Where the professionals are investing + falling rents at last?

Hi everyone,

Hope you’ve had a great week. I’m writing this newsletter from Lisbon in Portugal where I’ve had the privilege of hanging out with one of the world’s great entrepreneurs and understanding what makes them tick. More on what I’ve learned in a week or two.

I’ve travelled through Greece, Spain and Portugal this week… it certainly reinforces how good Australia’s standard of living is and also how fragile Europe is. For example, a big discussion amongst the Greeks is whether diamonds are now a better store of value in times of crisis than gold. There is genuine concern about the ripple effect of the ongoing war in Ukraine and the instability in Russia.

Fascinating.

But let’s turn the attention back to the financial issues affecting your hip pocket this week. Interest rates will stay on hold at Tuesday’s Reserve Bank Board meeting after the July monthly Consumer Price Index (CPI) indicator rose by 0.3 per cent to an annual 4.9 per cent.

But if you annualised the last 3 months’ worth of CPI results it would come out at 2.8 per cent. That’s within the RBA’s target range and an indication of how quickly inflation is coming down.

That’s good news and enough for the RBA to keep rates on hold for at least another month.

But while an easing of holiday travel and fuel prices slowed the inflation rate, other key inflation concerns like childcare, and tobacco and alcohol were not measured because they only get counted in the quarterly figure. Plus the Government’s new energy rebates dampened continuing cost spikes. Because of this subsidy, energy prices only rose 6 per cent; without the subsidy, energy would have risen a massive 19.2 per cent.

Rents rises also picked up pace to 7.6 per cent for the month.

Hopefully there can also be good news on the inflation front in next month’s August result, even though petrol prices have jumped on the back of the falling Aussie dollar and electricity won’t have the benefit of the subsidy.

Consumers stay in the bunker

Australian consumers are still in the bunker when it comes to spending. And remember this is a key factor in the Reserve Bank bringing down inflation and setting interest rates.

This week the latest retail trade figures for July rose 0.5 per cent, slightly better than economists expected and a lot better than the 0.8 per cent fall in June. Monthly retail sales figures can be volatile and a bounce back from the big fall was expected.

But over the last year, total retail trade is just 2.1 per cent higher… and lower than inflation.

Due to seasonal factors, the sectors that experienced the strongest growth in July were those that recorded the softest sales in June.

Spending in department stores rose by 3.6 per cent in July after contracting by 4.8 per cent in June. Clothing and footwear recorded growth of 2 per cent following a 2.3 per cent fall. Over the year momentum is still very soft with the annual growth rate for department stores and clothing being flat and down 0.4 per cent, respectively.

Eating out was 1.3 per cent higher in July, boosted by the FIFA Women’s World Cup and school holidays. Much of the tournament was staged in August, so it will provide a further boost in next month’s figures. Indeed, spending on eating out continues to be an outlier in terms of strength, with significant inflation and robust demand keeping nominal spend high.

By state, results were mixed with Vic (+0.8 per cent), NSW (+0.7 per cent) and Qld (+0.7 per cent) all recording solid growth. Tas (-0.7 per cent), WA (-0.4 per cent) and SA (-0.1 per cent) saw retail spend contract in the month. The territories were also split with ACT spending 1 per cent higher and the NT 0.2 per cent lower.

But house prices continue to rise

CoreLogic’s national Home Value Index (HVI) rose for a sixth consecutive monthly rise – up 0.8 per cent in August compared with 0.7 per cent in July.

Since bottoming out in February, the national HVI is up 4.9 per cent, adding approximately $34,301 to the median dwelling value.

The recovery trend remains broad-based, with every capital city except Hobart (-0.1 per cent) recording a rise in dwelling values over the month. Gains were led by a 1.5 per cent increase across Brisbane, followed by Sydney and Adelaide where home values were up 1.1 per cent.

CoreLogic Research Director, Tim Lawless, says Sydney has led the recovery with a gain of 8.8 per cent since values found a floor in January. Brisbane has also posted a strong recovery with values up 6.2 per cent since bottoming out in February.

