By a staff reporter, with AAP

UGL Ltd will proceed with a demerger of its engineering and property bsuinesses as soon as possible, after posting a steep fall in full-year profit.

Investors responded positively to the news. At the 1015 AEST official market open UGL shares were 3.11 per cent higher at $7.63, against a benchmark index fall of 0.07 per cent.

In the year to June 30, UGL's net profit was $36.472 million, a 72.8 per cent decline on the previous year's $135.392 million.

The group said net profit was weighed down by $55.6 million of costs associated to restructuring, the rebranding of DTZ, the amortisation of acquired intangibles, and there was a gain on the sale of property.

Underlying profit was $92.1 million, in line with earlier guidance.

Revenue in the same period was $3.816 million, 14.3 per cent lower than the 4.454 billion in 2012.

The group announced a fully-franked final dividend of 5 cents, to be paid on September 6 to shareholders on the register at August 23. Combined with the interim dividend of 34 cents, the group will pay a fully-franked total dividend of 39 cents in the year.

In 2012, UGL paid a partially-franked total dividend of 70 cents.

UGL chief executive Richard Leupen said the company's engineering business had suffered due to a slowdown in capital investment in the resources and infrastructure sectors.

But, he said, the DTZ business had seen its annual revenue rise to $1.9 billion, helped by an improvement in the US property market and a continued strong performance from its Chinese and Asia Pacific markets.

Demerger next logical step: Rowe

UGL chairman Trevor Rowe said the planned demerger would enhance shareholder value over the short and long term.

The group will work towards separating its property business DTZ from its under-performing engineering business over the next 12 to 18 months.

"Over the past decade, UGL has successfully grown its property services and engineering businesses to become sizeable businesses which are leaders in their respective markets," he said.

"As both businesses enter their next phase of growth, the operational and strategic priorities of each business, and the associated management and financial requirements are starting to diverge.

"As a result, we believe a demerger is the next logical step which will allow each business to pursue their own strategic priorities and opportunities for growth."

If we are not very careful Australia is going to have the mother of all dwelling booms. What we are seeing is a three-pronged boost to prices. First is a dramatic push to lift the demand for dwellings by banks offering cut mortgage rates thanks to Reserve Bank Governor Glenn Stevens. But second, and just as importantly, there is reluctance by banks to fund new supply.

In any commodity if you inflate demand and squeeze supply, prices go through the roof.

Thirdly taxpayers will subsidise the boom via a massive increase in the use of  negative gearing  via both personal and superannuation tax breaks.

And longer term that will damage the economy and the Reserve Bank will have to take responsibility for pulling the price boom trigger. The market accepts further interest rate cuts but surely the Reserve Bank board members will now have second thoughts about future cuts.

To understand what is now happening let’s go back to basics.

Where do you put your money? Glenn Stevens has priced bank deposits out of the market for long-term savers who want a fair return. Unless banks are once again prepared to go abroad for their money it means that there will be no abundance of long-term bank deposits although there will be plenty of short-term money.

The share market has delivered great returns but a large number of people have been burned in the last five years and brokers are no longer excited about value in the market. In this low interest rate environment shares will do well but that is not where the big money is going to go.

Australians are going to rush for bricks and mortar as they always have in situations like this. And when they see the market about to rise they just jump in. In Sydney, real estate agent John McGrath told a mortgage brokers conference that Sydney inner city property demand was “red hot”. Although in Melbourne there is a fair amount of supply in the market. Melbourne, along with Brisbane, will quickly follow although perhaps not with the same intensity.

Most of the demand will be from investors, including those using there self-managed funds, plus the Chinese. First home buyers will an obviously contribute at the lower end.

When you see a rush of demand what you need is supply. Given that the main demand is in inner city areas supply takes a long while to generate. Banks are reluctant to lend to developers – especially given recent failures – and the approval process is very slow.

In addition, the capacity of the building industry has been curbed by the slump and many have been forced out of business. The tax office and the banks played a big role in this.

All the conventional signals told Glenn Stevens he should lower rates. Yet if Tony Abbott wins the election we are going to see a surge in plant investment because the political crisis has held people back. The August rate cut will have had no effect. Because we are dealing with existing properties an inner city boom does not boost employment until developers can fund and gain approval for new projects. Of course, when it spreads to outer suburban areas then it does boost employment.

At some time (not in the short term) Glenn Stevens will be forced to address the inner city property boom which he triggered in August 2013 – probably by increasing interest rates at an inappropriate time.

Negative gearing may also  be curbed.

"I haven't seen it (inner-city Sydney) this hot since the last real estate boom and I'm not calling this a real estate boom, but I think if the pressure kept going at this level . . . we're heading for trouble," he said, according to the newspaper. 

"A bit of a growth spurt is a natural and welcome and healthy thing, it's bringing confidence in, but one would hope and expect that will settle into a more sustainable 5 to 8 per cent growth over a longer period."

The Reserve Bank of Australia last week cut the cash rate by 25 basis points to a new record low of 2.5 per cent. 

By a staff reporter, with AAP

Stockland Ltd is confident its earnings will improve in the year ahead, buoyed by increased income from new retail, residential and retirement living projects, after posting a marked decline in full-year net and statutory profit.

In the year to June 30, Stockland posted a statutory profit of $104.6 million, a 79 per cent decline on the $487 million recorded in the previous year.

The result was heavily skewed by a previously disclosed $355 million impairment in the value of the Stockland's residential book.

Underlying profit for the year was $494.8 million, a 27 per cent decline on $676.1 million recorded in 2012.

Revenue in the same period was $1.73 billion, a sharp decline on the $2.03 billion recorded in the previous year.

The group announced a final dividend of 12 cents, and a total dividend of 24 cents, unchanged from the previous year.

"Our decision to hold our distribution at 24 cents per share, despite being outside our target payout ratio, demonstrates our confidence that earnings should continue to improve from FY14," Stockland chief executive officer Mark Steinert said.

The group said it was targeting earnings in 2014 of between 4 and 6 per cent above, assuming no material decline in market conditions.

Mr Steinert said the group had been focused on reducing costs during the year, in a bid to combat weakness in the housing market.

"This has been a challenging year and we have responded with a number of important strategic decisions that position our business for stronger future returns," he said.

"We significantly restructured the business to reduce costs and improve core processes and skill sharing."

Mr Steinert said the company continued to face difficult conditions due to weak consumer confidence.

"In Australia business confidence remains low and consumer spending is relatively soft as households continue to de-leverage," the company said in its statement.

"We expect consumer sentiment will remain relatively subdued, however we do anticipate continued moderate economic growth."

By a staff reporter

Online real estate advertiser REA Group Ltd will focus on development and rollout of products for the Europe and Hong Kong markets after increasing profit and revenues this year.

Profit rose 26 per cent to $109.7 million in fiscal 2013, compared with $87 million in the previous corresponding period.

The group's revenue was $336.5 million in the year, up 21 per cent from $277.6 million the year before.

REA will pay a final dividend of 25.5 cents per share fully franked on September 24, which combined with an interim dividend of 16 cents takes the total dividend to 41.5 cents per share fully franked.

The owner of realestate.com.au says it remains resilient to global economic volatility because its business model is linked to transaction volumes rather than property cycles.

REA is 61 per cent owned by News Corp Australia, publisher of Business Spectator.

Stockland chief executive Mark Steinert is cautiously optimistic about the Australian housing market, predicting that the worst is over while warning a recovery will likely be modest and uneven, according to The Australian.

“The housing market has bottomed and is heading up,” Mr Steinert said, according to The Australian.

Mr Steinert's comments came as Stockland reported a 79 per cent fall in net profit to $105 million for the 2013 financial year, blaming persistently tough conditions and project writedowns.

The company said that residential land lot prices had stabilised after suffering a four per cent drop in some areas, while adding that contracts in hand were up 24 per cent from a year ago and that profit margins are improving.  

Some states are expressing concerns that Labor's industrial relations policies could destabilise Australia's property market and in doing so jeopardise a surge in state revenues from land transfer duties, according to The Australian.

State budgets are set to pull in about $13.6 billion from land transfer duties on houses and commercial buildings this financial year, the newspaper reported, up nearly 10 per cent from the year previous.

But some states fear federal policies will jeopardise the forecast of continued property market growth.

Victorian Treasurer Michael O'Brien has said the winner of the September federal election must reintroduce the Australian Building and Construction Commission (ABCC), which had been created by the Howard government and abandoned by Labor.

Victoria expects its stamp duties on property transfers to rise from $3.2 billion in 2012-13 to $3.5 billion in 2013-14.

But Mr O'Brien warned that Labor's industrial relations policies risk hampering productivity on construction projects.

“We are very keen to see the return of the ABCC because Victoria is fully exposed to the Fair Work Act as we don't have our own state IR system,” Mr O'Brien told The Australian.

Queensland Treasurer Tim Nicholls and New South Wales Treasurer Mike Baird have also called for a return of the ABCC.

Australia accounted for 52 per cent of the group's operating earnings, while Europe and the Asia Pacific each delivered a 24 per cent share. 

Growth was being driven by entry into Asia and the Americas, the group said, while demand for "core, high quality, stable yielding real estate remains strong from global pension and sovereign funds". 

Given that almost $400 million of earnings within its coal business and Target disappeared during the year, the 6.3 per cent increase in Wesfarmers’ profits last financial year is a more than creditable achievement.

In fact, the $579 million capital return Richard Goyder announced today signals the group’s conviction that its underlying performance and its cash generation in particular is surging in a sustainable way. The group’s operating cash flows were up 8 per cent to $3.93 billion.

It’s also, perhaps, a signal that the group is entering a slightly different phase after years of heavy investment in rehabilitating the suite of run-down retail brands it acquired back in 2007.

The resurgence of Coles and Kmart has been remarkable and still has considerable momentum and the pre-existing Bunnings hardware chain, after accelerating its expansion and fine-tuning its offering to pre-empt and counter the launch of Woolworths’ Masters business, is producing solid growth.

Target remains a problem child and is expected to continue to struggle through the first half of the current financial year as it continues to clear stock and absorb the costs of its restructuring under the newly-appointed Stuart Machin. It is unlikely to be a quick turnaround.

More particularly, and the capital return provides a signal of this, the surge in investment in property that was associated with the Coles’ restructuring and Bunnings’ expansion has peaked and the level of recycling of Wesfarmers’ retail properties is accelerating – Wesfarmers released $659 million from property sales in the year just ended and that’s likely to continue, releasing both cash and capital.

It is also notable that Wesfarmers’ has significantly reduced the amount of working capital within its retail businesses as their sales continue to grow, their sourcing becomes more efficient and their inventory control continues to improve. It released more than $500 million of working capital from those businesses last year.

Goyder would still be unsatisfied with his overall return on capital, which improved from 8.4 per cent to 8.9 per cent, although the capital return, the focus on working capital and the continued recycling of retail properties will help sharpen that this year.

He would, however, be very pleased with the continuing strong performance of Ian McLeod and his team at Coles, who generated a 13.1 per cent lift in earnings before interest and tax to $1.53 billion and lifted their return on capital from 8.7 per cent to 9.5 per cent.

They have doubled their EBIT over the past five years, increased their EBIT margin by nearly two percentage points to 4.9 per cent, added 440 basis points to their return on capital and appear to still have considerable upside as the business shifts from restructuring mode to growth mode.

Kmart, which was nearly a dead brand when Guy Russo was given charge of it, lifted EBIT 28.4 per cent to $344 million, has an EBIT margin of 8.3 per cent and improved its return on capital from 18.9 per cent to 25.9 per cent on very modest sales growth.

Bunnings produced a 7.5 per cent lift in earnings, lifted its EBIT margin slightly to 11.7 per cent and maintained its stellar return on capital of 25.9 per cent. After $2.1 billion of investment in the business over the past four years the focus is still on network expansion but the pick-up in the pace of property recycling should protect and enhance its return on capital.

Bunnings’ John Gillam also oversees the Officeworks business, which generated a 9.4 per cent increase in earnings, increased its margins and added 100 basis points to its return on capital, to 8.1 per cent.

Target was, as expected, the blot on the Wesfarmers’ retail copybook, with earnings down 44.3 per cent to $136 million. Machin was despatched from Coles to fix the business, where costs had blown out and the retail offer had become confused. It will take some time to see whether the brand can be stabilised.

Goyder would also be happy with the rebound in his insurance business and reasonably sanguine about the downturn in coal earnings, from $439 million to $148 million, given the division has been impacted by the difficult conditions and lower prices within the coal industry generally. The problems within the resources sector, generally, also affected Wesfarmers’ industrial divisions.

Wesfarmers says it is optimistic about the outlook for its businesses despite the expectation of "challenging" domestic conditions, with the turnarounds within Coles, Kmart and Officeworks and the continuing strong performance of Bunnings providing platforms for future growth.

The capital return and a 9 per cent increase in the annual dividend, to $1.80 a share, are a tangible expression of the confidence that there is significant upside within those retail businesses that now, given the downturn in resources and resource-related activities, generate about 80 per cent of the group’s earnings.

Lend Lease Group Ltd has won a landmark $20 million tax dispute that could set a benchmark for how stamp duty is levied on development land, according to The Australian Financial Review. 

