Cafe economy is full of beans

Perth's obsession at dinner party conversations about house prices is being replaced by an obsession about coffee, jewellery and the latest SUV.

It's a reflection of the way our spending priorities are changing.

And a reason why certain retailers whinge while others who are making cash are keeping mum.

Last week's retail trade figures were further confirmation of the change now taking place across Perth and pretty much across the rest of the country.

In the 12 months to the end of May, turnover through WA cafes had jumped the best part of 34 per cent.

On the wider measure of cafes, restaurants and takeaways the increase was still a stunning 26 per cent.

While there is some inflation in these figures (as anyone who likes a good coffee will argue), that is only a small part of the equation.

Taking inflation in the sector out of the equation, the increase in turnover through the State's cafes is still well over the 25 per cent mark.

Paul Bizzaca, who owns the Pizzaca Caffe in Scarborough, told The West that there was a change taking place — one that was good for him and his business.

"Coffee is one of the things that's selling a lot more," he said, adding that it felt like a much bigger lift than stated in the official figures.

"Coffee's just gone off the board. We've gone through two coffee machines in three years and we'll have to get another one soon."

The retail trade figures came out a couple of days after RP Data-Rismark's latest measure of dwelling values.

While there was some excitement that dwelling values in Perth had lifted 2 per cent in June, there was some sting in the tail.

Through the past three months, dwelling values were still down by 0.1 per cent through the quarter and 0.8 per cent through the year so far.

Measuring back to the June period of last year, the decline is much bigger.

Now have a look at the accompanying graph on this page.

It's a comparison of the cumulative increase in Perth house prices since 2002 and the cumulative increase in cafe turnover over the same period.

Between 2002 and the latest available figures, Perth's house prices (as measured by the Australian Bureau of Statistics) climbed by a cumulative 197.2 per cent.

They've actually fallen about 6 per cent since early 2010.

By contrast, the spending across WA through the State's cafes has climbed a cumulative 220 per cent.

Since early 2010, turnover is up by 70 per cent.

I've left out the jewellery sector, which is also going through its own surge. In my nearby Westfield I was recently talking to a long-time jeweller.

He was bemoaning the fact that over the past two or three years, the number of jewellers in the shopping centre had more than doubled (and is now approaching double figures).

Industry research company IBISWorld estimates the jewellery market in this country is worth around $4.5 billion and growing quicker than the overall economy.

And just to add to the issue, consider what's happening on the nation's roads.

Official figures on car sales out last week showed a record number of vehicles were bought in June, both in WA and nationally.

Vehicle sales in WA are 15 per cent higher for the year to date. Nationally, they're up by 10 per cent.

Passenger car sales are up a modest 5.8 per cent but SUV sales are so far this year up by 33 per cent across the country.

Obviously, if we're buying more lattes, bangles and SUVs then there is some cash flowing about the economy.

But it's not going into house prices.

Merrill Lynch senior economist Saul Eslake, who served as ANZ's senior economist a few years ago, reckons the days of supersonic price rises are over.

He makes the point that the deep falls in interest rates through the late 1990s and early 2000s, driven by rampant competition between banks and non-bank lenders with access to cheap cash overseas, delivered homeowners a once-in-a-lifetime chance to dramatically increase the amount they would pay for a new house.

The step-down in average mortgage interest rates between the pre-cheap money days (around 1996-97) and today is about 4.5 percentage points.

To put that in dollars and cents, the fall in average interest rates on a $300,000 mortgage is worth close to $800 a month.

Over a 25-year loan, at 7 per cent, you end up paying the bank back $636,000 of which $336,000 is interest.

At 2.5 per cent you end up paying back $404,000 of which $104,000 is interest.

That is serious money and one of the major reasons house prices across Australia (not just Perth) surged through the early parts of 2000.

But it ain't going to happen again.

Mr Eslake makes the point that the big fall in interest rates, and the money that freed up for those lucky enough to hold property at the time, has been capitalised into house prices.

"The structural decrease in interest rates associated with the move to inflation targeting has occurred and will not happen again," he said.

"The ability to leverage structurally lower rates into higher prices to the extent experienced over the recent decade was a one-off."

In other words, when banks started throwing cheap money at us we decided to put that cash into housing.

But it could only continue as long as overall interest rates kept falling.

Even in Perth, the house price party was coming to an end before some interlopers called Bear Sterns and Lehman Brothers walked through the door, took all the grog and turned off the music.

However, while house prices stopped climbing our overall incomes continued to climb.

So what are we doing with that cash?

Spending it on a new car, on that pretty pair of earrings or on coffee and cake.

That's good if you happen to run a Mazda dealership or manage a Diva outlet.

Not so good if you were banking on another huge step up in Perth house prices to boost the superannuation nest egg.

Still, you could think about all of this while having a slice of Paul Bizzaca's latest torte.

Source: The West Australian, 9 July 2012