Hobart home values are again unchanged, while values across the ACT have risen only mildly, up 1 per cent since a trough in April. These are also the only two capital cities where advertised supply is tracking higher than a year ago, suggesting a rebalancing between buyers and sellers is a key factor contributing to the stability of values in these regions.

When you combine results from all capital cities, house values are up 6.3 per cent since bottoming out in February, but there’s only been a 4.9 per cent rise in home unit values. The more significant rise in house values comes after a larger drop through the preceding downturn, where house values were down 10.7 per cent compared with a 6.5 per cent drop in unit values.

More signs rents are starting to flatten out … and fall

Over the last couple of weeks I’ve been writing about emerging signs that the horrendous spike in rents is turning, despite what’s currently coming through in the CPI figures. There were more signs of that this week.

According to CoreLogic, rent values rose for the 35th consecutive month nationally in July, but monthly rent growth has eased over the past four months. In regional Australia, rent value growth has been slowing since April last year, and rents are close to flattening out (albeit at high levels).

CoreLogic reckons slowing rent growth is expected to be one of the key housing market trends next year, for a few reasons. Firstly, the RBA’s cash rate is expected to fall, which could increase investment and first home buyer activity. Secondly, household income growth is expected to slow, which might prompt a change in housing preferences. Lastly, stretched rental affordability could see movements to more affordable areas, and base effects mean there will be a limit to how high growth can go.

Household income growth rose higher through the pandemic. Initially because of the largest peacetime fiscal stimulus package on record, and later, the tight labour market sparked wages growth. Total gross household income in the national accounts has averaged 1.4 per cent growth per quarter since the start of the pandemic, almost double the growth rate in the five years prior.

But rising interest rates are reducing demand in the economy, the unemployment rate rose to 3.7 per cent through July, and annual growth in wages has slowed to 3.63 per cent. As income growth slows, Aussies who rent will increasing look to move back in with parents or re-form share houses.

The big jump in rents means 30.8 per cent of a household’s income is now used to pay the landlord… the highest proportion since 2014.

As a result, rent value growth is likely to slow because renters tend to be on lower incomes, which means there could be a ceiling on how high rents can go before tenants move out.

Most rental markets are now seeing growth flatten or decline. Canberra rents are firmly in decline, and Hobart house rents look as though they will soon follow.

This is why Australian households are asset rich and cash poor

While the Federal Treasurer and PM put on dour faces and complain about how tough the impact of higher interest rates and inflation is having on the average Australian… they are quietly counting the dollars they’re reaping in the background.

Yes, iron ore and coal exports have been booming and the lower Australian dollar is cushioning the impact of falling commodity prices. But did you know we’re close to the top of record levels of income tax?

This graph I saw from IFM Investors puts it all in clear perspective. The jump in taxes over the last 10-15 years has been enormous… all those wage rises we’re seeing are being eaten up by Government tax.

But what makes it worse is that not only is the income you earn being diluted by tax, at the same time it’s being diverted to higher loan repayments from rising interest rates. Then whatever’s left after the tax and interest rate siphons is being diluted again by inflation.

As this IFM Investors chart shows, household disposable income is down almost 4 per cent, plus inflation on top.

So even though we may feel rich from rising house prices, our available cash to survive day-to-day is being drastically squeezed.

Where the professionals are investing

I reckon it’s always really instructive to see where professional investors are putting their money so we can learn from them. That’s why I always recommend everyone read their superannuation statements; not only to assess the performance of their fund managers, but also to understand how they’ve readjusted their investment strategy to reflect a changing economy and investment cycles.

As you can see, fund managers of industry superannuation funds have made significant changes to where they allocate your contributions.

Some of the trends are:

• Taking advantage of higher interest rates and investing more into fixed income investments.

• After being hurt by the collapse in the sharemarket during the pandemic, they are getting back into equities.

• They’ve watered down their exposure to property as commercial office space and retail have been hurt by the working-from-home phenomenon and retailers by consumers tightening their belts.