The group's win on appeal against Victoria’s revenue commissioner in the Supreme Court of Victoria saw it successfully argue that it should not have been taxed on the combined value of two separate payments for each of seven land parcels in Melbourne’s Docklands precinct, according to The Australian Financial Review. 

Lend Lease has started a $1.5 billion mixed use development in the Docklands, to be staged over 10 years.

In June, Lend Lease reiterated its full-year earnings guidance, saying the result would fall in line with analyst expectations of $540 to $550 million and the published Bloomberg median of $547 million.

Dow Jones

The president of the St. Louis Federal Bank said Thursday he doesn't think the higher mortgage rates that accompany increases in bond yields are likely to derail the housing recovery. 

The benchmark 10-year Treasury yields hit a fresh two-year high Thursday following upbeat economic data from the US and the UK. 

St. Louis Fed Chief James Bullard said in a meeting with reporters that rising yields raise a concern the economic recovery could suffer, but "the level of yields now is still quite low by historical standards." 

"I also think that momentum in housing is stronger than any effects that are going to come from higher yields, at least for now," he said. 

A voting member of the Fed's decision-making committee, Mr Bullard has also been vocal about his concerns that inflation is running too far below the Fed's two per cent target. 

The consumer price index rose 0.2 per cent last month after rising 0.5 per cent in June, the Labor Department said Thursday. 

Mr Bullard said he hadn't looked at the report, and would want to study it to get a better idea of what is happening with prices, but "to the extent you have higher inflation numbers in this report that would be bolstering the notion that inflation would naturally be moving back toward target in the coming months and quarters." 

"I have felt that because inflation is below target, that we can sort of take our time and allow more information to come in" before deciding to pull back on the Fed's $US85 billion bond-buying program, he said. "We don't have to be in any hurry to taper." 

Mr Bullard stressed he plans to go into the Fed's Sept. 17-18 policy meeting with "an open mind" and hasn't prejudged what the central bank will do about the bond program at that meeting.

Crown Ltd chairman James Packer has set his sights on Japan, saying he hopes the country will become the next growth target for his gaming empire, according to The Australian.

The recent electoral victory by Japanese Prime Minister Shinzo Abe is believed to usher in casino legislation, as early as November, that would allow fully fledged resort-casinos.

“I hope Japan comes up,” Mr Packer told The Australian.

“If Japan comes on it will be the second-biggest gaming market in the world. It has 100 million people who are all mad gamblers but they are all doing it through horse racing and pachinko.

“Japan is looking at the Singapore story. Done wrong, gambling can be parasitic. But done right (through integrated resorts) it can be hugely additive.”

He added that Japan is likely to become a hotspot for gaming development in two or three years, which he said would allow time to first finish his developments in Macau and The Philippines, The Australian reported.

The news comes as Hong Kong billionaire Tony Fung said he was open to working with Mr Packer or other such  casino owners in Australia, if his $4.2 billion development, Aquis, is approved in Cairns.

"I want to emphasise we are a resort with a casino, not a casino with a resort," Mr Fung told The Australian Financial Review.

"So we are not really in this to compete with other casino operators."

By a staff reporter

Pepper Australia has joined forces with the largest shareholder of target RHG Ltd to stage a takeover bid in an attempt to beat a rival offer from a syndicate led by Resimac Ltd. 

After striking a deal with major shareholder Cadence Capital, Pepper is seeking a scheme of arrangement to buy RHG, formerly RAMS Mortgage Corp, increasing its offer to 49.65 cents a share, in cash and Cadence scrip.

RHG will give the Resimac Syndicate three business days to provide a counterproposal, in accordance with the syndicate deed's exclusivity provisions. 

In July, the RHG board accepted a sweetened takeover bid from a Resimac-led syndicate of 48 cents per share, an increase of 3.9 cents per share over its original offer.

Pepper's offer included 35 per cents share in cash and one fully-paid Cadence share for every 10 ordinary RHG shares held, based on yesterdya's closing price of $1.465 for Cadence units. 

Cadence would also pay RHG investors a fully-franked dividend of 5 cents for each of its shares received under the scheme. 

Existing CDM shareholders will receive the full year dividend of 5 cents per share previously announced by CDM.

Under the deal, RHG would paying an extra fully-franked dividend by October 31, which would cut the amount Pepper would pay for the target. 

In April 2011 Cadence Asset Management and Wilson Asset Management were part of a shareholder action that prevented the delisting of RHG Limited at 88 cents per share.

Cadence chairman Karl Siegling said group's shareholders had been deliver "an excellent risk-adjusted return" through its investment in RHG.

"This proposal represents an optimal outcome with increased consideration and additional franking for both RHG and CDM shareholders," he said.

