I am reading wide ranging view points on what will happen in 2009 to our economy. All agree that employment will suffer, but after that is really is pure conjecture. Ask me when it is over and I will be able to give you a very accurate account of 2009.
However it is safe to assume that when job losses gather pace, then naturally personal spending will decrease (unemployed people don't spend as much) Others around them will see what is happening and get nervous, and thus also cut back in expenditure.
Talk of home prices falling out of the sky may have some truth in the high end of the market, but the low to medium end should be held up by the First Home Buyers Grant and lower interest rates, which will put extra money into the pockets of all mortgage borrowers. Those lucky people who don't have any debts and have surplus cash to invest, will not get much of a return on their savings for some time.
Interest rates will drop again in February (next week) and they will fall further before this is over. Rents may come under pressure to pass on a reduction, but at the moment there isn't enough accommodation to go around so it is likely that pressure won't amount to much.
Make sure that you look after your job. If you can do that you should be able to save money as the price of goods will fall, property prices won't increase much if at all, petrol prices will stay low, and as already mentioned the cost of borrowing will be low. Put that extra cash away for a rainy day. Pay it off the mortgage so that you can redraw it later (first check to ensure that you have a redraw facility) but just don't waste it.
Be cautious if investing, and generally be careful with money, but above all don't panic as opportunities will appear over the next year or so. Newspapers and the rest of the media always exaggerate the situation. So take little notice of current affairs programs such as "This Day Tonight" or "Extra" as they will try to increase ratings by bending the truth (well alright they lie). Don't rush your strategies as conditions will stay depressed for 18 months to 2 years.
Happy 2009
Tuesday, January 27, 2009
Tuesday, January 13, 2009
The Australian property Market - Chris Joye
The Australian 3 December 2008 Article by Christopher Joye (chief executive of the research group Rismark International.)
THE economics of Australia's $3.3 trillion housing market are widely misunderstood, with sensationalist claims that a housing bubble caused the global credit crisis and that Australian house prices will fall by 30 per cent to 50 per cent. In fact, the latest RP Data-Rismark Index results show that Australian house prices declined by just 0.8 per cent in the 12 months to October this year, and increased during the most recent three months.
The primary cause of the global credit crisis was a prolonged period of relaxed lending standards across asset markets, which led to excessively high levels of debt. This was further propelled by the US Federal Reserve's maintenance of unreasonably low interest rates in response to the 2001 tech wreck.
In the US, the crisis was exacerbated by poor regulatory practices in which lenders had no recourse to borrowers if they defaulted (which is not the case in Australia) and the presence of two quasi-government agencies that crowded the private sector out of the prime lending market.
Subsequent damage has been wrought by the tendency of today's highly interconnected financial markets to wildly overreact to positive and negative events.
As the inevitable unwinding of debt takes place, almost all asset prices have declined, especially in the US and British housing markets, where the coincidence of very high default rates, bank failures and severe credit rationing has precipitated price falls.
According to the Case-Shiller Index, US house prices are off 21 per cent. (This data is arguably biased downwards given that distressed sellers account for 40 per cent of all sales even though they represent only 3 per cent of homes.) In comparison, the S&P 500 has fallen by 43 per cent since its apogee in October 2007.
The contrast is more striking in Britain, which does not suffer from the US problem of overbuilding. According to the FT Index, which importantly captures all British sales, house prices have fallen by just 6 per cent from their peak.
Yet the FTSE All Share Index has contracted 39 per cent. Indeed, the FTSE has fallen more on individual days than the British housing market has from peak to trough. If one wants to talk about bubbles, the most credible conclusion is that the biggest bubbles were in shares.
In Australia, the hyperbolic predictions of economists Steve Keen and Gerard Minack that house prices will fall by 30 per cent to 50 per cent have been relentlessly recycled in newspapers and purportedly credible programs such as 60 Minutes and The 7.30 Report.
The doomsayers' claims are based on the assumption that housing affordability is at an all-time low.
They dismiss the fact house prices are determined by supply as well as demand (affordability is a demand-side factor) and conclude that prices must fall by some arbitrarily large margin. Keen likes to shock by quoting statistics about the rise in household debt without acknowledging that debt-servicing ratios have remained unchanged thanks to vastly lower real interest rates, the emergence of two-income households and higher real incomes.
Recent analysis by the Reserve Bank of Australia has comprehensively demonstrated that housing affordability is not at an all-time low. According to one of the Reserve Bank's benchmarks, the representative household in June 2007 had more real disposable income left over after purchasing a home and servicing a 90 per cent mortgage than at any other time since June 1982.
