Interest rates holding steady + the news that shocked the financial world

Happy Friday everyone,

Welcome to my weekly roundup of what I think are the most important things you need to know about your money.

It’s the first week of the month and all eyes were on the Reserve Bank board meeting which decided to keep official interest rates on hold for a second consecutive month at 4.1 per cent. This time last Friday morning I said the latest retail figures would swing the RBA vote.

If retail sales slowed, the RBA was likely to keep rates on hold as it showed Aussie consumers were tightening their belts and cutting spending. If retail sales rose strongly then it would show the economy was still hot and rates would rise again.

Thankfully those retail sales started to trend down.

That weakness in retail sales and falling inflation offset the continuing strong job market which, along with the recent lift in the minimum wage, is underpinning continuing high inflation.

In this week’s RBA statement attached to the rate decision, the RBA points out:

“Inflation is declining but is still too high at 6 per cent.”

“Prices of many services are rising briskly.”

“Services price inflation has been surprisingly persistent overseas and the same could occur in Australia.”

The RBA expects CPI to continue to decline and be around 3.5 per cent by the end of 2024 and within the 2‑3 per cent target in late 2025.

Basically the two biggest issues for the RBA are the steep rises in housing rents and wage increases. “At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.”

As for the future, the RBA’s forward guidance remained unchanged in August, and is the same as it’s been since May. “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe.” But the qualifying sentence has been slighted altered to, “but that will depend upon the data and the evolving assessment of risks.”

So it is still very willing to lift rates if the economic figures take a turn for the worse. Between now and the 6 September RBA board meeting we’ll see the June quarter Wage Price Index and next month’s CPI result. These are two big economic data signals we need to watch and which I’ll keep you up to date on.

So, after this week’s RBA decision to keep rates on hold, the big banks are now forecasting that this is the peak of the rate cycle:

• CBA: peak of 4.1 per cent, with four cuts next year, starting in March, down to a cash rate of 3.1 per cent by end of 2024.

• Westpac: peak of 4.1 per cent with the first cut in September 2024. Total of six cuts across 2024 and 2025 to 2.6 per cent in late 2025.

• NAB: One more hike in November 2023 to a peak of 4.35 per cent, with five cuts in 2024 and 2025 to a cash rate of 3.1 per cent by early 2025.

• ANZ: peak of 4.1 per cent with one 0.25 per cent cut in late 2024.

America loses its Triple-A rating

It’s the news that shocked the financial world this week.

Global credit rating agency, Fitch, downgraded the US’s credit rating from Triple-A to AA+… only the second time in history that this has happened to the world’s biggest economy. That’s why the US sharemarket had a dose of the wobbles this week.

Just for the record, Australia is one of only 9 countries to maintain a Triple-A credit rating along with Denmark, Germany, Luxembourg, Netherlands, Norway, Singapore, Sweden and Switzerland.

The reason why the US has toppled out of the top tier is because of its massive level of government debt and huge annual budget deficit.

Just to give you an idea of why Fitch would be worried, total US Government debt is about $US32 trillion which is about 128 per cent of the value of the US economy. That’s like having a mortgage which is worth 128 per cent of the value of your home… any bank would foreclose.

By contrast, Australia’s Government debt is about $A900 billion which is around 40 per cent of the value of our economy.

Then there is the respective Government budgets. This last financial year to the end of June, Australia’s budget will be in surplus by about $20 billion. In the US, they’re expecting a budget deficit that will be $US1.5 trillion.

So the US keeps adding to its Government as its budget deficits keep getting bigger.

They are extraordinary figures.

The US won’t go broke, the US dollar is the global currency standard. But it can’t keep going like this and the Fitch downgrade is an important warning shot to US policymakers.

Residential property prices continue their bounce back - but it’s patchy

CoreLogic’s national Home Value Index (HVI) rose 0.7 per cent in July… the fifth consecutive month of housing value recovery. Since the bottom of the housing crash in February, CoreLogic’s index is up 4.1 per cent after a 9.1 per cent decline from those record highs in April 2022.

The rebound in values is great for homeowners but don’t get too excited; the rate of growth is slowing. That 0.7 per cent rise is almost half the 1.2 per cent rise in May.

There are some pretty ominous signs that this housing price boom is starting to fizzle. Sydney is the engine room of Australia’s residential property market and its 0.9 per cent growth in July is half the 1.8 per cent in May… and more stock is coming onto the market. New listings are up 9.9 per cent on this time last year and 18 per cent higher than the 5-year average.

A torrent of new houses are coming onto the market at a time when buyers are going into their shell because of high interest rates.

Brisbane and Adelaide were the only markets to maintain their 1.4 per cent but new listings are on the rise there as well. Canberra was the only capital city to record a decline in values in July of 0.1 per cent, while Hobart values were unchanged.

As I often say, it’s hard to generalise about property as every market is different, as are value bands. For example, those low-to-middle value properties are holding up better than the top end as more first home buyers decide rents are so expensive they’ll become buyers instead.

