House prices back to record levels + super takes a hit

Happy Friday everyone,

A quiet week locally on the economic front, although a wild week in international politics and financial markets with tension in the Middle East.

This morning the latest US Consumer Price Index was released. The core inflation figure (which excludes food and energy costs) came in at 0.3 per cent for the month and the headline rate at 0.4 per cent – slightly above the 0.3 per cent expected for both.

That means the annual inflation figure in the US held steady at 3.7 per cent, although analysts were hoping it would continue the trend down to 3.6 per cent.

As expected, US sharemarkets dropped and bond yields rose on the expectation the result would trigger another rise in interest rates. The Dow Jones Markets dropped around 400 points on the news but, in a good sign, did recover the afternoon trading session to be down about 160 points on the day.

US annual inflation is still well above the 2 per cent target, so debate will continue about whether more rate rises from the Federal Reserve are on the way.

Australia’s crucial next CPI reading for the September quarter is due in about 10 days. It will play a significant role in our November Reserve Bank Board meeting on Melbourne Cup Day.

Superannuation returns take a hit on weak share performance 

After a horrible September on the sharemarket, October is turning out to be better. So, hopefully, superannuation returns will rebound.  

According to leading research house, SuperRatings, superannuation returns declined for a second straight month in September. Sharemarkets continued to be spooked by inflation and interest rate uncertainty, which is playing havoc with bond markets.

Median returns for the balanced option in super funds fell 1.8 per cent for the month, down 0.4 per cent for the September quarter.

The median growth option fell by an estimated 2.2 per cent, while lower exposure to shares resulted in the median capital stable option delivering a smaller loss of 1.1 per cent for September.

Pension returns also fell in September, with the median balanced pension option falling an estimated 1.8 per cent. The median growth option is estimated to decline 2.3 per cent, while the more defensive median capital stable pension option is estimated to fall 1.2 per cent.

The future of interest rates and Middle East geopolitical tensions are going to be the dominant factors driving market performance in the near future, and therefore superannuation returns.

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Great news: building cost spiral returning to normal

Anyone who has recently built a house or completed a renovation will know first-hand the exorbitant rise in construction costs due to post-pandemic supply chain issues and labour shortages. It has also sent builders who had fixed price contracts in place before the upheavals, broke.

The cost increases have been a major driver in our inflation rate, and therefore a major reason for the recent rise in interest rates.

Construction cost increases peaked in July 2022, rising by 21 per cent over the 12-month period. In Brisbane, the most impacted city, the increase exceeded 30 per cent.

Rising construction costs and builders going broke are major reasons why we have a housing shortage, which is subsequently pushing up property values and causing the rental crisis. Last year, Australia’s population increased by 500,000 people, requiring around 200,000 additional homes. Only 172,000 were built.

But, according to Ray White real estate chief economist, Nerida Conisbee, it looks like construction costs are finally starting to ease. So much so that in Perth and Hobart, construction costs are actually declining.

According to Nerida, there were a number of factors that have driven construction costs and lowered the number of homes built. Many of these are now resolved or will be over the next six months.

Problems started with supply chain blockages. Shipping costs skyrocketed post-pandemic and the cost of building materials increased as a result. However, cost increases weren’t the only challenge. It also became slower to get building materials and this impacted productivity. It then became slower to build as projects were delayed by a lack of materials. These supply chains are now moving smoothly again.

The cost of materials also increased because we weren’t the only ones starting to build again post-pandemic. The cost of many raw materials skyrocketed as a result of increasing demand worldwide.

Labour shortages have also been problematic and this is taking longer to fix. Higher migration is helping, but also putting more pressure on housing demand. Competition from other building projects has also meant that demand for trades is coming from a wide range of sources.

Brisbane, where costs have skyrocketed the most, has felt this most significantly. Not only did Brisbane see high interstate migration during the pandemic, which required more homes, it has also been in the midst of a building boom - a new casino, new office buildings, infrastructure construction and rebuilding post-floods. Labour costs are another reason why Brisbane saw the biggest jump in construction costs.

Fewer building companies has also been a problem. As building costs skyrocketed, a large number of building companies became insolvent. Projects were again put on hold or stopped mid-construction. Like labour, it will take some time for this to improve again, with less competition for building expected to keep prices more elevated.

Moderating construction costs are already leading to higher building approvals. Dwelling approvals are still very low but increased by 7 per cent in August. Victoria is leading the way with an increase of 22 per cent. Renovations are also starting up again and the value of alterations and additions approved for homes is now getting close to where it was during the 2021 peak.