The bank also found that the representative household could afford to buy 33 per cent of all homes in June 2007, which, although less than the historical average of 45 per cent, was markedly better than the 13 per cent of homes available to it in June 1990.
Importantly, the Reserve Bank's present 4.25 per cent cash rate is considerably lower than the 6.25 per cent rate that existed in June 2007. Since mortgage rates peaked at 9.6 per cent in August, the Reserve Bank has pushed them down to about 6.7 per cent, with markets predicting that they will be less than five per cent by mid-2009. At the same time, house prices have not appreciated.
These improvements in affordability have been augmented by the Government's $10.4 billion spending package, which has focused on supporting incomes and boosting the first home owners grant.
Thus, despite assumptions of rising unemployment and slowing wages growth, ANZ and Westpac believe that Australian disposable incomes will grow solidly by eight per cent or more during the next year.
Perhaps the best insight into mortgage stress is default rates. Only 0.4 per cent of all home loans on Australian bank balance-sheets were delinquent in August 2008, a fraction of equivalent rates in the US (more than 2.5 per cent) and Britain (1.3 per cent). The Reserve Bank has noted that although August was the peak of its recent monetary policy cycle, Australian delinquency rates were still materially lower than levels experienced in the mid-1990s.
Australia also benefits from the fact we don't really have a sub-prime market, which accounts for 15 per cent of US loans. And in contrast to the US and Britain, where most loans are fixed for years, about 85 per cent of all Australian mortgages are variable so Reserve Bank rate cuts immediately benefit borrowers.
The biggest risk to Australian house prices is a credit squeeze. Yet, unlike the US and Britain, which have suffered multiple bank failures, there is no evidence of Australian banks systematically denying residential credit. Since the crisis began the big banks have profited immensely from a decline in competition and tremendous deposit inflows.
While the banks are restricting credit to businesses, they are happily investing in the home loan market, which attracts a much lower risk-weighting from the regulator. Today, high-quality borrowers have no difficulties getting 95 per cent loans. Indeed, Australia's largest mortgage broker, AFG, reported that approvals in October were the strongest since November 2007.
The main reason most forecasters believe Australian house prices will rise in the medium term is because of enormous excess demand. Treasury projects that housing demand is growing at more than 190,000 properties a year compared with housing starts of 145,000 homes each year. Building approvals in NSW, our largest state, are at a 23-year low. This had led to a severe housing shortage, which Westpac and ANZ estimate at more than 120,000 homes and growing. ANZ forecasts that Australia's housing supply deficit will rise to 200,000 by 2010.
When the demand for an asset exceeds supply, prices rise as the market seeks to stimulate new production. This is why, despite the prophets of doom, and the five rate hikes borrowers endured between late 2007 and mid-2008, house prices have remained largely unchanged.
The Reserve Bank believes Australia's housing market is leading the US by three years, having entered into its downturn in 2004. There is also a consensus between the Reserve Bank and most economists that the doomsayers' predictions will be proven wrong. A striking counterfactual is the 1990-92 recession, when unemployment hit 10.9 per cent yet house prices rose by two per cent a year according to the Australian Bureau of Statistics.
The media would do well to interrogate sensationalism.
Christopher Joye was the principal author of the 2003 Prime Minister's Home Ownership Taskforce report and is chief executive of research group Rismark International.
Footnote - It is nice to find a voice of reason in the media who is prepared to supply hard facts and intelligent predictions and not just sensational headlines that shock people into an incorrect feeling of doom in regard to the housing market. The media such TV and newspapers are giving you data that relates to the market 2 or 3 months ago. Here at www.rescueme.com.au we are seeing strong demand for first homes, and we know that other brokers are as well. In a few months that will mean many ex-first home buyers will sell and look to upgrade. Translate that to late in 2009 and it seems difficult to escape a resurgent home/property market. Don't get carried away, it won't be a boom, but it will be a normal stable market with rises of around 4% to 6% annually which is where we want the market to be. The days of easy money are over for now, but good secure capital gains are still possible.
THE economics of Australia's $3.3 trillion housing market are widely misunderstood, with sensationalist claims that a housing bubble caused the global credit crisis and that Australian house prices will fall by 30 per cent to 50 per cent. In fact, the latest RP Data-Rismark Index results show that Australian house prices declined by just 0.8 per cent in the 12 months to October this year, and increased during the most recent three months.
The primary cause of the global credit crisis was a prolonged period of relaxed lending standards across asset markets, which led to excessively high levels of debt. This was further propelled by the US Federal Reserve's maintenance of unreasonably low interest rates in response to the 2001 tech wreck.
