Landlords are doing the heavy lifting + the budget 'surplus'

Hi everyone,

Let’s get straight into the news of the week which I think affects your financial wellbeing.

Interest rates and inflation are top of everyone’s mind at the moment, so there is always interest in the latest Reserve Bank board minutes. These show what the board was discussing and thinking at their last meeting, when they decided to keep official interest rates on hold.

I’ll come to that in a minute, but first a snapshot of the economy.

This week, the global ratings agency reaffirmed Australia’s credit rating at the top level of Triple A. This is no mean feat as there are only nine countries in that top level across all three international credit ratings agencies. Remember, the US was downgraded to AA a couple of months ago because of concerns over debt levels and budget deficits.

The Australian economy is in good shape, despite the financial pain being felt by so many Aussies as they battle inflation and higher interest rates.

And the economy is being underpinned by a big budget surplus… which you are paying for.

As many of you would know, this is one of my biggest gripes with this Government. A year ago, when the Treasurer delivered his first Federal Budget after the election, it was all doom and gloom. The Budget had a huge deficit black hole because of the economic mismanagement of the previous Coalition Government.

On Sunrise I called bullsh*t on that claim… or words to that effect.

I made a bet with the Treasurer that last financial year would deliver a Budget surplus because he seriously underestimated the export revenue we’d earn from coal and iron ore. In other words, to justify the criticism that the Coalition were bad economic managers, he’d rigged the income side of the budget to make it worse than it would be.

Well, the results are in. Last financial year the Federal Budget delivered a $22.1 billion surplus against the $37 billion deficit the Treasurer forecast a year ago.

That’s a whopping $60 billion difference.

As I predicted a year ago, the Government is now claiming the credit saying it’s because of their good economic management. Gee they think we’re suckers.

It really has nothing to do with them.

Iron ore and coal export prices have fallen, but are still more than double what the Budget forecast, so I reckon that got the Budget to break even.

The rest of the surplus is coming from you, the taxpayer, in the form of extra income tax. While you’re struggling to make ends meet because of inflation and higher interest rates, the Government is making it even harder by taking more of your cash.

The Treasurer says this Budget surplus is a remarkable effort at a time when he’s fighting inflation. Hmm, inflation leads to pay rises which, in turn, puts people in a higher tax bracket, and the Government is the winner.

This chart sums it up. The Treasurer should be thanking you.

And this is the impact on your household budget as a result of the rise in interest rates and rise in taxes.

Back to the Reserve Bank minutes

Once again, the minutes showed the RBA is keeping a close eye on four things when it comes to setting interest rates:

• the global economy (particularly China);

• household spending;

• the outlook for inflation; and

• the job market.

At the moment the global economy is soft, household spending has slowed, the inflation rate is coming down, and the job market remains historically tight but continues to ease.

So all the indications are that interest rates could stay at these levels for an extended period of time. But the RBA is very firm in pointing out if any of these key indicators turn for the worse then they will have no hesitation in lifting rates.

The biggest threat I see is the fall in the Australian dollar, which makes imports more expensive, which could feed into inflation. Petrol prices are a case in point. The reason we’re paying such high prices at the pump is the falling Australian dollar combined with a rise in global oil prices because of the OPEC production cutbacks. The petrol price plays a big role in the inflation rate.

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Victims of the RBA’s misguided forecasts continue to feel the pain

You know how ropeable I am about the Reserve Bank’s comments two years ago reassuring Australians to go out and borrow with the comfort of knowing interest rates would not rise until 2024. It was negligent for them to make those comments.

Financial markets were warning of a then-imminent breakout in inflation and the need to lift interest rates, but the RBA publicly said they were wrong. The RBA sets rates so the Australian public naturally believed them, not the markets, and went out and borrowed.

As we all know the RBA was wrong… not just wrong, but horribly wrong. We’ve endured the shortest, sharpest rise in interest rates in a generation.

The financial and emotional cost of that is being felt by those Australians who took the RBA’s advice.

The CoreLogic Pain & Gain report for the June quarter shows the portion of loss-making short-term resales of property has increased to 9.7 per cent, from just 2.7 per cent a year ago.

What this means is that almost 10 per cent of people who bought a property within the last two years have now sold at a loss. That loss is generally about $30,000. The other 90 per cent of people who have sold within two years of buying generally made a profit of about $70,000.

But this is just based on the buy and sell price. As we all know, the transaction costs of buying and selling (stamp duty, legal fees, agent commissions and fees) are huge. So the losses are a lot higher and profits much lower.

It shows these new home buyers borrowed what they could afford at the time on the back of the RBA forecast but have been caught out by the sooner-than-expected rate rise. They are willing to take a loss on a sale to get out of a serious financial crisis.

Over the longer term, the outlook is very different for property sellers. It shows the rewards gained from property over the medium-to-long term… and shows the residential boom we’ve been through over the last couple of years.

The CoreLogic Pain & Gain report shows 92.8 per cent of existing property resales were made at a profit over the June quarter.

Key findings were:

• The incidence of profit-making sales nationally increased to 92.8 per cent, up from 92.4 per cent in the previous quarter.

• The median gains from resale were $290,000 in the quarter.

• The median losses from resale were $39,982.