House prices back to record levels 

All the property research companies are united in finding house prices are back to record levels in the major capital cities.

The latest PropTrack Home Price Index shows Australia’s median home price rose 0.35 per cent in September and the capital city median increased 0.41 per cent, even though buyers had more properties to choose from last month.

PropTrack senior economist Eleanor Creagh says growth has been driven by record levels of net overseas migration, tight rental markets and a housing shortage.

Prices grew fastest in Perth (0.71 per cent), Sydney (0.48 per cent), Adelaide (0.48 per cent) and Brisbane (0.39 per cent) in September, following the good gains of the previous month.

Perth, Adelaide and Brisbane are now at record highs, while Sydney prices are just below the peak recorded in February 2022.

Insurance companies don’t value loyalty… so why should you? 

No one wants to buy the same product for a markup at the supermarket, especially when the cheaper alternative may be just as good, if not better. Yet, the latest research from Compare the Market shows that almost one in four car insurance policyholders (22.5 per cent) could be throwing away money by staying with the same insurer they’ve always had.

With car insurers flagging that premiums are likely to increase at renewal time, there are potential savings people may miss out on by sticking with the same insurer without comparing their options.

Gone are the days where it pays to be faithful to companies. In fact, we’re seeing more incentives than ever before offered to new customers. We’ve seen this across the banking sector, where banks are trying to entice new customers to refinance, while even those who ask for a negotiated rate are getting better rates than those mortgagees who sit idle.

It’s the same thing in the car insurance sector. The harder you look for a deal, the more likely you are to find it.

With so many choices and levels of car insurance available, it’s hard to understand why so many people are potentially throwing money away on higher premiums with their current insurer.

By shopping around, people may be able to find a greater level of cover, for the same, if not cheaper, price point. There may be greater perks or discounts on offer, which could boost the hip pocket, especially with the current cost of living crisis breathing down our necks.

The survey also found that Baby Boomers were the most likely to stick with what they know, with almost 30 per cent of the cohort stating they never stray from their car insurer. And as much as Baby Boomers may call Millennials the ‘switch and ditch’ workforce, this mentality may be helping Millennials save on their car insurance, as only 14.9 per cent of the cohort stated they stay loyal to their insurer.

The research found that Gen Z was partial to choosing their car insurance providers based on family recommendations (30.9 per cent). While this may be a good place to start, it’s recommended that people review their own needs and what they may be able to afford. No policy is a one-size-fits-all, so something that may work for an established family might not work for someone starting university.

But there are things people need to consider when looking at car insurance, such as the underwriters of each company.

There may be a misconception that all brands underwrite, or take on the financial responsibility to pay out policies if people claim on their policies. Yet in most cases, especially for most challenger brands, they are underwritten by bigger, more well-established companies, which may offer similar levels of cover for a lower price.

And while people may feel a bit more comfortable paying more for cover from a well-known brand, there may be challenger brands in the space who use the same underwriter. And at the end of the day, it will be the underwriter who will look to pay out if there’s ever a claim made against a policy.

In the current economic climate where every cent is under review, comparing the products on the market may help you find car insurance policies that are better suited to your needs at a possibly cheaper price, without having to pay for brand faithfulness.

Stocks of the Week: ResMed and CSL 

Healthcare stocks have been great performers over the last five years. The likes of ResMed, CSL, Cochlear, and Ramsay Healthcare have become market darlings.

But they’ve fallen out of bed badly. The debate now is whether this is a great buying opportunity, or are health stocks unwinding and their best is behind them?

In June, blood plasma and vaccination giant CSL was $312 a share and analysts were talking about it building a solid foundation to break up through its previous support levels and go much higher… last night it closed at $238.

The impact of higher interest rates, digestion problems with its most recent acquisition, and subdued profit guidance have all hit investor confidence. This was a stock which previously never disappointed.

ResMed, the sleep apnoea giant which produces the CPAP machines, was $36 in May… last night it closed at $22. Markets reckon the new weight loss drug Ozempic (and similar clones) will reduce sleep apnoea and the need for these machines.

Among the analysts on business and investment streaming channel www.ausbiz.com.au and on my daily share program The Call the debate has been raging about how investors should be reacting.

The opinions are fairly evenly split between buying both stocks at these levels and avoiding both because healthcare stocks are being re-rated lower.