In the US, the crisis was exacerbated by poor regulatory practices in which lenders had no recourse to borrowers if they defaulted (which is not the case in Australia) and the presence of two quasi-government agencies that crowded the private sector out of the prime lending market.
Subsequent damage has been wrought by the tendency of today's highly interconnected financial markets to wildly overreact to positive and negative events.
As the inevitable unwinding of debt takes place, almost all asset prices have declined, especially in the US and British housing markets, where the coincidence of very high default rates, bank failures and severe credit rationing has precipitated price falls.
According to the Case-Shiller Index, US house prices are off 21 per cent. (This data is arguably biased downwards given that distressed sellers account for 40 per cent of all sales even though they represent only 3 per cent of homes.) In comparison, the S&P 500 has fallen by 43 per cent since its apogee in October 2007.
The contrast is more striking in Britain, which does not suffer from the US problem of overbuilding. According to the FT Index, which importantly captures all British sales, house prices have fallen by just 6 per cent from their peak.
Yet the FTSE All Share Index has contracted 39 per cent. Indeed, the FTSE has fallen more on individual days than the British housing market has from peak to trough. If one wants to talk about bubbles, the most credible conclusion is that the biggest bubbles were in shares.
In Australia, the hyperbolic predictions of economists Steve Keen and Gerard Minack that house prices will fall by 30 per cent to 50 per cent have been relentlessly recycled in newspapers and purportedly credible programs such as 60 Minutes and The 7.30 Report.
The doomsayers' claims are based on the assumption that housing affordability is at an all-time low.
They dismiss the fact house prices are determined by supply as well as demand (affordability is a demand-side factor) and conclude that prices must fall by some arbitrarily large margin. Keen likes to shock by quoting statistics about the rise in household debt without acknowledging that debt-servicing ratios have remained unchanged thanks to vastly lower real interest rates, the emergence of two-income households and higher real incomes.
Recent analysis by the Reserve Bank of Australia has comprehensively demonstrated that housing affordability is not at an all-time low. According to one of the Reserve Bank's benchmarks, the representative household in June 2007 had more real disposable income left over after purchasing a home and servicing a 90 per cent mortgage than at any other time since June 1982.
The bank also found that the representative household could afford to buy 33 per cent of all homes in June 2007, which, although less than the historical average of 45 per cent, was markedly better than the 13 per cent of homes available to it in June 1990.
Importantly, the Reserve Bank's present 4.25 per cent cash rate is considerably lower than the 6.25 per cent rate that existed in June 2007. Since mortgage rates peaked at 9.6 per cent in August, the Reserve Bank has pushed them down to about 6.7 per cent, with markets predicting that they will be less than five per cent by mid-2009. At the same time, house prices have not appreciated.
These improvements in affordability have been augmented by the Government's $10.4 billion spending package, which has focused on supporting incomes and boosting the first home owners grant.
Thus, despite assumptions of rising unemployment and slowing wages growth, ANZ and Westpac believe that Australian disposable incomes will grow solidly by eight per cent or more during the next year.
Perhaps the best insight into mortgage stress is default rates. Only 0.4 per cent of all home loans on Australian bank balance-sheets were delinquent in August 2008, a fraction of equivalent rates in the US (more than 2.5 per cent) and Britain (1.3 per cent). The Reserve Bank has noted that although August was the peak of its recent monetary policy cycle, Australian delinquency rates were still materially lower than levels experienced in the mid-1990s.
Australia also benefits from the fact we don't really have a sub-prime market, which accounts for 15 per cent of US loans. And in contrast to the US and Britain, where most loans are fixed for years, about 85 per cent of all Australian mortgages are variable so Reserve Bank rate cuts immediately benefit borrowers.
The biggest risk to Australian house prices is a credit squeeze. Yet, unlike the US and Britain, which have suffered multiple bank failures, there is no evidence of Australian banks systematically denying residential credit. Since the crisis began the big banks have profited immensely from a decline in competition and tremendous deposit inflows.
While the banks are restricting credit to businesses, they are happily investing in the home loan market, which attracts a much lower risk-weighting from the regulator. Today, high-quality borrowers have no difficulties getting 95 per cent loans. Indeed, Australia's largest mortgage broker, AFG, reported that approvals in October were the strongest since November 2007.
The main reason most forecasters believe Australian house prices will rise in the medium term is because of enormous excess demand. Treasury projects that housing demand is growing at more than 190,000 properties a year compared with housing starts of 145,000 homes each year. Building approvals in NSW, our largest state, are at a 23-year low. This had led to a severe housing shortage, which Westpac and ANZ estimate at more than 120,000 homes and growing. ANZ forecasts that Australia's housing supply deficit will rise to 200,000 by 2010.
