It’s August and we are into the final month of an unusually balmy winter, after a record run of high temperatures for July in many states. Financial markets have also been running hot with new records set.
Global sharemarkets were riding high in July, fueled by higher than expected US growth, rising expectations that the US Fed would cut interest rates this month and hopes of further China-US trade talks.
On the flip side, global bond yields fell to record lows. Australian 10-year government bonds currently yield 1.21 per cent, down 1.45 per cent in 12 months.
The US S&P500 share index hit a new record high in July while Australia’s All Ordinaries Index and ASX200 finally broke through their 2007 record highs set before the GFC. Australian shares were also buoyed by the second cut in official interest rates in as many months, to a new low of 1 per cent. Rising iron ore prices (up 72 per cent in 12 months) and further falls in the Aussie dollar to below US69c also helped boost our export sector.
Australia’s trade surplus rose to a record high of $5.75 billion in May, including a record surplus with China. But in a worrying sign, China’s economic growth fell to an annual rate of 6.2 per cent in the June quarter, its weakest in 27 years.
The International Monetary Fund (IMF) lowered its forecasts for global growth to 3.2 per cent in 2019. If accurate, this would be the slowest growth in 10 years. This is reflected in Australia’s inflation rate; the Consumer Price Index rose to an annual rate of 1.6% in the June quarter, better than the 1.3% reading in March but still stubbornly below the Reserve Banks 2-3 per cent target.
For the first time in years, the planets seem to be aligning for homebuyers and property investors. Interest rates are falling, property prices largely appear to be stabilising and constraints on bank mortgage lending have been relaxed.
It’s welcome news for first homebuyers and anyone who has been waiting on the sidelines for a signal that the downturn in house prices could be at or near the bottom in key markets such as Melbourne and Sydney.
As is always the case though with the national housing market, the full story is more than a tale of two cities.
House price slide losing momentum
According to research group CoreLogic, in the year to July the national housing market fell 6.4 per cent. This fall was driven by the two biggest markets Sydney (down 9.0 per cent) and Melbourne (down 8.2 per cent).
Perth, still coming down from the peak of the mining boom, and Darwin suffered similar declines. Brisbane fell 2.4 per cent and Adelaide was down 0.8 per cent from a much lower peak. Hobart (up 2.8 per cent) and Canberra (up 1.1 per cent) were the only capital cities to rise in the year to July.
But in the aftermath of the May federal election and the first of the Reserve Bank’s two recent interest rate cuts, the downhill slide in prices began to lose momentum.
In July, home values recorded zero growth nationally, with signs the housing conditions are stabilising. Most tellingly, prices rose slightly for the second month in a row in both Sydney (up 0.2 per cent) and Melbourne (up 0.2 per cent). However the stabilisation in housing values is becoming more broadly based with Brisbane, Hobart and Darwin also recording rises in values. i
Reserve Bank opens the bidding
In hindsight, the Reserve Bank’s recent decision to cut interest rates for the first time since 2016 could mark the beginning of the end of the downturn in home prices.
In June, the Reserve Bank lowered the cash rate from 1.5 per cent to a new historic low 1.25 per cent and followed up in July with another cut to 1 per cent.
Mortgage interest rates are also low by historic standards. In early July, the average standard variable mortgage rates of the big four banks were all around 4.9 per cent. The best available rates from smaller lenders are now below 3 per cent. ii
Banking regulator joins in
The Australian Prudential Regulatory Authority (APRA) is also doing its bit to breathe new life into the property market.
In July, the banking regulator scrapped a rule that required banks to assess new mortgage customers on their ability to manage repayments with 7.25 per cent interest rates no matter what their actual rate might be.
APRA will now require banks to test if borrowers can manage repayments at least 2.5 percentage points above a loan’s current rate. With many mortgage rates for new customers currently around 3.5 per cent, this would mean banks would have to test whether customers could afford repayments of 6 per cent instead of 7.25 per cent. iii
As a result, comparison website RateCity estimates someone earning the average wage ($83,455) could see their borrowing power increase by $66,000 to $544,000. iv
Property investing beyond houses
Australians’ love affair with bricks and mortar is legendary, but there is more than one way to profit from property.
