - while leaving the tough inflation-busting decisions to the RBA.

The good news is that the quarterly wages growth eased to 0.8 per cent for the three months to the end of June - a bit lower than the RBA had forecast but in line with what most economists expected. But looking at the detail paints an interesting picture.

Basically, wage rises in the private sector (business) are slowing but wage rises in the public sector (government/public service) are much higher.

The underlying wage dynamics in the private sector are clearly softening. In contrast, public sector wages growth rose to 0.9 per cent for the quarter and 3.9 per cent for the year. The highest in at least 14 years.

By state, the strongest gains in wages over the past year occurred in Tas (5.1 per cent) and QLD (4.6 per cent), with more modest gains in NSW and WA (4.2 per cent), the ACT (4.1 per cent) and SA (3.9 per cent). Victorian wages growth of just 3.3 per cent was the worst with both private sector and public sector wage growth significantly lagging behind all other states and territories.

By industry, the industries with the highest annual pace of wages growth remain those in the government/public service sector. These industries are tied to government services and are less responsive to cyclical changes in the economy.

Wages in ‘health care and social assistance’ rose by 5 per cent over the year, while ‘education and training’ rose by 4.3 per cent. In contrast, annual wages growth in ‘other services’ was just 3.1 per cent and in ‘arts and recreational services’ it was 3.3 per cent.

Jobs grow but unemployment rises. What the hell?!

It was a weird set of job numbers yesterday. 58,000 new jobs were created, when the market expected only 20,000 - but unemployment also rose to 4.2 per cent.

It sort of doesn’t make sense. The number of unemployed has reached 637,000, which is the highest number since October 2021.

The reason is the participation rate; that is the number of people actually employed, which is up to 67.1 per cent of all adults. This is one of the highest participation rates in the world and makes a joke of the myth that “Australians don’t know how to work hard”. We work hard, but we also play hard in our downtime.

Employment growth for the year to July was 3.2 per cent, compared to an economy growing closer to 1 per cent - the slowest rate in 30 years outside of the pandemic.

Hours worked are slowing faster than employment growth and job vacancies are falling. So, the big jobs growth shouldn’t hide the fact that the labour market is slowing.

CommBank is a financial beast

For the last nine months, virtually every banking analyst I know has slapped a “sell” on CBA shares - but the share price has kept rising to record levels.

This week CBA reported its annual results and I got to interview CEO Matt Comyn on the ausbiz business streaming network. He is seriously one of the most impressive CEOs in the country - smart, humble, grounded and a great leader.

CBA is the most expensive bank in the world. It’s extraordinary. Valued at 23 times earnings which is double the other Big three Australian banks. CBA is valued as a growth stock. Who would have thought that would ever have happened?

The latest result produced a $9.83 billion half-year profit to the end of June, which was down 4 per cent on the previous six months. But the bank declared a $2.50 final dividend, up on the $2.15 declared for the first half, taking total returns for the year to a record $4.65.

So why is CBA so revered and its share price so expensive? Have a look at these statistics:

• 35 per cent of all Australian bank customers bank with CBA.

• 64 per cent of all new migrants open an account with CBA.

• 46 per cent of young adults bank with CBA. This is a generation which distrusts big institutions and are incredibly fickle.

The biggest profit earner for the bank is home loans. 72 per cent of all home loans come through a middleman - a mortgage broker - but not with CBA.

Of all new home loans, 66 per cent are sold directly to the customer at CBA and only 34 per cent are through a mortgage broker. CBA has literally cut out the middleman which means CBA’s profit margin is bigger.

As I said earlier, CBA is a financial beast.

Under Matt Comyn the bank just has great strategies to attract new customers, which includes the best technology of any bank - by far. Its banking app is the best of any bank and one of the main reasons it dominates the young adult customer market.

Having said all that, most banking analysts still have CBA shares as a “sell”.

July was a good start for your superannuation fund

After a strong 2024 financial year, superannuation funds made a good start to the new financial year with leading superannuation research house, SuperRatings, estimating that the median balanced option returned 1.9 per cent over July. But markets quickly shed those gains in the first two weeks of August.

Over the first two weeks of August balanced options recorded a fall of 1.7 per cent, but this last week has been a good one on the markets. So by the end of the month it, could all even out.

The median growth option grew by an estimated 2.4 per cent in July, while the median capital stable option rose by a more modest 1.3 per cent.

Pension returns followed a similar pattern, with the median balanced pension option increasing by an estimated 2.2 per cent. The median capital stable pension option is estimated to rise 1.5 per cent over the month, while the median growth pension option is estimated to rise 2.5 per cent for the same period.

How the Spring Selling Season will shape the property market

Spring is always seen as the peak property season. Analysis from research group CoreLogic, shows an average uplift of 18.2 per cent in fresh listings and 8.3 per cent for sales over the past decade, led by cities across the east coast.

Interestingly, colder regions also have the largest increase in spring time listings.

CoreLogic also warns that seasonal factors can still be tempered by broader market conditions, such as interest rates and economic factors.

Sales volumes across some cities have actually declined during spring when the market has been in a downswing. For example, Sydney and Melbourne in the spring of 2015, 2017 and 2018, when temporary tightening of lending rules created a sharp decline in investor demand.

This Spring Selling Season is under pressure from a continuation of high interest rates, slowing economic conditions and low consumer sentiment. As such, sellers may struggle in two of the state capitals in particular.

CoreLogic analysis indicates that sellers will have an advantage this spring in Adelaide and Perth, and some of the more affordable markets of Brisbane, such as Beaudesert. But for some sellers in Melbourne, Hobart and Sydney, spring does not necessarily mean it is a good time to sell.

Prospective vendors need to assess the state of their local market, as they may find there is more competition for sellers in the months ahead.

The data points to a particular weakness in Sunbury in Melbourne, and Brighton in Hobart. For the Melbourne and Hobart markets with high total listings, sellers appear to be in a fairly flat, or falling market, based on the three-month value change.

The most depleted markets are in Adelaide, Perth and Brisbane, where the minimum uplift in value was 3.7 per cent over the three months to July in the Norwood/Payneham/St Peters region of Adelaide.

The depth of housing demand may be tested as we move into spring, especially in markets like Melbourne and Hobart where listings are already elevated. A rise in new listings is anticipated, but a lift in demand may not occur at the same time.

If we do see advertised stock levels rising though spring, it’s a good sign that we may see some further momentum leave the upswing in the Australian dwelling market.

Think construction costs are extortionate? You’re right

Last year it looked like the rapid rise in construction costs had come to an end. According to real estate giant, Ray White, the cost of building a new home increased by more than 20 per cent in the 12 months to September 2022. By September 2023, that rate of growth had declined to 3.9 per cent.

Given how expensive it is to now build a new home in Australia and the negative impact this has had on housing supply, it was hoped there would at some point soon be a decline in construction costs. Concerningly, the rate of growth has again climbed.

Labour continues to be a major contributor to the cost of construction and year-on-year increases in wages remain problematic to bring down the cost of building a new home. The Australian Bureau of Statistics specifically pointed to a lack of finishing trades. Strong union activity, now the subject of a Senate inquiry, has also contributed to low productivity in the industry.

How technology companies suck energy from the grid

I know it has been a bit of a theme for me over the last few weeks, but I don’t think people really know just how much energy technology companies use.

Remember how I was explaining that AI computer chips use 10 times the energy of normal silicon chips, and that the global data centre and crypto mining sector use as much electricity as Japan?

I was interested then in this graphic which shows how much energy Google and Microsoft use, compared with entire countries.

Fascinating, don’t you think?

Have a good week, everyone.