Good news for home owners, but not for renters + How to save on two big household bills

Hi everyone,

Happy Friday from Adelaide. I’m here for LIV Golf and also the Port Adelaide Football Club’s (PAFC) season launch and their Hall of Fame tonight.

Australian markets are on tenterhooks ahead of next week’s Reserve Bank board meeting on Monday and Tuesday. 2.30pm on Tuesday is when RBA governor Michele Bullock will reveal whether the Central Bank has decided to cut interest rates for the first time since the pandemic.

When coming out of COVID, we experienced the shortest, sharpest cycle of rate rises in history. And it hurt Aussie households in this cost-of-living crisis. Rates have stayed higher for longer but financial markets are almost unanimous in their opinion that the RBA will cut rates on Tuesday.

It follows that last December quarter CPI result, which was better than expected. So fingers crossed.

In this week’s newsletter:

• What the numbers behind the mortgage relief of a rate cut mean.

• These are the property markets likely to benefit the most from a rate cut.

• The rental crisis is suddenly back … and it’s getting worse.

• The two other big household bills you need to focus on (before there are massive changes).

• How you can benefit from ‘Trump Trade’.

• In the US, the rich are getting richer.

This is the financial impact of a rate cut

As major banks and lenders forecast the Reserve Bank of Australia (RBA) to slash interest rates at this month’s board meeting, the move could help Aussie mortgage holders claw back over $1,000 dollars a year.

Many experts predict that the RBA will cut the cash rate by 0.25 per cent on Tuesday - from 4.35 per cent to 4.10 per cent. If lenders pass the rate cut on to customers, the monthly repayments would be slashed drastically.

Monthly repayments on an average $642,000 loan with a variable interest rate of 6.3 per cent could be cut by as much as $104, or around $1,248 over the course of the year. The exact reduction would depend on the size of the loan, if the lender passes on the potential rate cut and the current interest rate.

Any cut to interest rates would be welcomed, given rates have climbed more than 4 per cent since the RBA started lifting rates almost three years ago. The shortest, sharpest hike in rates in history.

These rate cuts have been a long time coming and it’s going to give some breathing room in the household budget for Aussies already gasping for air. It’s a promising sign that some major banks have already started cutting their fixed interest rates, and you only have to delve into the latest CPI data to understand why a rate cut is looking likely.

Even if we look at the trimmed mean CPI, which the RBA says is more important than the headline rate, it rose by 0.5 per cent which was lower than the 0.6 per cent that economists forecast and the 0.7 per cent the RBA predicted for December.

But ultimately, the RBA will be looking at trends and how quickly the economy is rising and falling. It looks as though we’re currently in that happy spot, even with a huge amount of uncertainty in overseas markets sending us into a spin.

While the RBA lowering the cash rate would be a good thing, it’s not guaranteed that all banks or lenders will pass on the reduced rate.

The fact of the matter is some banks may not pass on a rate cut right away, while some may not pass it on at all. This is why Australians have to be on the ball and push to be moved onto better rates or move to a lender who is offering a better deal. Your loyalty could be costing you. It simply doesn’t make sense to be paying a cent more than you need to.

If you’re planning on haggling with your current lender, ensure you know what their current lowest advertised rate is. Often, the banks are going to reserve the best offers for new customers.

If you are comparing with other lenders, look at their rates, as well as any cashback offers or incentives that are available. While cashback offers aren’t as prominent as they once were, some great deals are still available.

The market analysis conducted in February found a 1.4 per cent difference between the highest (7.24 per cent) and lowest (5.84 per cent) advertised rates for some variable loans.

If you are interested in refinancing, be aware that there usually are some costs involved, so make sure the savings to switch outweigh these fees. While new lenders may try to lure you with deals, incentives, cashbacks or rewards, also make sure these are actually giving you bang for your buck.

Which property markets will benefit the most from a rate cut?

Not only will a rate cut provide much-needed mortgage payment relief but it could stimulate more growth in property values. While we generally look at overall monthly performance figures of property values, the more affordable end of the market has remained strong, while the top and middle levels have struggled because of a lack of affordability.

