The Property Puzzle

Is Abbot or Gillard brave enough to stop the profiteering?

2010-07-20T23:03:00.003+10:00

There is a way that interest rate movements by the banks could be more fairly controlled, but will the next-elected Federal Government be brave enough to do it?

http://www.apimagazine.com.au/blog/2010/07/is-abbot-or-gillard-brave-enough-to-stop-the-profiteering/

RBA went too far

2010-05-19T15:32:00.001+10:00

Just finished a radio interview in Adelaide and it’s interesting to note that the real estate guys (also on the show) agree that the property market has slowed over the past three weeks. I suspect the RBA has increased rates too quickly… I’ll write on this when I have more time.

Banks are taking advantage of us

2010-02-10T14:28:00.002+11:00

CBA announced its results today – a lazy $6 billion annualized profit! It made for interesting reading. They say that the cost to fund new loans has increased 1.12% since July 2007. This doesn't mean that this new cost level applies to all home loans. Some home loans are funded using facilities established before the credit crisis. Some loans are funded using cash in transaction accounts (paying effectively zero interest).

Now, the Bank has increased home loan rates by a total of 1.04% above RBA rate movements (per http://www.keepbankshonest.com.au/) across their whole portfolio of loans.

It’s been a bonanza for the Bank enjoying huge market share gains – while probably increasing profit margins! It goes to show… we should never believe the banks propaganda... they are making billions!

Note to government: BRING BACK HOME LOAN COMPETITION... please.

Fixed rates only worthwhile if 7% or below

2010-02-03T13:56:00.003+11:00

I have calculated the profit or loss for a fixed rate borrower over the past 20 years at each quarter. I then sorted this data based on the fixed rate at the time the borrower entered into the fixed rate loan and sorted from lowest to highest rate (For example, in Jan 2005 the 3 year fixed rate was 6.60%. A borrower that locked in at this rate was 0.39% better off compared to a variable rate borrower. Therefore, the graph below includes a profit bar of 0.39% at the 6.60% rate interval).

This analysis shows that, based on history, you have a significant chance of being worse off financially if you fix your mortgage when fixed rates are above 7% (to the right of the red line). If you fix when fixed rates are below 7%, you have an even chance of being better or worse off.

My predictions

2010-01-30T16:07:00.000+11:00

Inventor Alan Cox once said “I figure lots of predictions is best. People will forget the ones I get wrong and marvel over the rest.” It was with this piece of advice that I sat down to write this month’s newsletter. I am often asked about where I think interest rates are heading (like I know!!!), what the property market is going to do and so on. Well, I thought I would put all my thoughts on paper. At the end of 2010, I will return to these predictions to see how close I got (and this assessment will be accompanied by another article which says that no one in the world can ever predict anything, or how only the truly intelligent and astute geniuses can make correct predictions – depending on the outcome of my predictions of course)!

Often, I think people can “over analyse” the market when forming predictions. I don’t think you can be too scientific about it. The most accurate predictions are generally those that are made by people that have a good “feeling” for the market and those that operate within that market. After all, it is the behaviour of humans that will ultimately influence the outcomes and humans can be irrational and unpredictable (see, I am already subtly making excuses in case my predictions are wrong).

The property market

The property market performed very strongly in 2009 – much to the surprise of many people. In May 2009, I wrote to all our clients to say that I thought it was the best time in many years to invest – something I have never done before. It seems I was right as Melbourne’s median price jumped 22% in the last 6 months of 2009! I hope that’s a good omen for the predictions in this article.

Most of the gains in 2009 clawed back the property value decline experienced in 2008. Median price values across Australia are now back to (or above) December 2007 levels. REIV (Victoria) released its median price for the December quarter and it came in at whopping $540,000. That equates to an annual compound growth rate of 7.2% p.a. since December 2007 – what GFC? Sydney and Brisbane haven’t performed as strongly as Melbourne, but quality, well-located property has still performed very well.

