Is easier access to loans really worth it? + Coles vs Woolies shares

Hi everyone,

Another big week when it comes to your money: why RBA-speak is “blaming” the Government for rate rises; Coles versus Woolies shares; new housing value forecasts; more saving rate increases; and is easier access to loans really worth it?

Now if you think I’ve been too hard on the Federal Government over the last couple of weeks in blaming them for higher interest rates, the Reserve Bank is sort of backing me — in RBA-speak.

My issue is that inflation is staying higher for longer because the Federal Government has been playing the good-cop role and encouraging big wage rises. This feeds inflation, which means the RBA has to play the bad cop by putting up interest rates which fights inflation and slows the economy… the risk is it will slow into an economic recession.

This week’s minutes from the 6 June RBA board meeting noted “the possibility of implicit indexation of wages to past high inflation and the potential for this to become widespread. Similarly, members observed that some firms were indexing their prices, either implicitly or directly, to past inflation.”

In plain speak, they are saying a lot of wage rises are being based on inflation at its peak and not the lower level it is now (and expected to be lower over the next few months). What they are saying is that higher-based wage rises will still be there keeping inflation higher when it should be coming down faster.

But bosses are not helping inflation either. Because they are having to pay wage rises higher than inflation, they are putting up prices at a rate higher than inflation.

It is turning into a horrible inflation cycle for the RBA: higher-than-inflation wage rises is leading to higher-than-inflation price rises; which is leading to inflation staying higher for longer; which means interest rates have to go up higher than expected to bring inflation down… and it looks like a recession is the only event which will make all sides see some sense.

Next week we have the crucial May CPI indicator and retail sales, which are followed the next week by housing market data – all key figures to watch before the next RBA meeting on 4 July.

The housing market is also weighing on the RBA. Because as house prices keep rising (see below), consumers feel richer and tend to spend more rather less to bring down inflation.

The RBA minutes noted: “National housing prices had increased in recent months and households’ expectations for future rises in housing prices had strengthened. