Australians wealthiest in the world + RBA finger on the trigger

Hi everyone,

Happy Friday from Perth where it’s the annual Telethon fundraising weekend for the Children’s Hospital and medical research – one of my favourite weekends to be involved with. It is the biggest community fundraising event in the world, which is something to be really proud of.

Mark this Wednesday in your calendar. That’s the day the September quarter Consumer Price Index (CPI) will be released at 11.30am. That single figure will determine whether the Reserve Bank lifts interest rates or not at its next board meeting on Melbourne Cup Day.

The release of the Board minutes from the last RBA meeting indicate they have their finger on the trigger and they are more than ready to move.

The minutes said: 

• “The monthly CPI indicator suggested that progress in lowering services price inflation remained slow.”

• “Some further tightening of policy may be required should inflation prove more persistent than expected.”

• “The Board has a low tolerance for a slower return of inflation to target than currently expected.” 

That last comment was a new one in the minutes and has markets on edge. It shows the RBA is not just wanting inflation to slow, they want it down at a faster rate.

They are concerned that rising property prices will make consumers feel rich and encourage them to go out and spend more, fuelling inflation.

The minutes noted rising home prices, “could support consumption by more than currently assumed” and, “the rise in housing prices could also be a signal that the current policy stance was not as restrictive as had been assumed”.

The RBA has for a while now been saying the inflation figure and the strength of the jobs market are its two main concerns. So Wednesday’s CPI is crucial because yesterday’s employment figures sent a mixed message.

There was a small increase in new jobs of 6,700 in September which was less than the 20-25,000 forecast by analysts. That figure, on its own, seemed to indicate that maybe the job market is softening.

But a surprise fall in the participation rate (proportion of the population in work) meant that the unemployment rate dipped from 3.7 per cent to 3.6 per cent… which by itself shows a strong job market.

Normally 37,000 new jobs need to be created each month to keep the unemployment rate steady on an unchanged participation rate.

What you need to know

Right now (pending Wednesday’s CPI data) the case to sit tight on rates remains pretty strong. The job market is showing signs of cooling and spending is down, so we may be spared another rate rise in November.  

But we're not out of the woods yet. The RBA won't take the possibility of a rate rise off the table while inflation remains high.

There are also concerns about the rising cost of fuel, which not only impacts the cost of commuting but also the cost of delivering goods and essentials.

It's really important that progress does not begin to backslide, but we don't want to see the scales tip too much.

Any decision to raise interest rates should not be taken lightly, as major spending cuts and job losses could be very damaging to the economy.

Should you be worried?

Mortgagees are in a lot of pain with repayments increasing to 9.9 per cent of household disposable income in August. The RBA has reported that's above the previous estimated historical peak.

Most households are treading water and should be able to keep their heads dry, but a big lift in unemployment could be catastrophic.

It's not yet time to panic but it's safest to prepare for all eventualities. Now is a good time to build up your rainy-day fund and search for savings in your everyday expenses. That's the best defence against inflationary price hikes!

So what next?

If you're coming off the fixed-rate cliff, it's really important to shop around to avoid falling onto a rubbish rate.

Do some research, compare different loans, and see what you could be saving. Depending on your circumstances, the difference could save you thousands over the life of your loan.

Once you’re armed with some information, phone your lender and see if they can offer a discount. If the answer is ‘no’ be prepared to walk.

The story in numbers 

Compare the Market analysis shows the difference between some advertised home loan rates was a whopping 0.79 per cent.

A person with an owner-occupier $750,000 loan could save $383 a month when they switch from a rate of 6.49 per cent to 5.70 per cent.

Perspective: it feels tough but we’re in good shape

The economy is slowing, inflation is still too high, it has never been harder to balance the family budget and loan repayments are sky high… but the average Australian is still one of the wealthiest, if not THE wealthiest, people in the world.

I always enjoy reading James Kirby in The Australian newspaper and during the week he reminded us that the annual UBS Global Wealth report showed the median wealth per adult in the US in 2022 was $US107,320. Belgium is the richest in the world at $US249,940; Australia is second with $US247,450.

In the US, the wealth is largely held by the elites, whereas in Australia it is spread much wider.

So why don’t we feel like the richest people in the world? James Kirby makes some interesting points:

Does a $1million home make you a millionaire? 

Or does it merely imply that you have an $800,000 mortgage that costs you more than $40,000 a year after tax? A modest house on a modest street can be worth $1m, but it remains the same house on the same street. The cash value means little to you unless you plan on selling up and moving very far away.

Super doesn’t secure a stable retirement income stream

The nation’s superannuation system is good at building retirement income, but poor at helping people secure a stable income stream in retirement. We have the third-highest ratio of retirement assets to GDP in the G20, and of course we have a government aged pension with universal access.

An Australian can expect to retire at 65.5 years, which is later in life than a citizen of the EU, the UK or even the US.

As we are endlessly pressured by Big Super telling us we might not have saved enough for a “comfortable retirement”, one thing is for sure, everyone in the super industry will have a comfortable retirement as the compulsory con­tribution rate (the Superannuation Guarantee Charge) continues to climb.

What we know for a fact is that many middle-income Australians ultimately leave the bulk of their retirement savings to their estate.

We work longer hours

As labour productivity across the economy continues to decline – and artificial intelligence is about to accelerate automation – it turns out we work more hours each week. The Productivity Commission recently reported a surge in the number of hours worked by individual employees across the economy.

