Good morning and welcome to our regular monthly update
It does look now that interest rates have peaked in the US with their CPI coming in significantly lower than anticipated. This was reflected in the Australian market with the listed property trust sector regaining up to 10% in one session with the highlight being Charter Hall.
Listed Property – SLF (Source: Commsec)
This reflects the expectation that interest rates will begin to fall in Australia possibly sooner than anticipated by the regulator. Indeed, the last interest rate increase earlier in the month was probably unnecessary on reflecting data now available to us. The most probable path forward will be for interest rates to stay on hold until the February meeting when Christmas trading can be reviewed.
US Bond Yield Rate (Source: Yieldreport.com.au)
Migration and Property
It is important to delve deeper into these numbers and make an adjustment for the highest level of migration into Australia in our history with 520,000 new full-time migrants entering in the last 12 months. With the shortage of homes for them to live in this has exacerbated the rental crisis leading to large increases in rent which it is in itself is inflationary asworkers need more money from their employers and employers charge more for their products and services to the end client.
In aggregate this becomes a self-fulfilling loop where rising interest rates lead to further inflation leading to further higher interest rates until the cycle is broken when a significant amount of the community are unable to meet mortgage payments. It is pretty clear through our client base that discretionary spending has slowed rapidly with the public prioritising retaining their ownership of their homes via higher interest rates rather than consuming or going into more debt.
Australia Long Term Migration Figures(Source: ABS, Migration, Treasury, Independent Australia)
Australian National Rental Price Increases (Source: Corelogic)
At this stage of the cycle savers are benefiting from very high returns without taking risk while small business remains hostage to difficult borrowing conditions while not achieving satisfactory returns. This is a dangerous situation where people are being rewarded too much for not taking risk and penalised too much for taking risk. Over time policy settings will need to adjust to reward risk taking and encourage investors to take money out of guaranteed returns and to begin to invest and higher risk assets which will provide a greater social good if successful. The most obvious being investing in health technology and improvements in lifestyle opportunities as our communities age.
In essence we need to increase out GST to rates more common in Europe and put limitations on the amount of money that can be earned by investors without taking risk the most obvious being no limitations on the capital gains tax exemption on the principal place of residence. This is of course politically difficult and unlikely to happen in the foreseeable future.
Australian GST Rate Compared to Other Countries(Source: The Australian)
In the meantime, Australia is blessed with a strong resource sector which is providing much of the taxation to meet government spending. There are signs that the Chinese economy is reopening to Australia with the recent visit of our Prime Minister and as our largest economic neighbour our future is closely tied to any stimulus policy that the Chinese now seek to introduce to improve their own productivity and economic growth. We now have eight Chinese airlines flying into Australia and it is clear from observing the lines outside of our luxury stores in Pitt St that there are significant foreign purchases be made in our jurisdiction which again to some extent can distort the boring capacity of our community.
Calculations of CPI do not accurately reflect the amount of purchasing power of international tourists while they are spending in Australia. So, in essence we need to look through the CPI numbers and think more carefully about the impact of interest rates on spending decisions particularly for our vulnerable members of society.
We are currently in the AGM season for most companies listed in Australia which is an opportunity for shareholders large and small to have their say in the running of their company. So far results have been steady. the four major banks have all reported significant increases in their profits and dividends over the last two weeks, combined the big four had made $32 billion of profit and distributed approximately 75% to shareholders as dividends most of which has been franked. At this stage borrowers appear to be keeping up with their mortgage payments and arrears at the banks appear to be modest.
CBA Bank Arrears 90+ Days(Source: ASX, CBA)
The residential property market in Sydney continues to be very strong put those rents and valuations increasing significantly again impacted by lack of supply and record migration. The positive part of this is it the overall value of residential property in Australia has again hit a new record of $10 trillion. This provides a lot of equity for investors to buy other assets and fund travel and possibly most importantly of all help their children and grandchildren in their desire to get into the property market close to their parents. The Bank of mum and dad remains the main supporting lender for deposits while the federal government has introduced various incentives to allow younger people to purchase properties with a 5% deposit but outside of the more desirable suburbs and limited to below $1 million.
Australian Residential Property Movement last 12 months(Source: Corelogic)
Locally we are getting ready for the Christmas season with our annual function at the Manly Skiff Club organised for Wednesday the 6th of December where we very much hope to see as many of you as possible. Do feel free to visit our website at www.virtueandpartners.com.au where we cover in detail much of the technical issues relating to superannuation and Centrelink benefits. We continue to keep the office open on a Thursday evening and Saturday mornings to be as available as possible for clients at times that suit you. We are also taking new clients and welcome your referrals from family and friends. It is a great privilege to provide financial advice to our community and as you know we take our responsibility incredibly seriously.
As always, we thank you for your support.
Tony and Fiona