In regional Australia, values continue to lag behind the capitals with the CoreLogic combined regionals index rising 0.2 per cent in July, compared with a 0.8 per cent increase across the combined capitals index. Every state recorded a smaller change in dwelling values through July relative to their state capital city.

The Spring selling tsunami is starting early

According to Ray White, new property listings grew 3.1 per cent across Australia in July. That’s unusual because it’s winter, which traditionally doesn’t attract new listings. But to keep it in perspective, July’s listings are still down 10.3 per cent on the same month two years ago.

Even so, Melbourne and Sydney reported big jumps in the numbers of new properties for sale. Hobart reported a massive 39.2 per cent increase in listings over the last year while regional Australia had an overall increase of 10.6 per cent.

A lot of that increase in new listings looks to be coming from people caught by the rapidly rising interest rates - those who took the advice of the RBA to go out and borrow and buy property after being reassured that interest rates wouldn’t rise until 2024.

It was unforgivable to give that advice. I can’t imagine the financial and emotional stress it has brought on people who followed it and overextended themselves. Now it looks like many are simply selling to get out of their financial squeeze.

CoreLogic data shows the percentage of properties being sold after being owned for less than two years is at a nine-year high.

That’s a lot of first home buyers and investors calling it quits. Thankfully most would have sold for a higher value than they’d bought, but then you have to take into account the additional transaction costs from stamp duty, real estate commissions and marketing costs.

Side hustles are increasingly bridging the income gap

The combined impact of high inflation and rising mortgage repayments is playing havoc with the household budget of average Aussie families. There are two solutions… cut your expenses or boost your income.

It seems boosting income is the answer for many with a record number of people - almost a million - holding down multiple jobs in March.

In March 2023, there were 947,300 Australians holding down two or more jobs, compared to just over 13 million single jobholders. This was up 2.1 per cent from December 2022 when there were 927,900 multiple jobholders, according to new data from the Australian Bureau of Statistics. Overall, 6.6 per cent of all working Australians have multiple jobs… 7.7 per cent of women and 5.7 per cent of men.

Australians have always been entrepreneurial. From the Hills Hoist and Victa lawnmower to the ultrasound, cochlear implant, wireless internet and black box flight recorder, Australians have been building great businesses from scratch.

But it seems that entrepreneurial spirit is getting even more passionate as average Aussies are increasingly starting money-making ventures on the side to plug the income gap.

It’s called “moonlighting”. Operating a part-time business while holding down a full-time job. And technology is helping in a big way.

Employee by day, entrepreneur by night.

That extra income is not only invaluable to balancing the family budget but also provides a great training ground to establish a full-time business in the future.

Starting a business part-time is the first and most secure route to turning that dream of becoming your own boss into a reality. It means entrepreneurs can get a taste without the sink-or-swim risks of diving in with big upfront costs to sustain.

In effect, moonlighting in a part-time venture is providing the business with seed funding to get started. It is a difficult balancing act, although today’s technology certainly helps.

The secret is to become a time-management expert. Family life can suffer and the risk of divorce increases. Weigh up these sacrifices before making your decision.

It isn’t easy, but it can be done if you follow some simple rules:

• Talk to the family. Discuss the idea with them and explain the pressures it will create on family life and free time. Get them involved.

• Be a time manager. Take advantage of every minute of the day. Use lunch hours and free time to work on the business, but do it in a disciplined way.

• Confine business to one room. Try and limit your office equipment and storage to just one room, otherwise you'll be constantly in turmoil and unable to escape the pressures.

• Don’t let the day job slip. The performance at your full-time job is critical. It must not deteriorate. Remember the job is providing that all-important financial security to try a new business.

• Don’t make business calls during your day job. The risk is you will get fired.

• Never compete with the boss. Apart from being unethical, you can be accused of fraud by pinching ideas and systems. Start a totally different business or a completely separate niche.

• Don’t use company equipment. Unless you have permission from your employer and offer to pay for anything used, do not use the boss’s photocopier or PCs for your business.

Once you’ve set the rules, it’s then about turning that idea into a reality. Again, take it one step at a time.

1. Stop talking about it

People who talk about their ideas before acting are usually the same ones who don’t do anything about them. So just give it a go.

2. Think through all the angles

Look at the idea through an investor’s eyes. Who’s the target market? What problem is being solved? What resources will be required to get it off the ground? What does the business roughly look like?

Use one of the many business plan templates online.

3. Test it 

Ask a sample of your target market whether they would pay for the privilege of your product or service. Whether people will pay for it is the real test.

4. Assess feedback

After testing, respond to the feedback by making any necessary changes to the business plan, product and plan of attack.

5. Find some support

Business partners are a hugely beneficial source of support, from acting as sounding boards to proving your product to others. Forge a support network of entrepreneurs who will help you along the way. Pick their brains and learn from their successes and failures.

6. Figure out finances

Look at all the options… self-funding, family loans, bank borrowing, government grants, credit cards or even angel investors. Weigh up the best alternative.

7. Make the minimum product 

Get the minimum viable product together and get it to market. If there’s appetite for the basic version of whatever it is, you can improve on it in the next batch.