When the demand for an asset exceeds supply, prices rise as the market seeks to stimulate new production. This is why, despite the prophets of doom, and the five rate hikes borrowers endured between late 2007 and mid-2008, house prices have remained largely unchanged.
The Reserve Bank believes Australia's housing market is leading the US by three years, having entered into its downturn in 2004. There is also a consensus between the Reserve Bank and most economists that the doomsayers' predictions will be proven wrong. A striking counterfactual is the 1990-92 recession, when unemployment hit 10.9 per cent yet house prices rose by two per cent a year according to the Australian Bureau of Statistics.
The media would do well to interrogate sensationalism.
Christopher Joye was the principal author of the 2003 Prime Minister's Home Ownership Taskforce report and is chief executive of research group Rismark International.
Footnote - It is nice to find a voice of reason in the media who is prepared to supply hard facts and intelligent predictions and not just sensational headlines that shock people into an incorrect feeling of doom in regard to the housing market. The media such TV and newspapers are giving you data that relates to the market 2 or 3 months ago. Here at www.rescueme.com.au we are seeing strong demand for first homes, and we know that other brokers are as well. In a few months that will mean many ex-first home buyers will sell and look to upgrade. Translate that to late in 2009 and it seems difficult to escape a resurgent home/property market. Don't get carried away, it won't be a boom, but it will be a normal stable market with rises of around 4% to 6% annually which is where we want the market to be. The days of easy money are over for now, but good secure capital gains are still possible.
Sunday, January 11, 2009
BUY PROPERTY NOW - 12/01/2009 - If you are a first home buyer, you will not have a better opportunity than right now to get into your own place courtesy of the Federal Governments generous grant, and low interest rates, with the prospect of more rate cuts in February and March. Most experts are predicting borrowing rates to reduce to about 4.5% variable and in the low fives for fixed rates of 2 to 3 years. I am now seeing strong demand for low priced homes, and many are selling within a few days. Result - prices will increase although probably by only $20,000 or so. But still by buying now that is an extra $20,000 that you won't have to pay for your house, and with lower repayments for the next 30 years.
Calculate what repayments would be, and compare that to your rental now, and then add an extra 10% to your rent to allow for increases over the next two years. How does it compare? If your rent is more or much the same as the repayments, then what are you waiting for, grab a house now. If renting is still much cheaper than perhaps you should wait for now, but these market conditions won't last forever. The good times don't last forever, and neither do the bad times. Plan ahead for the next 10 years now. Use our free calculator at http://www.rescueme.com.au/calculators.html to see whether renting is cheaper than buying for you. If you do decide to buy then try to get an experienced negotiater to advise you with your contract offer and negotiations.
Calculate what repayments would be, and compare that to your rental now, and then add an extra 10% to your rent to allow for increases over the next two years. How does it compare? If your rent is more or much the same as the repayments, then what are you waiting for, grab a house now. If renting is still much cheaper than perhaps you should wait for now, but these market conditions won't last forever. The good times don't last forever, and neither do the bad times. Plan ahead for the next 10 years now. Use our free calculator at http://www.rescueme.com.au/calculators.html to see whether renting is cheaper than buying for you. If you do decide to buy then try to get an experienced negotiater to advise you with your contract offer and negotiations.
Sunday, January 4, 2009
MAKING MONEY OUT OF THE FINANCIAL CRISIS
What's that you say? How can anyone make money at the moment?
Easy really, the two best drivers of wealth are still property and the sharemarket. Both of these are down at the moment, although property is not down very much apart from property owned by financially distressed vendors.
Let's look at PROPERTY first - There is good buying pressure on lower priced homes in the first home buyers are of the market, so let's avoid that area. If you look around carefully and talk to as many real estate agents as possible, then you will find homes in the bracket just above that level. (Agents will chase deals for cashed up buyers at present) For example if the entry level in your area is $350,000 then look at homes in the $500,000 bracket. You should be able to pick up one of these for around $430,000 if you are prepared to wait and negotiate hard. That will give you a much better buy in the long run for that extra $80,000.
You must buy with your head using all of the logical measures rather that just picking a home with colours that you like. A house needs to be a sound building displaying some worthwhile architectural features that make it stand out, and importantly it must be well located. Paint colour, age, and other superficial characteristics will in the long run have little bearing on what you can achieve with a house. In fact I always consider a house or property that is a bit run down as an advantage as less people will be interested thus offering a better buy. Really paint is cheap. This market has brought prices back to a realistic level and ensured that they don't race off leaving everyone behind. You do need to take a long term view, and with the current interest rates you can afford to hold a property that brings in reasonable rent. Yields should be in the vicinity of 5% or more. If I buy for $520,000 then I look for $520 per week or close to that. Interest rates will shortly be around 5% so a positively geared property is not out of the question if you have a small deposit.