If you’re thinking of buying as an investment, rather than as a place to call home, there may be opportunities to invest directly in commercial property or via a managed fund.
Listed property trusts, property ETFs (exchange traded funds) and traditional unlisted managed funds offer a way to invest in a diversified portfolio of properties in Australia and overseas. As well as residential property they can invest in retail, office and industrial property.
If you would like to discuss your property investment strategy in light of recent developments, give us a call.
i All house price data from Core Logic, 1 July 2019, https://www.corelogic.com.au/sites/default/files/2019-07/CoreLogic%20home%20value%20index%20JULY%202019%20FINAL.pdf
ii The Sun Herald, 1 August 2019, https://www.corelogic.com.au/sites/default/files/2019-08/CoreLogic%20home%20value%20index%20AUGUST%20FINAL.pdf
iii APRA, 5 July 2019, https://www.apra.gov.au/media-centre/media-releases/apra-finalises-amendments-guidance-residential-mortgage-lending
iv RateCity, 5 July 2019, https://www.ratecity.com.au/home-loans/mortgage-news/apra-changes-average-aussie-family-can-now-borrow-60k
Aussies are living 10 years longer than we did 50 years ago; we are also staying fit and active well into retirement. Expectations of retirement are also higher, whether that be overseas travel, learning a new skill or spoiling the grandkids.
Recent changes to boost retirement income may go at least some of the way to achieving your dream retirement and providing for a healthy, independent and good life in your later years. While there are some changes that affect self-funded retirees, the changes generally relate to those with Centrelink entitlements.
Here are the three main areas where changes have been introduced as of 1 July 2019.
Pension Work Bonus
If you receive the age pension or a Veterans Affairs pension, you can now earn up to $300 a fortnight (up from $250) without impacting on your Centrelink payment. Together with the income test free area of $174, this means singles can earn $472 a fortnight before your pension is affected.
The work bonus applies whether you are an employee or self-employed. And you don’t have to earn a maximum of $300 every fortnight. You can accumulate unused work bonus up to $7,800 (previously $6,500) and use this when you earn employment or business income in the future.
For instance, if you haven’t worked for a year, you accumulate $7,800 of unused work bonus. Then if you earn $4,000 for contract work over a six-week period, $4,000 of your accumulated work bonus (leaving a balance of $3,800) is used so your Centrelink payment will not be affected.
Not only can you improve your income, but you may also enjoy the stimulation of remaining in the workforce.
Pension Loans Scheme
Changes to the Pensions Loans Scheme mean that more people can tap into the equity in their home.
The fortnightly loan to boost income has been extended to apply to all age pensioners as well as self-funded retirees.
You can borrow up to 150 per cent (previously 100 per cent) of your maximum fortnightly pension rate to provide you with a better standard of living in retirement. The amount borrowed is secured by property you own in Australia.
The loan can be repaid at any time you choose, although it is recovered either when you sell the property or it’s sold from your estate (whichever comes first).
Currently retirees are charged a compounding variable interest rate of 5.25 per cent a year. The scheme is effectively a reverse mortgage facilitated by the government. Of course, such a loan will reduce your home equity, but it will give you added cash flow in the meantime.
New means testing of annuities
Changes have also been made to the treatment of pooled lifetime retirement income streams such as lifetime pensions, lifetime annuities both in and out of super and deferred lifetime annuities.
An annuity is a product where your money is pooled with other investors and a set amount is paid to you each year, usually for the rest of your life. The changes do not apply to account-based pensions or to annuities purchased before 1 July 2019.
Under the new rules, Centrelink will treat a fixed 60 per cent of all annuity payments as income. And for the assets test, it will assess 60 per cent of the nominal purchase price for the period until you are age 84 (for a minimum of five years) and after that 30 per cent for the rest of your life.