It’s my opinion that the property market will have another healthy year. Demand will continue to outstrip supply, which will propel prices forward. I think this demand will mainly be supported by:
1. Continuing signs that the economy is returning to good health with unemployment improving. This will boost property buyers’ confidence and they’ll feel more comfortable to enter the market (with some urgency since they have seen prices rise) – particularly “upgraders” in the higher end price brackets.
2. Return of property investors. Property investor started to return to the market around August/September last year. However, I believe a lot more will enter the market and create quite a bit of demand.
3. The perennial drivers of demand will continue – such as housing shortage, population growth and so on – these have been covered ad nauseam before.

However, probably the biggest dampener on property price growth will be the tight credit market. This will mean that fewer buyers will qualify for loans (or reduced borrowing capacity) and this will tamper demand. At some level, this is a good thing, as we don’t want property prices to get out of control (which they could in the absence of tight credit).

The Sydney market is an interesting one, as the market has been quite quiet over the past 5 years – although it is now showing signs of life. Maybe the State government’s instability is destroying confidence? Whatever it is, I can’t help thinking that Sydney is a bit of sleeping giant and will take off sooner or later. People that already have a foothold in this market will do very well over the next 3 to 5 years.

I think we’ll see median growth in the range of 8% to 15% p.a. in most well developed property markets.

The share market

I have completely no idea what the stock market will do this year. I think the market over the past 2 years has proved how unpredictable it is. In 2008, the market just kept falling – even if there wasn’t any more bad news, it would still fall! Melbourne-based stockbroker and author, Marcus Padley says that ‘momentum’ will win every time. Forget about fundamentals. It’s all about the market’s momentum. Currently, the momentum in the market is all positive and it’s been pushing the index higher. Will this continue through 2010? My guess is that it won’t. I think the market will have to take a breather at some stage.

Generally, a stock price that is at a recent high point exhibits high risk in that an investor’s downside is significant and the upside is probably limited. Let me explain by example. CBA’s share price is currently trading close to $56. The share price has only been over $60 once for a very short period of time (immediately prior to the GFC). Therefore, how much upside can there be – who knows? However, this time last year, the share price was under $28. Given that it had fallen from $60 (from Oct 2007 to Jan 2009), its downside was limited (because how much more can it fall?) and its upside was significant. Of course that’s easy to say now but the time-tested rule is “buy low, sell high”. Don’t buy when it’s high!

I think that some stocks have got ahead of themselves and for that reason, I think the market might take a bit of a breather. However, I wouldn’t think for one second that I could predict where the index might be at the end of 2010! That’s just as dumb as former US President, George W Bush going on a speaking tour! That said, if you’re a long term investor, who cares what will happen over the next 12 months! Maybe I shouldn’t say that, as it makes this newsletter redundant.

Interest rates

There are now two things we need to consider when thinking about interest rates; what is the RBA going to do and what are the banks going to do. They might actually be influenced by each other.

In terms of RBA rate hikes in 2010, I think it’s unlikely that the RBA will raise rates by more than 1.00% during 2010. I’m predicting that the Cash Rate will be 4.50% to 4.75% by the end of the year. On balance, including lenders rate increases (over and above RBA), I think home loan interest rates will be close to 1% higher than they are today. Therefore, on average, professional package customers will be paying around 6.90% (which is close to the long term average interest rate).

I believe that fixed rates will remain elevated and completely unattractive for the rest of 2010 (unless we experience some unexpected market competition).

One of the concerns for the government and RBA is that they may have lost control of the monetary policy levers if the banks do what they want when it comes to interest rates. This is something they might have to look at, but I don’t think it will have too much effect. The RBA will take the banks’ behaviour into account when it sets the Cash Rate.

Banking & lending

This is a very interesting market to consider. How the banking market evolves through 2010 could have many flow-on effects to other parts of the economy.

Firstly, I think we will continue to see many changes in credit policy as lenders try and manage their growth and mortgage books. On the whole, I think that credit policy will become tighter – meaning it will be more difficult to get a loan. The main driver behind this credit policy tightening is banks wanting to control the amount and quality of new mortgages. They can do this by price (i.e. increase interest rates so less borrowers’ ask for money) or credit policy (make it harder to get a loan approved). I think Westpac has witnessed the level of negativity created by trying to manage volume by price. Changing credit policy is a lot more covert way of managing volume – it doesn’t have the added ill effect of putting customers offside, like Westpac did. I predict that each lender will have a turn at tightening and relaxing credit policy, as they manage their way through 2010. Therefore, if you are going to apply for a loan this year, it is important for you to ascertain what appetite your chosen lender has to lending money (are they in a tight or relaxed phase?)... or engage an expert (us) to do it for you.