RHG updates guidance

RHG expects its full-year earnings will be slightly above the top of the guidance range it provided to the market in February, which was $26 million to $29 million of net operating profit after tax.

The increase is due to a lift in profit because of an adjustment to one of the group's accounting assumptions.

The profit generated due to these changes in accounting assumptions are non-cash items, the group said.

By a staff reporter

AVJennings Ltd is hopeful an uptick in consumer confidence and increased activity in the property sector in the second half of the year will carry forward into 2014, after significantly narrowing its net loss in the full-year.

In the year to June 30, AVJennings posted a net loss of $15.27 million, a 48.8 per cent improvement of the $29.83 loss recorded in 2012.

Revenue in the period was $158.462 million, a 16.1 per cent decline on the $188.809 million in the previous year.

While full-year revenue declined, the group said it was heartened by the fact its second-half revenue of $105.6 million was almost double that of the first half, due to the completion of inventory and gradually improving market conditions.

AV Jennings declined to pay a dividend.

FT.com

The Godfather flashes silently on the TV as Steve Wilson sips a tequila and apple juice cocktail, clutching a letter from the property assessor.

The house he bought 11 years ago for $280,500 is worth $137,000 today. Factoring in the loan that added interest to his principal, and deferred property tax bills that accrued when he was sick with colon cancer, the part-time automotive repair salesman is now paying off a $300,000 mortgage.

“I’ll be dead long before then,” the 54-year-old says; the screen behind him showing a mob boss whispering threats of a shakedown. The walls in the kitchen are rotting from termite damage and mould, while police sirens wail through Richmond, California, a working-class city 18 miles from San Francisco rife with unemployment and crime.

The city government is fighting to finance Wilson and his neighbours. His address is included in a list of more than 600 properties it wants to take over with the help of Mortgage Resolution Partners, an investor group that is advised by Evercore Partners, which plans to arrange funding for cities that want to compulsorily purchase loans, and Westwood Capital.

The pair have teamed up in a controversial scheme to wrest the housing loans away from JPMorgan Chase, Wells Fargo and 30 other banks by relying on a novel interpretation of eminent domain laws, an idea spearheaded by MRP, which it started pitching last year. Richmond is being closely watched as a test case by other cities across the US considering the plan.

Municipalities have historically used the law to seize private properties when the land is needed for a public project, paying the owners fair market value of the home. In Richmond, and in several other US cities worried about mass foreclosures, officials plan to use the law to seize underwater mortgages from banks and replace them with new, cheaper loans based on current home values to relieve the debt burden on cash-strapped citizens.

“Homeowners are at their wits end,” Richmond’s mayor, Gayle McLaughlin, says. “Federal programs have not provided relief. We have tried working with the banks for five years. Only a few mortgages have been modified.”

She says the housing crisis has rippled through the city’s economy. When residents struggle to meet high monthly mortgage payments they do not spend money with local businesses. As homes go into foreclosure, nearby property values go down, generating less tax revenue for the city, and more crime.

John Vlahoplus, chief strategy officer for MRP, said the firm would make a flat fee of $4,500 per loan, and would make a return for its investors only if the scheme spread to multiple cities and 10,000s of loans across the US. “We thought from the beginning that eminent domain would be the tool that would get everybody to the table,” he said. “Nobody is making any decisions on these loans, there are conflicts of interest and inertia and a slow grind towards foreclosing on people.”

Newark, New Jersey, Seattle, Washington and several others are considering a similar plan, provoking an angry reaction from investors who buy mortgage-backed securities, bonds backed by pools of home loans. If it turns out the underlying collateral can be seized by local governments, they say there could be major disruption in the mortgage-backed securities market, with knock-on consequences for the availability of mortgages.

But Daniel Ivascyn, who runs the $28 billion Pimco Income Fund, one of the biggest bond investors, and head of its mortgage credit portfolio team, said the scheme threatens to raise mortgage costs for all US citizens. “One significant policy concern is the chill that this puts across the housing finance markets more generally,” he says. “Investors will require additional compensation in the form of yields or spreads, if you have this uncertainty and additional complexity.”

With backing from Pimco and a coalition of other investors holding securities that will be affected, Wells Fargo and Deutsche Bank sued the city of Richmond last week in their capacity as trustees. The case, filed in the district court for the Northern District of California, claims the proposal violated the US Constitution and imposed losses on pension funds and individual savers totalling $200 million in Richmond, and “billions of dollars” more if the plan were rolled out across the country.

