October 2018 Newsletter

October is here, which means football fever and the holiday long weekend are behind us as we enter the final stretch towards Christmas. It’s traditionally a busy time for households and on the business and economic scene, as we prepare for the end of another year.

As expected, the US Federal Reserve lifted interest rates for the 8th time in September, by 0.25 per cent to a target range of 2.0-2.5 per cent. The US economy is growing strongly, with growth of 3.1 per cent forecast for 2018, full employment and inflation on target at 2 per cent. The Fed forecasts one more rate rise this year and three in 2019. Meanwhile, Australia’s cash rate remains at an historic low of 1.5 per cent. The growing differential between local and US rates pushed the Aussie dollar lower in September, down more than 1 per cent to around US72.5 cents.

Overall, our economy is in good shape. Australia’s record economic expansion is in its 28th year, with growth up 0.9 per cent in the June quarter, 3.4 per cent on an annual basis, the strongest in 6 years. The Budget deficit fell to $10.1 billion in 2017-18, the smallest in a decade, with more Australians in jobs and record company profits boosting tax revenues and reducing the welfare bill. Unemployment was steady at 5.3 per cent in August. Consumer and business confidence continue to fluctuate on political uncertainty; the ANZ-Roy Morgan consumer confidence index fell 0.7 per cent from a 5-week high to 117.2 in late September. The NAB Business Confidence index fell from 7 points to a 25-month low of 4.4 points in August.

Housing prices off the boil

The Australian housing market appears to have reached a turning point, with prices falling 2.2 per cent since peaking in September 2017. This is welcome news for first home buyers; not so much for sellers and investors.

As always with residential property, it’s a tale of many markets with big differences between states, cities and even between suburbs. Before you make any property decisions, it’s important to look beyond the national figures to understand what is happening to prices in your neck of the woods and why.

A tale of many markets
Price falls over the past year have been greatest in Sydney (-5.6 per cent), Darwin (-4 per cent), Perth (-2.1 per cent) and Melbourne (-1.7) per cent. The standout performer is Hobart (+10.7 per cent), followed by Canberra (+2.3 per cent), Adelaide (+ 1 per cent) and Brisbane (+0.9 per cent). Regional areas are still rising (+1.6 per cent) as buyers look beyond the big cities.i

There are a variety of factors at play. The Australian Prudential Regulatory Authority (APRA) has imposed tighter lending standards on the banks and encouraged them to restrict higher risk lending, which has slowed market activity.

There has also been a fall in foreign investment. Last year, Chinese investment in local residential property fell 25 per cent, although Australia still ranks second only to the US as a favoured destination.ii

With fewer buyers in the market and an oversupply of new apartments in Sydney and Melbourne in particular, sellers are having to drop their asking price to compete.

Mortgage rates on the rise
More recently, three of the big four banks and many smaller lenders have lifted mortgage interest rates due to the increased cost of funding. Lenders source much of their funding from overseas markets where interest rates are rising, unlike here where the cash rate remains at an historically low 1.5 per cent.

This raises the bar for first home buyers and puts added pressure on existing borrowers who are already stretched to the limit.

Rates on interest-only loans, used mostly by investors, have been increasing for some time. Interest-only loans typically have a term of 1-5 years after which they revert to principal and interest payments. This has raised concerns that investors who took out loans at the peak of the housing boom may struggle to meet higher principal and interest payments. Forced sales could lead to further price falls.

However, as Reserve Bank Assistant Governor, Michele Bullock, recently said, “borrowers have been transitioning to principal and interest loans for the past couple of years without signs of widespread stress”.iii

Affordability a worry
Despite falling prices, housing affordability remains an issue, especially for first home buyers in Sydney and Melbourne. The median home value in Sydney is $855,287, almost twice as much as Hobart ($437,254) and more than twice the regional average ($368,366).

Affordability is measured by the share of income required for mortgage repayments. In June 2018, for borrowers with a 20 per cent deposit, the repayment required on the average mortgage amounted to 36.3 per cent of gross household income. Ten years ago, it was 51 per cent. That’s due largely to mortgage interest rates almost halving over the same period.iv

What does it mean for me?
For first home buyers, the biggest stumbling block is often saving a deposit as rising prices push desirable properties further out of reach. But with prices expected to fall over the next couple of years, time is on your side.

Homeowners planning to downsize have an opportunity to sell now near the market peak and buy a smaller property in a falling market. What’s more, if you are over 65 you can put up to $300,000 of the sale proceeds into your super for a significant tax saving.

Families looking to upsize to a larger home also need to weigh up whether it’s better to sell and buy now or wait and see if prices of larger homes fall further.

If you are looking to buy or sell a home or an investment property and would like to discuss your options, give us a call.

i https://www.corelogic.com.au/news/augusthomevalueindexresults

ii https://thenewdaily.com.au/money/property/2018/09/11/foreign-investment-real-estate/

iii https://www.rba.gov.au/speeches/2018/sp-ag-2018-09-10.html

iv https://www.corelogic.com.au/housingaffordability

Don’t forget your tax deadline

Although nobody likes to pay tax, it’s that time of year again and we all need to dust off our tax receipts and get crunching the numbers.

While everyone is aware that June 30 is the end of the financial year, there is more uncertainty about who needs to lodge an income tax return and when it is due if you do.

For most individuals, you need to lodge an income tax return by the end of October if you have earned income in Australia during the past financial year, otherwise the tax man could come calling. That said, if you miss the deadline it may not be the end of the world.

Meeting the deadline
The official deadline for lodging an income tax return for individuals, sole traders, partnerships and trusts this year is 31 October 2018. This is also the lodgement deadline for super funds.

It may be possible to obtain an extension if you have no prior or existing tax debts, no unlodged or overdue tax returns from previous years, and you have no outstanding Centrelink or Child Support debts.