Secondly, I believe that we’ll see more effects of the lack of banking competition. The thing that is dampening the effect of lower competition at the moment is the relative differences in growth between CBA/Westpac and NAB/ANZ. NAB and ANZ haven’t grown (particularly in terms of mortgages) as fast as Westpac and CBA. Therefore, these two lenders are still hungry for business and this is creating some competition. However, because it is easy for any of the Big 4 to obtain more business, this quasi-competition won’t last for long. Therefore, I think we’ll see lenders continue to control the market price (interest rates), which is very concerning to me both as a borrower and an advisor.

Rental market

Due to the higher First Home Buyer grants in 2009, a higher than normal amount of first home buyers entered the property market last year. That means that renters will probably remain renters in 2010 (as anyone planning to buy a home this year was probably financially enticed to buy it last year). As such, I think the demand for rental properties will be strong and as such, we should see some rental growth, but nothing extraordinary.

Economy

It appears that the economy is on the mend. For the most part, over the last 2 years, many people kept their jobs. Their income stayed the same. However, interest rates and petrol prices were much lower. Whilst peoples’ confidence might have taken a battering, their financial positions actually improved (as they had more cash in their pockets). What we experienced was very much a confidence-led slowdown. Therefore, as confidence returns, we should be back on track. However, the economy is a complex animal and I don’t pretend to understand it fully. However, my feeling is that we’ll see the economy recover its health this year.

An interesting exercise

There you go. For what it’s worth, this is what I think will happen this year! Maybe it’s provided you with some food for thought. If nothing else, it will be in interesting exercise to see how close my predictions will be.

The government wears some blame for higher home loan rates

2010-01-18T12:39:00.002+11:00

On the back of CBA’s profit estimate (nearly equating to $6bn p.a.!), the Federal government MUST withdraw all support immediately. The Federal government has guaranteed all bank customer deposits and has provided the banks access to a loan guarantee (to help them fund new and existing loans to customers). Clearly, the banks no longer need this support and providing it only makes them bigger and stronger and reduces competition. It’s this lack of competition that has allowed them to increase rates above official RBA rate increases. At a bare minimum, the government must withdraw all support NOW (something they should have done months ago). They haven’t done so and therefore I hold the government partly responsible for the banks arrogance and rate hikes. Wake up Mr Rudd – your action is needed to re-cultivate competition in the Australian market. There is always a time lag with these things so I think we haven’t seen the worst of this lack of competition yet... stay tuned for more bad news.

Banks again shopping higher rates

2010-01-14T22:42:00.000+11:00

Aussie banks are again complaining about an increase in the cost of funding home loans. This time they are blaming new liquidity rules imposed by the regulator (APRA). Frankly, I find it impossible to trust the banks’ rhetoric anymore. Given the huge market share and market power that the GFC has delivered them, it’s very difficult to appreciate if they are being honest or they are just finding new reasons to hike up rates in unsuspecting borrowers. The sceptic in me makes me think the latter is probably true. If they do this again, all customers must complain to their banks. We need to send a message that customers still hold the ultimate power.

Start planning for the new year

2010-01-01T23:49:00.000+11:00

Many people take the beginning of the New Year as a cue to set some goals for the next 12 months. After you have had a break from work and celebrated Christmas your head should be nice and clear and ready to start planning. It’s a great time as we generally get a better perspective of our lives and what’s important to us. Set aside one hour and write down a one page plan (or list of goals). I like to divide the page into 4 sections and use the following headings: Personal (e.g. your fitness, weight, work/life balance, etc.), Family (e.g. holidays, ‘date night’ with partner, etc.), Financial (e.g. income, net worth, etc.) and Business/Career. Under each heading, set some goals relating to this heading. This should aid in balancing out financial and non-financial goals. More soon...
New Year Financial Planning Checklist