According to CoreLogic Head of Research, Eliza Owen, lower interest rates are set to boost the housing market in 2025. Lower rates mean buyers can borrow more, spend more, and ultimately make housing a more attractive investment.

CoreLogic estimates, based on previous periods of rate reductions, that national dwelling values would increase an average of 6.1 per cent for each 1 percentage point decline in the cash rate. But Australia is not one housing market.

If history is anything to go by, certain markets will see a bigger boost from rate reductions than others, and it may be because of market characteristics like price point, location and investor interest.

Based on CoreLogic’s analysis, relatively expensive markets have historically shown stronger responses to reduced cash rate settings, especially in the house sector.

Key examples are houses in Leichhardt, Whitehorse and other inner markets of Sydney and Melbourne which have previously shown the strongest reaction to a reduction in the cash rate.

The tables below show the Australian house and unit markets that have had the strongest response to cash rate reductions nationally between 2015 and 2019. These markets are also generally down from peak values, suggesting they have had a strong response to interest rate rises since May 2022.

Sydney and Melbourne

Sydney and Melbourne houses and units seem to have the most to gain from a reduction in interest rates. In Leichardt, a one per cent reduction in interest rates is associated with a 19 per cent increase in house values historically.

Unit markets with the biggest response to rate falls have a high price point, a high concentration of investment ownership, or both. In Sydney, Melbourne, Hobart and Canberra, many of the markets with a solid response to rate reductions are also seeing values well below their peak under recent interest rate rises, so easier access to credit may trigger a recovery trend in these markets.

Brisbane

The Brisbane markets that have historically had the strongest reaction to a reduction in interest rates are also relatively expensive. With the exception of Browns Plains, each of the top ten house markets had a median house value of at least $1 million.

Adelaide and Perth

The relationship between the cash rate and home values is far less pronounced in markets across Adelaide and Perth, which had very different market performance throughout the 2010s - a reminder that housing markets respond to a broad range of factors beyond changes in the cost of debt. In Perth and WA, market values were far more influenced by the boom-and-bust conditions in the mining sector than movements in the domestic cash rate target.

South Australian dwellings had slow and steady value changes throughout the 2010s, before seeing a rapid ‘catch up’ in home values through the COVID period.

Changes to internal migration during the pandemic, namely a boost to arrivals from Victoria and a decline in departures from the state also aided growth. Interestingly, WA and SA also saw virtually no response in the trajectory of home value to higher interest rates, which has further demonstrated the loose relationship between the cash rate and property values in these states.

Overall

The markets that stand to gain the most from a cash rate cut could be those that have demonstrated more sensitivity to changes in financial and interest rate settings in the past. These are typically the higher-end markets of Sydney and Melbourne, many of which have also seen a substantial reduction in home values amid rate rises.

A reduction in the cash rate could spur a recovery trend in the high end of the Sydney and Melbourne housing market, which tend to be the bellwether for broader market recoveries in those cities.

The rental crisis is back … and it’s getting worse

For the last couple of months, it looked as though the rental crisis was easing. Vacancy rates increased while the pace of rent growth was slowing. All terrific signs for tenants.

But then, all of a sudden in January, the rental crisis exploded again.

According to SQM Research, Australia's residential dwelling vacancy rate declined to just 1 per cent in January, sharply down from 1.6 per cent recorded in December. The total number of rental vacancies fell off a cliff to 31,822 from 47,336 in the previous month.

Unfortunately, SQM chief Louis Christopher, doesn’t think this is a one-off aberration. SQM’s records for February listings to date are lower than what was recorded in January. So the rental shortage is getting worse. He stated:

“As a research house, we are aware of the ongoing under building that has been occurring. Over and above, this our concern is what is not known. And that is the real time, present level of overseas arrivals. Could there have been another surge in migration levels in recent weeks? We don’t know for sure but clearly something has driven this retreat in rental vacancies.”