Under current legislation, the ATO can impose a Failure to Lodge (FTL) penalty if your tax return is not lodged by the due date. Generally, the tax man does not apply penalties immediately on individuals and usually warns you by phone or in writing.

For individuals and small businesses, the ATO will send a penalty notice if it does decides to apply a FLT penalty. The ATO uses a formula of one penalty unit for each period of 28 days a return is overdue, up a maximum of five penalty units. Currently, each penalty unit is $210; double that for medium-sized business and $1,050 for large entities.

The ATO may even remit the interest and penalties charges, depending on your reason for lodging late.

If you find you are unable to pay the debt, all is not lost. The ATO is generally willing to negotiate a payment plan or even release the debt in special circumstances.

No income? You still need to lodge
Even if you have not worked or received any income during a financial year, or have earned less than the tax-free threshold (currently $18,200), most people still need to lodge a Non-Lodgement Advice form with the ATO.

If you are not sure whether you need to lodge a tax return this year, the ATO has an online tool to help you work it out.i

This Non-Lodgement Advice form notifies the ATO that you don’t need to lodge a return for the previous financial year. It also ensures you’re not listed as having an outstanding return.

Getting some breathing space
Sometimes it’s not possible to lodge your tax return by October 31. If that’s the case, contact us. You can lodge after the deadline if you are on our books before it rolls around.

For most existing clients the lodgement deadline is 15 May 2019, but if your tax bill last year was $20,000 or more, your return will need to be in by 31 March 2019.

This concession is not a ‘get out of jail’ card, as failing to lodge a tax return is an offence under the Tax Act. The current maximum penalty is $8,500 or imprisonment for up to 12 months, but charges are usually only laid for severe tax related fraud offences.

It’s also worth remembering that lodging late can increase your risk of being reviewed or audited by the ATO.

Missing tax returns
If you have one or more tax returns outstanding, the ATO will eventually take notice and it is usually easier to take steps to get your returns up to date before that happens.

Accountants are happy to help sort things out and assist with filling in gaps in your information from third-parties like banks and employers. We can also work out what you can claim as a deduction and, if you are facing penalties, talk to the ATO on your behalf.

If you have any questions or concerns about later lodgement, please give us a call today.

i https://www.ato.gov.au/Calculators-and-tools/Do-I-need-to-lodge-a-tax-return/

Opportunities in the cooling property market

Things are looking up for first home buyers for the first time in years as house price growth begins to slow across the country. While prices have been on the slide for some areas in the West and the North since the end of the mining boom, the housing market in Sydney and Melbourne also appears to be losing steam.

At a national level, house prices were unchanged in October and up just 0.3 per cent over the quarter according to the latest figures from property research group CoreLogic. Significantly, the over-heated Sydney market fell 0.6 per cent over the three months to October, joining Perth and Darwin which have been falling since 2014.i

Hobart is the top performing market, fuelled by mainlanders searching for more affordable housing. Prices for Hobart dwellings rose 12.7 per cent over the past year, although price growth slowed to 0.09 per cent in October. It’s easy to see why people are flocking to the Apple Isle; the median dwelling value of $396,393 in Hobart is less than half what you can expect to pay in Sydney ($905,917) where prices are up 74 per cent since the boom began in early 2012.

Melbourne is the second most expensive city, with an average dwelling price of $710,420. And while the Melbourne market isn’t falling, it also shows signs of cooling with growth of 1.9 per cent in the three months to October and annual growth of 11 per cent. Other capital cities show little change with Brisbane up 0.6 per cent over the quarter while prices in Adelaide rose just 0.1 per cent.

Tighter lending begins to bite
The Australian housing market is a tale of many markets, each with their own supply and demand issues. But there are some common factors at play. At a national level, concerns about rapidly rising prices, risky lending practices and worsening housing affordability prompted regulators to act.

In late 2014, the Australian Prudential Regulatory Authority (APRA) announced that lenders were to limit housing finance to investors to 10 per cent of their total home lending. Then in March 2017 APRA announced a 30 per cent limit on new, interest-only home loans to dampen risks in the housing market.

In April the Australian Securities and Investments Commission (ASIC) signalled a crackdown on lenders and mortgage brokers recommending more expensive, interest-only loans to customers who were often unaware of the risks.

Investors paying more for credit
Lenders responded to the regulators’ concerns by lifting interest rates on interest-only and investor loans. According to comparison site Canstar, the average standard variable rate for investors has grown to around 0.5 per cent higher than the equivalent rate for owner occupiers.

And it seems these measures are working. The number of investor home loan approvals dropped sharply in 2015 and again in 2017, while owner occupier loans have shown a significant uptick in 2017.ii

While tighter lending policies have undoubtedly taken some of the heat out of the housing market, other forces may also be playing a role.

Understanding supply and demand
So far there is little sign of a housing bust in Australia, with significant unmet demand from first home buyers, high levels of migration and land shortages in major urban areas. But when house prices rise as far and as fast as they have in markets like Sydney and Melbourne, it’s natural to expect periodic corrections.

Commentators have been warning of an oversupply of apartments in Melbourne as well as in Brisbane. The Brisbane market has been cooling for some time, and now property values in Melbourne are rising at their slowest quarterly pace since 2016.

Despite the slowdown in price growth, Australian housing is still far from cheap. But with tighter controls on investor lending and continuing low interest rates for owner occupiers, the tables may be finally turning in favour of first home buyers.

If you would like to discuss your property strategy, give us a call.

i All price data from CoreLogic, 1 November 2017, https://www.corelogic.com.au/news/growth-conditions-remain-flat-national-basis-while-sydney-values-fall#.WgEZ3uQUnIU