Abuse of market power

2009-10-11T08:57:00.000+11:00

Apparently, the Australian Big 4 banks have been talking about raising rates outside of RBA movements again. Website www.keepbankshonest.com.au suggests that they have already raised rates by 1% above RBA. The Banks’ cite higher funding costs as a reason for future hikes. My opinion is that it’s absolutely despicable for them to consider doing this. It’s an abuse of their market power. They have to act responsible as they have the economy’s health and Australian’s livelihoods in their hands. The GFC has handed the Banks’ a massive amount of power (i.e. huge market share). They have an oligopoly over the banking market – something the smaller players just can’t crack into. If the Banks’ are allowed to increase interest rates independently, they will become more powerful and more profitable which will mean less competition. The Federal Government needs to wake up to itself and take action. Verbal warnings from the Federal Treasure are useless! This week, CBA owned BankWest withdraw its hallmark competitive product. Why? Probably because it was cannibalising CBA’s profit. No need to offer such a good deal in a market you dominate. Right?

Get ready to rumble

2009-09-03T12:53:00.000+10:00

Australian Prudential Regulation Authority (or APRA) data suggest that the Big 4 Australian banks had 100% market share of new mortgages in July 2009. Their market share in September 2007 was just 65%! This is a huge change in a relatively short amount of time. Financial commentators suggest that the government needs to do something to assist funding the smaller banks. I agree. However, it will take years of government intervention and hard work by smaller lenders to claw back some of this market share. The problem is; once you give a bank something as valuable as market share, they will hang onto it for dear life! They’ll flight the smaller lenders tooth and nail and they’ll probably win. Therefore, government intervention is necessary but it’s not a solution – at least not in the short to medium term. Prepare yourself for less competition because it’s here to stay. I don’t think we’ve seen the full effects yet. One solution could be to find yourself a good debt advisor. They’ll know the lay of the land and can ensure you won’t be a victim of no competition.

Don’t believe the banks bullshit

2009-08-25T22:21:00.001+10:00

I was at a Big 4 bank seminar today where they AGAIN complained about home loan profit margins being ‘tight’. This PR crap makes me so angry as it’s only half the story. Sure. The GFC has increased the cost of funding mortgages which is negative on profit – no argument. However, the GFC has also resulted in a hell of a lot of consolidations (mergers) and sent customers flooding back to the Big 4 banks on mass. Their market share is absolutely huge now (over 90%). They now have more customers that they can cross-sell products to = even more profit. But what happens when margins ease… they make zillions! Business nirvana is winning more clients at the same or higher profit margin. Stuff we all dream of. A very good outcome is winning heaps of new customers at slightly lower margins that you can sell more products to. I would take that any day of the week. Feeling sorry for the banks (or ‘buying’ their story) is like feeling sorry for someone that tells you they lost $1 million last week. If the person went on to tell you that they still had $500 million in the bank (i.e. you heard the full story), you wouldn’t be that sorry for them would you? A tighter home loan profit margin is only half the story. The fact of the matter is the GCF has been the best thing to happen to the Big 4 banks in years. Over the longer term they will prosper greatly. Tighter home loan margins in the medium term it’s a small price to pay for this huge upside and they know it!

It's never a good time to invest

2009-08-17T21:35:00.001+10:00

Many people get caught up with when it’s a “good” or “bad” time to invest in property. Sometimes they get utterly confused, scared and bamboozled. They feel if they “wait a few more months to see what happens to prices” they might magically feel more confident – it never happens. Either prices fall and they then they need to wait until they hit to bottom or prices rise and now they think that they can’t invest at the ‘peak’ of the market. They’re crippled and they don’t do anything. Consequently, years go by and nothing happens. A much better approach is to invest when it’s a good time for “you”. Wait until you are confident with borrowing money and you feel you can afford the next investment. When the time comes, make the leap. Trust me. The “market” will not tap you on the shoulder one day and say “hey, it’s a perfect time to buy. Prices have bottomed out and in the next month they’ll start to rise. Buy now. Buy now”. It will NEVER happen so take control of your financial future and you determine when you do something. Who the hell cares about the ‘market’ when you’re investing for the long term in quality property. “Doing” is the most important part of investing. I’ve seen too many people let wealth pass them by through sitting on the sidelines – particularly in the last 18 months.