While the 60 per cent ruling may improve your circumstances, it won’t in all cases. If you have or are considering an annuity, give us a call to discuss what works best for you.
As the interest rate on annuities is set at the time of purchase, they are less attractive when interest rates are low. But there is an argument for investing part of your retirement savings in an annuity to give you guaranteed income on top of any Centrelink payments or a superannuation account-based pension that may not last your lifetime.
These three changes are all aimed at giving you additional sources of stable income in retirement. If you would like to know more, give us a call.
The Reserve Bank’s decision to cut official interest rates is good news for anyone with a mortgage or hoping to buy their first home, but presents a challenge for savers. Whatever your personal situation, the question now is how to make the most of falling rates.
On July 2, the Reserve Bank cut the official cash rate for the second month in a row by 25 basis points. This second rate cut saw rates falling from 1.25 per cent to 1 per cent, the lowest on record. Many economists predict further cuts, with some suggesting rates could fall to as little as 0.5 per cent.
Just how low rates go will depend on the broader economy. Growth in the three months to March was up just 0.4 per cent, or 1.8 per cent over the year. The Reserve Bank is also concerned about sluggish wage growth, unemployment stuck at around 5 per cent and inflation of 1.3 per cent well below its target 2-3 per cent range.
Rather than wait to see how low rates will go, there are things you can do now to take advantage of lower rates or minimise their impact, depending on your personal circumstances.
Grab a better home loan deal
Many banks moved quickly to cut home loan interest rates in the days following the Reserve Bank’s move, although not all of them passed on the full amount.
The average standard variable rate offered by the big four banks is now between 4.92 and 4.98 per cent, saving the majority of variable rate homeowners over $100 a month.i
The big four also cut their discount rates, while some smaller lenders are offering rates as low as 2.89 per cent. The lowest 1-year fixed rate is below 3 per cent.
While house prices and interest rates continue to fall, the stars could finally be aligning for Australians wanting to buy their first home.
The Australian Regulation Prudential Authority (APRA) plans to relax the minimum 7 per cent interest rate banks are required to use when assessing borrowers’ ability to service a home loan.
Also, the Morrison government proposes low deposit financing for eligible first home buyers who save a deposit of as little as 5 per cent up to 20 per cent to purchase property.
For people with existing home loans, it’s time to check whether you are getting a good deal from your lender. If not, ring them to negotiate a lower rate and be prepared to shop around if they won’t budge.
The outlook for savers
Lower interest rates can be more challenging for savers. That includes anyone with a savings account as well as retirees who depend on the income from term deposits to help with living expenses.
Term deposit rates are likely to head south of 2 per cent. The best interest rate for $10,000 invested in a 1-year term deposit is currently around 2.5 per cent.
Banks have also been cutting rates on their online savings accounts. The best rates on offer are currently around 3 per cent for the first four months, before dropping to a base rate around half that, so shop around and read the terms and conditions.
The hunt for yield
If you have a longer time horizon, growth assets such as shares and property can provide regular income. If you can ride out the short-term fluctuations in share and property prices, the income they provide in the form of dividends (shares) and rent (property) tend to be more stable and reliable.
The national average rental yield on Australian residential property is sitting at around 4.1 per cent.ii Coincidentally, Australian shares currently provide an average dividend yield of 4 per cent (7 per cent after franking) but many quality companies pay more.iii
For example, the big four banks currently offer dividend yields of between 5.2 and 6.8 per cent. After franking credits are included, the yields grow to 7.5 and 9.7 per cent respectively.
Whether you plan to borrow or pump up your income, falling interest rates offer opportunities and challenges. If you would like to discuss the impact of lower rates on your investment strategy, give us a call.
i ABC, 3 July 2019, https://www.abc.net.au/news/2019-07-03/what-the-rate-cuts-mean-for-you/11273500
ii CoreLogic, 1 June 2019, https://www.corelogic.com.au/sites/default/files/2019-06/CoreLogic%20home%20value%20index%20JUNE%20FINAL.pdf
iii AFR share online market tables, 24 June 2019