The Federal Housing Finance Agency, which controls the government agencies Fannie Mae and Freddie Mac that backstop the majority of US mortgage-backed securities, has even threatened to pull out of areas that approve the use of eminent domain, which would dramatically reduce the availability of mortgages to new borrowers.

Richmond officials are undeterred and MRP has agreed to back all legal costs. The mayor says the city vetted the plan with lawyers and scholars and is confident the legal reasoning is sound.

“FHFA lacks statutory authority to dictate what cities may do to solve our local foreclosure crises,” McLaughlin said, adding that because the vast majority of Richmond residents are Latino or African American, pulling out of the city would amount to “redlining,” a discriminatory denial of services.

Tom Butts, a member of Richmond’s city council for 18 years, said the banks’ lawsuit only emboldened the effort on a political level.

“The banks caused the whole financial meltdown that resulted in the Great Recession,” he says. “They all got bailed out by the government. For them to come back and try to attack a very well thought out and very creative scheme to try to bail out some of the people who were their victims is extremely cynical and extremely hypocritical.”

For homeowners in Richmond, the concerns are more practical.

After Wilson received chemotherapy to treat his colon cancer, he suffered nerve damage in his feet, forcing him to give up his auto repair business. He collects social security and disability benefits, and works part time in sales, but still feels the weight of his monthly mortgage payment.

Community organisers have visited him to rally support for the eminent domain plan, but he is wary of the political arguments and assertions that the banks want him to fail so they can collect the insurance in his loan. For him, any plan will do as long as it has one basic criterion.

“I’m in it for me,” he says. “If it cuts my payment in half, I’ll go along with the program.” He rattles the ice in his tequila and tips the cup toward his lips. “I’m just a simple little dude.”

Copyright the Financial Times 2013. 

Dow Jones

Overall US home building rose in July, though a drop in starts on single-family homes suggests greater hurdles facing home builders. 

Overall US housing starts rose 5.9 per cent in July from a month earlier to a seasonally adjusted annual rate of 896,000 units, the Commerce Department said Friday. Construction of multifamily units, including apartments, rose 26 per cent, while starts on single-family units declined 2.2 per cent. 

Compared with a year earlier, overall starts were up 20.9 per cent. 

Economists surveyed by Dow Jones Newswires had forecast that overall housing starts would rise 8.9 per cent. 

The report offered a mixed picture on housing. Overall home construction has risen for two of the past three months, potentially indicating a stronger housing market and boosting the economy. However, the rise has largely been due to strength in the multifamily sector, a volatile category that can obscure underlying demand. 

Construction of single-family homes--considered a more reliable category--remains less than robust. Starts on single-family homes numbered 591,000 in July, the lowest level since November. That suggests that, while home sales remain strong, builders are cautious about building or being held back by other factors, such as a lack of land to develop. 

Also, higher mortgage interest rates have raised questions about future demand for housing. Mortgage rates are running higher from the spring but have levelled off recently. The average interest rate on a 30-year, fixed-rate mortgage is hovering near 4.40 per cent this week, the same as last week but nearly a percentage point above April's level. 

In an indication of future construction, the number of new housing permits increased by 2.7 per cent to annualized level of 943,000 in July. Economists had forecast a rate of 945,000 for new permits. 

The report follows others suggesting the housing market remains strong. Thursday, the National Association of Home Builders, an industry trade group, said home builders' confidence in the market rose this month to the highest level in nearly eight years. 

The Commerce report can be found at http://www.census.gov/construction/nrc/pdf/newresconst.pdf

One of the advantages of being overseas right now is that it takes less effort to avoid listening to the insipid discourse that passes for political debate during this Australian election. As Kevin Rudd and Tony Abbott compete over who can be more obnoxious to refugees, I find myself pining for the days of sensible and humane policies under Malcolm Fraser. As politicians make themselves the butt of their own unintentional suppository jokes, I pine for someone who could deliver a killer line against his opponent, rather than against himself: Paul Keating.

Whatever one might say about his policies, Keating’s political rhetoric was masterful. My favourite among his many put-downs of opponents was his reference to a pre-Rudd political comeback kid, the flamboyant Andrew Peacock. Peacock beat the dour Howard to become Opposition Leader after Hawke’s victory in 1983, then resigned in office in response to Howard’s white-anting of his leadership (plus la change?), and then came back again after Howard lost the next election. Commenting on Peacock’s chances of winning the election after that, Keating quipped that “a soufflé doesn’t rise twice.”

It’s not a Keating original , but it’s a goodie. And it segues to my topic, a soufflé that clearly is rising again right now: Australian house prices.

Having peaked in June 2010 (when the ABS index hit 261) after the fuel from Rudd’s First Home Vendors Boost ran out, the index fell by 10.2 per cent to 234.3 in September 2012. It has risen since then by 4.3 per cent to 244.4 in June 2013. This performance has the property lobby bulls and trolls salivating over the vision of a revived investor’s Magic Pudding of ever-rising house prices, while more measured voices worry that another damaging property boom might be upon us (Beware the mother of all housing booms, August 13).

I think they’re both wrong, but it’s also clear that Australian house prices aren’t undertaking the long slow burn down that I expected when I drew the analogy to Japan’s house prices (by saying that Japan’s prices had fallen about 40 per cent over the ten to fifteen years after its bubble economy burst, and I saw no reason that Australia would be different).

Clearly I was wrong here: there are substantial ways in which Australia is different. But they’re not ones that are likely to make the property lobby happy.

First and foremost is that I was wrong in my expectation that Australia (and the OECD in general) would reduce private debt in the same way the Japanese had, and therefore with falling debt would go falling asset prices (since they’d been driven higher by leverage in the first place).

Clearly that hasn’t happened in Australia – or hasn’t happened yet.  But it did happen in Japan after its bubble economy burst, and in the USA after the subprime bubble burst. The differences in debt dynamics go a long way towards explaining why the property markets of these countries have behaved so differently, so that there’s now no way that I’m going to win the Keen-Robertson bet in the way that Rob Burgess interpreted it (a 20 per cent fall 5 years after the bet itself, rather than 5 years after the peak in June 2010, which is my interpretation), though the jury is still out on where house prices will be in June 2015 (see Figure 2).

So why is Australia different? Mainly because it hasn’t delivered whereas the Japanese and the Americans have.

Until recently, making this point involved some hand-waving, because Japanese data was extremely difficult to locate and collate. But the BIS (Bank of International Settlements: www.bis.org) has recently helped out here immensely by releasing two databases – one on private debt levels and the other on property prices– where the definitions are as consistent across countries as the BIS could make them. This data is very new: the credit data’s existence was announced in June at Malaysia’s central bank conference, and to my knowledge the property data came out after that. It’s going to take a while for me to import it into my own database and analyse it, so this is just the first in a series of posts on both debt and house prices.

These BIS figures have turned upside down some relativities that I thought applied when I had cobbled together data from the USA’s excellent Flow of Funds database, Australia’s good Reserve Bank Statistical Bulletin, and the patchy and badly structured data that I could find on Japan, for two reasons.

Firstly, I used to include financial sector debt in my calculations for the USA, in the erroneous belief that the Flow of Funds data was on debt by non-bank financial corporations to banks. As I noted in an earlier post, that would be the case if I or any other endogenous money advocate had directed the collection of statistics; but it ain’t so, because most economists think private debt doesn’t matter, and they can’t see why banks make any difference to the nature of debt. So statisticians have thrown a grab-bag of debts into the financial bin, and though there is undoubtedly some of the kind of debt that I argue matters in there, it’s just too difficult to tease it apart from the rest.

The BIS – which has the best record of all international economic organisations on the crisis, thanks to its then research director Bill White’s expertise on Minsky’s Financial Instability Hypothesis – avoided this problem by only recording the debts of the household and non-financial corporations.

Secondly, the BIS data – at least on Australia – differs from what is published by the Reserve Bank in its Table D02 (see Figure 2). This must reflect different information that the BIS requires the Reserve Bank to supply, or data that the Reserve puts in other tables being included in the BIS data set, because the BIS – the Central Banker’s Central Bank – gathers its data from its members. 

There is no trend to the difference in the data, and the correlation coefficient of the two series is very high (over 0.99), but it makes a great difference when comparing Australia’s debt levels to other countries. With my earlier Reserve Bank and Federal Reserve data sources, it appeared that America’s private debt level exceeded Australia’s. Now, on the BIS data, Australia has the dubious distinction of carrying even more private debt that the USA – though Japan remains the all-time champion, at least in this three country comparison (see Figure 3, where the vertical markers “BE” and “BNP” refer to the bursting of Japan’s “Bubble Economy” at the beginning of 1990, and the BNP ushering in the Global Financial Crisis with its shutdown of its Subprime Funds in August 2007). 

I expect that anyone looking at that chart might think that there’s nothing exceptional about 1990 in terms of Japan’s debt, and that private debt in the USA and Australia kept rising after the BNP decision, so what’s the big deal? The big deal is the turnaround in the rate of growth of debt, which Figure 5 displays. Japan’s bubble economy burst when the meteoric growth in private debt peaked and then fell in 1990, while the BNP decision also marks the peak of debt growth in both Australia and the USA.

