Greetings and Happy Christmas to you all particularly those of you overseas for the festive season.
It was great to see so many of you last week at the Manly Skiff Club for our Christmas function with a stunning night on our harbour.
Investment markets improved significantly over the last few weeks, both here and overseas, as it becomes clearer that inflation has peaked, and interest rates are predicted to fall over the next 12 months. Interest sensitive stock rebounded sharply particularly in the real estate listed commercial sector. The US market reached a high for the year while the Australian market has lagged significantly when compared to the US, and as such looks comparatively cheap.
Importantly dividends have increased in the major banking stock in Australia. This supplemented with higher fixed interest returns linked to the RBA rate has meant that most clients have been able to achieve income of at least 5% on their portfolio with the prospect of growth in valuations over the next year or two as interest rates normalise.
ASX versus US NASDAQ and S&P500 (Source: TradingView)
Federal Government Policy Half Yearly Update
At this time of the year, it is customary for the Federal Government to update the market on its fiscal position and plans for the following year. The quarterly September GDP result of 0.2% was disappointing and well below market expectations. Indeed, if it were not for record migration into Australia we would now be in a technical recession. At the same time, the Federal Government currently owes just under $900 billion, and this has become a very significant cost to our community in line with our total NDIS payments.
Some of this debt now needs to be refinanced at higher rates and as such the Federal Government is in a similar position to retail borrowers having to pay a far higher percentage of their disposable income in unproductive interest payments. This is a hangover from the COVID era when Governments effectively paid people not to work for a significant period. The practical outworking of this should see interest rates drop to a neutral level which is an equilibrium that balances the needs of borrowers and investors in ensuring that interest rate settings are both predictable and fair.
Federal Government Debt – Top 5 Spending Areas (Source: Federal Government, AFR)
Migration Saves the Day
The Government has indicated that migration is expected to fall substantially next year back to more normal numbers of around 250,000. This is important as we need to get the right balance of additional labour while having adequate infrastructure and property for our community to live in an affordable manner. Part of the outlook statement indicated that additional taxes will be levied on foreign investments in Australia including additional taxes where properties has been bought and left vacant and not rent out.
The NSW state government has also indicated a loosening of planning rules particularly in Sydney to encourage medium density housing and to speed up planning approvals. There have been several infrastructure products particularly motorways which have reached completion, and which is speeding up getting around the city. There have been some exceptions in Rozelle, which demonstrates community engagement is key to avoid issues. With the Metro Project also well advanced this should make Sydney much more livable and easier to get in and out of.
Sydney Metro Map(Source: NSW Department of Planning)
As we head towards Christmas it does appear that there is a slowdown in the growth of property prices particularly in Sydney which is to be expected given the higher interest rate environment leading to lower borrowing capacity to support purchases. The top end of the market does remain very strong though with many of these properties trading with minimal debt. With the current bilateral political policy of the family home being exempt from any capital gains tax distorting markets where home ownership remains the key tax planning goal even if properties are very expensive on an absolute basis.
We have seen quite a trend of clients downsizing their homes and then topping up their superannuation and converting into an income stream. In the current environment of solid income from investments allowing many clients to live off their income without drawing down on capital. The rental market remains very tight and higher interest rates have led to landlords passing this onto the tenants in the form of higher rent which has become inflationary and ultimately not sustainable.
National Rental Rates(Source: CoreLogic)
We will be working right up to Christmas and will keep a skeleton staff over the break particularly to support overseas clients coming back to Australia for the festive season. The firm remains in good shape as we seek to help our community in the management of their financial affairs through the business cycles and highs and lows which are a fact of life. It is a privilege to help so many in our community and make a difference in people’s lives. We thank you for your support and look forward to being of service to you next year.
Tony and Fiona