Many are in a negative cashflow

Inflation is back with a vengeance and prices for goods and services have lifted dramatically. For a generation that had never witnessed the corrosive effect of inflation on salaries, the change is severe. Already we can see from official statistics that, after health and school fees are taken into consideration, the share of borrowers with negative cashflows has quadrupled to 14 per cent.

Our mortgages are the biggest in the world

We are not just putting a greater share of income into mortgage repayments. At more than 15 per cent, we are actually putting in a greater share than any other advanced economy, the International Monetary Fund revealed this week. We are paying more on the mortgage than anywhere else… nearly 50 per cent higher than in the UK or the US.

Very high price to pay

Putting it all together, we can understand why our special position in the global wealth tables is not to be taken that seriously. On one reading we might have the second-highest median wealth per head in the world – but just now it’s a prize that comes at a very high price.

No end in sight for the rental crisis

A major ingredient in the current inflation figure is the crippling rise in rents. But the latest figures show it is going to get worse with a massive shortage of rental properties available.

According to SQM Research, the national residential property rental vacancy rate has continued to fall to just 1.1 per cent in September.

Most of capital cities recorded a decrease in vacancies, with Sydney, Melbourne and Canberra reporting decreases in rental vacancy rates during the month, standing at 1.3 per cent, 1.2 per cent and 1.8 per cent respectively.

After a recent reprieve, the rental vacancy rate in the Sydney CBD declined, falling to 3.9 per cent in September. Similarly, Melbourne CBD and Brisbane CBD saw decreases in their rental vacancy rates, which now stand at 5 per cent and 1.7 per cent, respectively.

In total, 77.6 per cent of all postcodes recorded a fall in rental vacancy rates over September.

The national median weekly asking rent for a combined dwelling is $594 a week and $684 in a capital city. For a capital city house it’s $792 a week, while the rent for a capital city unit is $590 a week.

The most expensive rent is Sydney houses at $996 a week and the most affordable rent is Adelaide units at $438 a week.

Over the last couple of months I’ve been telling you about to significant drop-off in building approvals which indicates that, down the track, not enough houses and units are being built to ease the shortage.

Of course, the process takes quite a while as after building approval from the local council you then have to build the property. So this current drop-off in building approvals will affect supply of properties in about two years’ time.

As this chart shows, there’s close to a record number of properties being built at this very moment… and there’s still a shortage. So just imagine how much worse it is going to be in two years.

Could granny flats help solve the rental crisis?

New analysis of all residential properties across Australia’s three largest capitals has identified more than 655,000 sites suitable for the construction of a granny flat, offering a solution to help ease the housing shortage.

Granny flats: Where are the greatest opportunities for development? by national town planning research platforms Archistar, real estate construction lender Blackfort and property data and analytics provider CoreLogic assessed every residential block across Sydney, Melbourne and Brisbane to determine how many individual properties have building potential for a self-contained two-bedroom unit.

Sydney is home to the most granny flat development opportunities with around 242,000 suitable properties — that’s 17.6 per cent of all housing blocks. Melbourne has almost 230,000 potential sites (13 per cent of blocks), while Brisbane has almost 185,000 suitable sites (23.3 per cent of blocks).

According to CoreLogic, forecasts show Australia will be 106,300 properties short over the next 5 years. For homeowners, the addition of a second self-contained dwelling provides an opportunity to provide rental housing or additional accommodation for family members, while at the same time, increasing the value of their property and potentially contributing additional rental income.

CoreLogic figures show an extra two bedrooms, and an additional bathroom could add around 32 per cent to the value of an existing dwelling. For a house worth $500,000, the addition of a granny flat has the potential to add approximately $160,000 to the value of the property.

When the tide goes out on a sea change it’s time to ride the wave

Remember during the pandemic when so many people moved out of the city for a so-called “sea change” to escape the lockdowns? Property prices in coastal towns went through the roof as they literally became hot property.

But now the pandemic is a bitter distant memory it seems a lot of Aussies are heading back to the cities and coastal property prices are being dumped.

According to Ray White Real Estate chief economist, Nerida Conisbee, interest in having a holiday home surged during the pandemic, but with rising interest rates and growing restrictions on short term rentals, this is a luxury that few can now afford. As a result, prices are declining in these areas, particularly in parts of the Sunshine Coast and coastal New South Wales.

It isn’t just the holiday house market affected. Lismore, North Lismore and South Kempsey experienced heavy flooding in February 2022. And while it has been over 18 months since the waters receded, it looks like those who were left with homes in a marketable condition had to walk away with potentially more than 40 per cent losses on sales, or over a $200,000 loss on their net wealth for the median sale.

While many holiday home towns and some select mining towns have seen declining prices, it isn’t consistent across the board. While some selected Sunshine Coast suburbs have seen declines in prices, across the region, prices are back where they were during the 2022 peak. In Western Australia, green energy minerals are pushing up values in places that have previously been very low in growth.

How the US keeps OPEC under control

I reckon this will surprise you. When we talk oil prices the focus is always on what OPEC (the organisation of major oil producing countries) is doing – either increasing or cutting supplies. What it does affects global oil prices and what we pay at the pump (along with the level of the Australian dollar).

But recently, as OPEC has been cutting oil production, global prices haven’t really been rising as much as expected (if you ignore the knee-jerk reaction to the current Middle East conflict).

Interestingly, while OPEC is cutting supplies, the US has been filling the gap. As you can see from this chart, the US is a major oil producer in its own right and has been pumping out more supply than ever.

Because US oil producers are so nimble, they’ve been able to quickly fill the gap so the pain at the pump is not as pronounced as it should be.