Twitter

2009-08-17T21:13:00.001+10:00

You can now follow me on Twitter: http://twitter.com/StuartWemyss

ANZ is marketing a rate hike

2009-08-06T09:34:00.000+10:00

I note that Mike Smith is quoted in the press today commenting that the banks might increase home loan rates before the RBA. Why? Maybe they are still annoyed that they will have to “follow the leader” and cut overdrawn fees like the other 3 banks. Just watch this space... the banks report their financial results soon and all eyes will be on their ‘cash profits’ from home loans to see if they are suffering or profiteering.

Sign of the times

2009-07-17T20:40:00.002+10:00

NAB has had a professional package for as long as I can remember – at least 20 years. However, it’s the first time ever that they have advertised this package on TV. The standard package has been pretty ordinary until 12 months ago when they brought it into line. This week they have reduced the competitiveness of the package. Before the change this week, the bank used to provide a 70 bpt discount if you borrowed more than $250k. Today, to get the same discount you need to borrow in excess of $500k. Clearly, the bank has advertised and subsequently realised how easy it is to get business in this post-CFG world (with 4 major’s controlling nearly 95% market share). Consequently, they have decided “we don’t need to provide these discounts”. To me, this is a sign of the “less competitive” times. It’s not a good sign. Home loan customers should brace themselves for more “non-competitiveness” ahead.

The anti-commissions train... all aboard!

2009-06-23T15:20:00.000+10:00

Of the past few months, many bodies within the financial planning industry have started to talk about banning commissions paid to financial planners (e.g. Financial Planning Association and Investment and Financial Services Association). The Federal government will focus on commissions in its review of the industry. It has been a talking point for many years but I guess the recent high profile collapses such as Storm Financial and tax-effective investments have made people focus on the quality of financial advice and the fees charged for it.

One argument for a commission based system (more often than not argued by financial planners themselves) is that commissions make financial planning advice more affordable because the client doesn’t need to pay. However, this argument fails to recognise the fact that clients are paying for these commissions indirectly in the form of higher fees. Therefore, instead of paying a once-off planning fee, they are paying higher ongoing fees.

In my opinion, there is no question that a commission-free environment brings about a more transparent financial planning experience. A fee-for-service based financial planning industry clarifies exactly who the financial planner works for (should be you, not the managed fund provider). Whether fees are charged as a once-off upfront fee or an ongoing trail style payment, is not relevant. Investors just need to ensure that the financial planner’s fee is not dependent upon the advice or product outcome thereby avoiding any conflicts of interest.

I don’t think that commissions should be outlawed. That’s probably overregulation. Instead, I think commissions should be (by law) capped so that the maximum commission a financial planner can receive from selling a product is one percent of the amount invested.

Storm clients have to accept responsibility

2009-06-19T10:32:00.001+10:00

I was watching Lateline on Channel 2 last night and it featured husband and wife investors that were Storm Financial clients. The husband was a policeman and their combined income was $100,000 p.a. They borrowed $4 million from CBA to invest (per advice from Storm). They were upset with CBA and blame them for this troubles.

In my opinion, if you are silly enough to borrow $4 million when you only earning $100,000 (and not even get a second opinion), then it’s only a matter of time before some clown takes you to the cleaners. Investors must be proactive with this investments. They need to take responsibility for their decisions. Ask questions. Make sure it makes sense to the average person. Speak to friends and family. Do some checking. If these Storm clients had have done their research, I'm sure they would have found out that borrowing $4 million was financial suicide.

If I jump off a building because someone tells me too, who’s the idiot? Who normally gets the blame. It looks like the CBA and Storm were totally wrong and unethical. No argument there. However, the clients need to take some responsibility for their own decisions.

Perhaps the clients should be angry with the government? The government sets school curriculum and school is supposed to prepare you for life. The lack of education about personal financial management is mind numbing. Parents, if there’s anything you can do to help your children its teach them about money.