• Net profit from residential resales was $25.5 billion in the June quarter.

• Among the capital cities, Darwin had the highest volume of loss-making resales at 34.4 per cent, followed by Perth at 12.3 per cent.

• Adelaide was the most profitable market of all the regions and capital cities, with just 1.8 per cent of loss-making sales.

• Owner occupiers continued to see a far greater rate of profitability than investors.

• The median ownership hold period for resales across Australia was 8.7 – down from 8.9 years in the March quarter, and almost 10 years in the final quarter of 2022. So homeowners are flipping properties quicker than ever.

Perspective: How landlord investors have done the heavy lifting on rental property

Last week I wrote about how landlords are being driven out of the rental market, which is exacerbating the crisis.

I was interested in an analysis by the research director at Ray White, Nerida Conisbee on the rental crisis and what is causing it.

The Economist magazine recently undertook an analysis into OECD data to compare the proportion of households that are seeing very high levels of rental stress. Australia is faring relatively well. Not as good as France or Germany, but remarkably better off compared to New Zealand, Britain and the US.

The current global crisis has been driven by both a reduction in household size during the pandemic (people spread out) and then a return to high migration levels (not enough homes subsequently available). From Singapore to London and to smaller cities in between, the end of the pandemic resulted in double digit rental increases. Only now, as housing construction starts to get back to more normal levels and more people start to share again, are we seeing these increases dissipate.

According to Nerida, incentives available to property investors in Australia have been overwhelmingly successful in providing a steady stream of rental properties and keeping the proportion of households under rental stress at globally low levels.

Between 1996 and 2021, there were an additional 1.1 million rental properties provided by investors.

But how about this for a shocking comparison: over that period only 41,000 homes were provided by community groups and even worse, a LOSS of 53,000 rental properties provided by the government.

For social and affordable housing, thankfully the $10 billion Federal Government Housing Australia Future Fund was finally passed, promising to provide an additional 30,000 social and affordable homes.

But that is still tiny compared with traditional investor/landlord stock.

Bottom line is for Government to encourage investors to help ease the crisis and not use them as the scapegoat.

The property pipeline of new apartments is being choked.

There is a rental crisis. There is a shortage of properties to rent. Home units are the main type of rental property. But building approvals for home units is plunging.

Conclusion: the rental crisis is going to continue for years.

According to CoreLogic, the latest Australian Bureau of Statistics building approvals data just 4,490 units were approved for construction in July… that’s down 19.9 per cent from the previous month and 39.8 per cent below the decade average. The trend in new unit approvals has largely been below the decade average since mid-2018 and well below the trend in house approvals since late 2017. 

The latest ABS building activity data also shows an easing in unit completions, while house completions have held close to the decade average.  

In the past 10 years, units have accounted for approximately 41.7 per cent of total new housing completions nationally. However, over the March quarter this year, units made up just 37.1 per cent of completions, around 27.1 per cent below the decade average.

So not enough units are being built to meet current demand. But remember, we are going through a period of record migration numbers and most migrants rent a home unit when they first arrive. They are going to push up demand even more.

In the year to March 2023, net overseas migration reached a new record high, with 454,400 people added to Australia’s population. At the current average household size, this equates to an additional 181,723 households.

That’s just this year. Migration levels are expected to be above 300,000 a year for the next three years. 

China set to be the world’s car manufacturer

Moody’s is forecasting China to become the world’s largest car exporter by the end of 2023, overtaking Japan, South Korea, Germany, and the United States.

According to their report, China’s electric vehicle (EV) exports doubled on a year-over-year basis, while traditional cars produced in Japan (the current largest automobile exporter) struggled to return to their pre-pandemic levels.

China’s investment in the EV industry and its support of domestic brands like MG, BYD, Geely, and Changan has driven the growth. It also helps that China is the biggest manufacturer of lithium-ion batteries in the world.

I love quirky “investments”

One of my most treasured possessions is a series of photographs by the iconic Australian photographer Max Dupain. I try and convince Libby they are an “investment” but, frankly, she isn’t convinced.

Anyway, I follow the auction catalogues of a number of galleries, including from Josef Lebovic who I reckon I first interviewed on my old Money Talks radio program on 2GB 30 years ago.

The catalogue cover caught my eye because of the famous photo of former Treasurer Paul Keating.

Lorrie Graham’s image of Paul Keating “brandishing a pair of Ray-Ban sunglasses… conveying his illusive cool” is up for sale.

I remember that photo so clearly when it first appeared. Like all great photos it captures a moment in time and history magnificently.

Lorrie Graham recalled, “In 1993, I was dispatched to take a photo of prime minister Paul Keating for the cover of Rolling Stone, while three writers – Linda Jaivin, Peter Corris, and Reg Mombassa (founder of Mambo) – interviewed him. His minder, writer and feminist Anne Summers, brought him to my studio in Surry Hills, and the plan was for a straight portrait of him in his Zegna suit. But I’d brought some props with me: three pairs of sunglasses. I handed him the Ray-Bans and told him to play around with them. The result was one of the best-known photos of a politician in Australia.”

It sure is.

And how about this in the same catalogue.

“Scene of the bidding when Ampol shares came on the market at the stock exchange today.”

That was the stock exchange back in 1948 – bit of history for you.

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