Sydney’s rental vacancy rate dropped back to 1.4 per cent and Melbourne also recorded a sharp decline, with its vacancy rate dropping to 1.5 per cent. Brisbane recorded a rental vacancy rate of just 0.8 per cent - the second lowest rental vacancy rate ever recorded for Brisbane since SQM’s records began in 2005. The record low of 0.7 per cent was registered in May 2022.

Canberra’s vacancy rate dropped to 1.3 per cent per cent while Perth and Adelaide remained stable at 0.4 per cent and 0.5 per cent respectively. Darwin experienced a decline to 1.1 per cent, while Hobart recorded its lowest rental vacancy rate ever recorded for itself and among the capitals at just 0.3 per cent.

The two other big household bills to start focusing on

Australian families could pocket or miss out on hundreds of dollars in savings depending on a series of upcoming pricing decisions. Authorities are due to make these in the next few weeks.

While the Reserve Bank’s rate decision on 18 February could have a huge impact on home loan repayments, the energy regulators’ draft pricing announcements, along with an imminent call to be made regarding health insurance premiums, will also have a major impact on household finances.

These authorities have the power to deliver considerable relief, or issue fresh pain to people battling the cost of living.

It’s an election year, so the good news is there will be plenty of scrutiny over each decision that’s made.

Health insurance premiums

A “perfect storm” of inflationary pressures and political tensions have added heat to health premium pricing negotiations this year.

Health Minister, Mark Butler, has already rejected initial proposals from health funds, urging them to come up with a more "reasonable" average figure to reduce the strain on household budgets.

When the decision is finally made, Australians will have until 1 April to compare their options before the changes take effect.

It’s critical that customers be prepared, as shopping for cheaper deals may be one of the only ways for some to avoid the sting.

While the headline average figure is what everyone talks about, we know that there can be huge discrepancies between insurers and policies. Last year, we saw increases as low as 0.27 per cent and as high as 5.82 per cent at individual funds, so doing some research can make a big difference.

Some health insurers will even allow you to pay for your policy a year in advance, which means you can effectively lock in last year’s cheaper price for the next 12 months.

Energy prices

New ‘pricing safety nets’ will come into effect in July this year but consumers will get the first indication of what could come when regulators release their draft decisions in early March.

The Default Market Offer (DMO) acts as a cap on what energy retailers should charge consumers for a standing offer electricity plan in New South Wales, South East Queensland, South Australia, and the ACT.

Meanwhile the Victorian Default Offer (VDO) is considered a fair price for a standing offer electricity plan, to help consumers discern whether they are on a good deal or not.

Recent reports of higher-than-normal demand for electricity, triggered by extreme weather conditions on the east coast, are an early indication that prices could increase this year.

We haven’t seen demand like this for nearly a decade and that volume has been compounded by reduced coal availability and transmission issues.

Higher wholesale prices could mean bigger bills for households. When the government rebates finally start to roll out, the difference could be a real rude shock.

It’s important to remember, while the DMO provides a safety net for consumers, there are often much more attractive deals on offer for consumers who are willing to compare and switch providers.

Trump Trade 2.0: What it means for your investments

Been keeping an eye on the markets lately? Then you’ve probably heard the phrase ‘Trump Trade’ thrown around a fair bit. If you’re wondering what it actually means - or, more importantly, how it might impact your investments - you’re not alone.

Put simply, the Trump Trade is how the market is reacting to Donald Trump’s US presidential election win. Investors have been betting that his return to the White House will bring lower taxes and deregulation, which could be a tailwind for some industries and stocks.

But as with anything in investing, there’s plenty more to the story. Some sectors will boom, others will struggle, and if you’re an Aussie investor then I reckon you need to tune in to how things could play out here at home.

And, because Trump is so unpredictable, you never quite know what’s happening next. So it’s important to constantly keep a close eye on developments.

What is the ‘Trump Trade’?

When Trump won in November, Wall Street roared to life. The Dow Jones jumped 3.6 per cent the day after the election, the S&P 500 gained 2.5 per cent and small-cap stocks surged even higher.