It’s also obvious that credit growth turned negative in both the USA and Japan after their crises – but not in Australia. Credit growth slumped from plus 25 per cent of GDP in Japan at the height of its bubble to minus 15 per cent a decade later, and it spent a full decade in negative territory. America plunged from plus 15 per cent in 2008 to minus 5 per cent in 2010, and it spent two years in negative territory. In contrast, Australia’s credit growth peaked at almost 25 per cent of GDP in 2008 – substantially higher than the USA’s at the time – and then fell to plus 2 per cent in 2010, but it then bounced, rising to a peak at plus 10 per cent in June 2012.

So why did Australia not deliver, and is this a good thing? I had hoped to get on to those topics in this post, but the workload in loading the new data from the BIS got in the way. To be continued.

By a staff reporter

Dexus Property Group Ltd has flagged a modest lift in earnings for the upcoming financial year after delivering a 280 per cent increase in statutory profit to $514 million profit for 2013.

Investors were unimpressed. At 1205 AEST, Dexus shares slipped 1.22 per cent to $1.0125 against a benchmark S&P/ASX 200 index rise of 0.09 per cent.

The result was boosted by a $218 million revaluation of investment properties and a reversal of an impairment of management rights of $20.5 million.

Operating income from office rents was up 9.5 per cent to $317 million, with income from industrial property flat.

During the year Dexus engaged in $2.9 billion in transactions, divesting offshore holdings and investing $1.1 billion in the Australian market.

Chief executive officer Darren Steinberg said, "in a tough operating environment, we delivered on all of our strategic objectives which we announced in August 2012".

“We have refocused the business, concentrating on maximising value, improving earnings and investing in our target markets," he said.

Distributions for the year were $6 per security, up 12 per cent and payable on August 30.

Dexus prepares for possible CBA property fund bid

The group is seeking a major backer for a potential $3 billion all-scrip bid for the Commonwealth Bank's listed office landlord, The Australian reported.

According to the newspaper, Dexus has made an informal offer for the Commonwealth Property Office Fund but needs support from a new or existing investor for the deal to go ahead.

The group has engaged investment banks Citigroup and JPMorgan as advisers, and analysts estimate any offer for the company would be between $1.23 and $1.30 per share, The Australian reported.

Dexus last month acquired a 14.9 per cent stake in the fund.

By a staff reporter

Federation Centres Ltd expects to increase earnings per share to between 16.5 cents and 16.8 cents after swinging to a full-year profit, as it continues its strategy of cost control to weather a subdued retail market.

For the year to June 30, the commercial property group posted a net profit after tax of $212.65 million, compared to a $222.89 million loss in the seven-month period to June 2012 following its rebirth from Centro Ltd.

Revenue was also up, at $546.05 million compared to $318.29 million in fiscal 2011-12.

The group paid a final unfranked dividend of 7.5 cents per security, bringing the total dividend to 14.1 cents for the financial year.

By a staff reporter

Writedowns on the value of its Melbourne Myer Emporium and readjustments to valuations on other properties have pushed Colonial First State Retail Property Trust Ltd’s full-year profit down almost 40 per cent to $295 million.

CFS, whose portfolio consists of interests in 29 retail properties, said it underperformed the benchmark retail property index by 2.5 per cent in the half to June 30, and suggested that conditions were likely to remain challenged in the year ahead.

Shopping centre sales for the year rose just 2.8 per cent to $6.64 billion dollars, with department stores down 1.2 per cent. A rare bright spot was a 9.4 per cent rise in sales at DFO discount outlets, which rose to $421 million.

That equated to a drop in rental and property income of just under one per cent to $725 million. Taking account for an upward valuation in investment properties in the previous year, the total revenue decline was 18 per cent.

Michael Gordon, CFS fund manager said, “While there continue to be challenges in the Australian retail environment, several macroeconomic indicators remain supportive for retail expenditure.

Positive real wages growth continues, the housing market is picking up and the rate of growth in offshore travel has slowed in recent months compared to previous years.

"We remain cautious on retail sales and forecast retail specialty sales growth of 3 per cent for the CFS portfolio over FY14," the group said.

Over the year, CFS wrote down the value of its Myer Melbourne Emporium, due to open in Q1, 2014 by $63 million.

The company announced a distribution of 13.6 cents for the year a 3.8 per cent increase on the previous year.