PROFITS - give yourself at least 5 years, but I suspect that you may earn an easy $100,000 out of a $500,000 house over that time as well as taking some tax benefits along the way, and you will only be taxed on half of the capital gain as long as you hold for more than 12 months.
Now lets look at the SHAREMARKET - This market has taken an absolute hammering over the last 18 months, in particular the latter half of 2008 when many were predicting the end of the world as we know it. and truly it was the end of the world for many banks and related financial concerns. We now have some stability in this market, banks are again lending, Obama is promising to fix the ills of the system and has brought on many good people who appear capable of doing that given time, and the more normal market conditions means that investors will again look at the fundamentals of the companies rather that just looking for the nearest exit to run through. Many of these companies will receive solid upgrades once we realise that they still have good earning capacity. Look for CASH earnings, and not just revaluations of assets to drive income. Values of warehouses, breweries, retail property etc. can go up or down, but a company with sound cash earnings can ride out storms and fluctuations in the economy. I can't and won't tell you what companies to invest in, but ask yourself if people will still need to eat, have a beer, drive a car (and what sort of a car) go to the movies etc. Regardless of the situation people will still need necessities, but perhaps champagne and caviar will be off the menu for a while.
Think carefully about the industry that you are putting money into, the company, the people running the company, and the strength of the company. If you are unsure ask your stockbroker for advice, but always be involved in the decision yourself. Never invest in any company that you don't understand.
Invest with intelligence and win in this credit crisis.....
www.rescueme.com.au
Easy really, the two best drivers of wealth are still property and the sharemarket. Both of these are down at the moment, although property is not down very much apart from property owned by financially distressed vendors.
Let's look at PROPERTY first - There is good buying pressure on lower priced homes in the first home buyers are of the market, so let's avoid that area. If you look around carefully and talk to as many real estate agents as possible, then you will find homes in the bracket just above that level. (Agents will chase deals for cashed up buyers at present) For example if the entry level in your area is $350,000 then look at homes in the $500,000 bracket. You should be able to pick up one of these for around $430,000 if you are prepared to wait and negotiate hard. That will give you a much better buy in the long run for that extra $80,000.
You must buy with your head using all of the logical measures rather that just picking a home with colours that you like. A house needs to be a sound building displaying some worthwhile architectural features that make it stand out, and importantly it must be well located. Paint colour, age, and other superficial characteristics will in the long run have little bearing on what you can achieve with a house. In fact I always consider a house or property that is a bit run down as an advantage as less people will be interested thus offering a better buy. Really paint is cheap. This market has brought prices back to a realistic level and ensured that they don't race off leaving everyone behind. You do need to take a long term view, and with the current interest rates you can afford to hold a property that brings in reasonable rent. Yields should be in the vicinity of 5% or more. If I buy for $520,000 then I look for $520 per week or close to that. Interest rates will shortly be around 5% so a positively geared property is not out of the question if you have a small deposit.
PROFITS - give yourself at least 5 years, but I suspect that you may earn an easy $100,000 out of a $500,000 house over that time as well as taking some tax benefits along the way, and you will only be taxed on half of the capital gain as long as you hold for more than 12 months.
Now lets look at the SHAREMARKET - This market has taken an absolute hammering over the last 18 months, in particular the latter half of 2008 when many were predicting the end of the world as we know it. and truly it was the end of the world for many banks and related financial concerns. We now have some stability in this market, banks are again lending, Obama is promising to fix the ills of the system and has brought on many good people who appear capable of doing that given time, and the more normal market conditions means that investors will again look at the fundamentals of the companies rather that just looking for the nearest exit to run through. Many of these companies will receive solid upgrades once we realise that they still have good earning capacity. Look for CASH earnings, and not just revaluations of assets to drive income. Values of warehouses, breweries, retail property etc. can go up or down, but a company with sound cash earnings can ride out storms and fluctuations in the economy. I can't and won't tell you what companies to invest in, but ask yourself if people will still need to eat, have a beer, drive a car (and what sort of a car) go to the movies etc. Regardless of the situation people will still need necessities, but perhaps champagne and caviar will be off the menu for a while.
Think carefully about the industry that you are putting money into, the company, the people running the company, and the strength of the company. If you are unsure ask your stockbroker for advice, but always be involved in the decision yourself. Never invest in any company that you don't understand.
Invest with intelligence and win in this credit crisis.....
www.rescueme.com.au
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