The theory behind the Trump Trade is that Trump’s policies - especially tax cuts, trade tariffs and much, much looser regulations - will generate a more pro-business environment that will fuel economic growth ... and profits.

We saw a similar market reaction after his 2016 victory, with stocks in financials and energy, as well as small-cap stocks on the upswing. This time around, investors are again piling into sectors they think will benefit from a Trump-led America. And there’s some serious momentum behind it. Just take a look at these numbers:

Tesla added $450 billion in market value in a month. Bitcoin’s market cap jumped past $1 trillion. The S&P 500 added $15 trillion over the 13 months to November 2024. Nvidia, the AI chipmaker, saw its value soar $2.4 trillion over the previous 12 months.

Clearly something big is happening. But how can you make the most of it?

Which investments will benefit most from Trump’s presidency?

Some sectors and stocks are already thriving under Trump Trade 2.0, while others are feeling the heat.

1. Big tech and AI stocks

Tech giants like Tesla, Nvidia and Apple are riding the wave, even though Trump has a mixed history with Silicon Valley. Investors have been piling into AI-related stocks, believing the States will take a more aggressive stance on innovation and industry deregulation under Trump.

2. Energy and oil companies

Trump is a guy who’s big on energy independence, and that’s driving interest in oil and gas stocks. The US is the largest oil producer in the world, and investors will be expecting fewer environmental regulations, which could translate to cheaper energy production and more profits for the big oil firms.

3. Cryptocurrency

This one’s a bit surprising. Trump embracing crypto was a key piece of his 2024 platform, where he vowed to make the US the “crypto capital of the planet”. Shortly after the election, Bitcoin went past US$105,000 (but has since dipped back under the US$100,000 mark), and crypto-related stocks like Coinbase gained nearly 40 per cent.

How can you ride the Trump Trade?

There are a few ways you can take advantage of the Trump-driven market rally as an Aussie investor.

If you don’t already have US investments, now might be the time to consider it. An index fund or ETF (like one tracking the S&P 500) will give you fairly broad exposure to the US market. If you want to be more specific, find ETFs that are built around AI or energy.

One side effect of the Trump Trade is that it has strengthened the US dollar – which means a weaker Aussie dollar. But that’s good news if you already own international shares, because your returns will get a boost when converted back into AUD. It’s bad news, though, for Australian companies that rely on imports - think retailers and manufacturers - since they’ll have to pay more for goods priced in USD.

Here’s where Aussie investors need to be cautious. Trump has doubled down on tariffs, including a 25 per cent tax on steel and aluminum imports. While Australia is lobbying for an exemption, if we get caught up in a trade war then some of our local industries -especially mining and manufacturing - could take a serious hit. On the flip side, a weaker Aussie dollar makes our exports more competitive, which could help drive sectors like agriculture and resources.

Trump Trade 2.0 is in full swing. If you’re investing in US stocks, you could be riding the wave - especially if you’re in sectors like tech, energy and finance. But if you’re holding Aussie investments, you’ll want to pay very close attention to Trump’s trade policies and their impact on the Aussie dollar.

I reckon the most important takeaway from the latest US election is that you need to look beyond the immediate. Stay diversified, think long-term and always keep an eye on global trends. Yes, the Trump Trade is making waves - but, as always, smart investing is about making the right moves, not just following the hype.

The big Trump Trade US winners are … you guessed it, the rich

Under Trump the rich will keep getting richer and the inequity between rich and poor is getting more pronounced.

Consider this:

According to the US Federal Reserve Economic Data, the share of total net wealth held by the top 1 per cent of America’s wealthiest people has increased from 22.8 per cent in 1989 to 30.8 per cent today.

The top 0.1 per cent (the wealthiest of the wealthy) accounted for 13.8 per cent of the nation’s total wealth and the other 0.9 per cent of the elite had a 17 per cent share. All up the top 1 per cent were worth $US49.3 trillion.

At the other end of the scale, the bottom 50 per cent of Americans held just 2.8 per cent of total net wealth. This was down from 3.5 per cent in 1989.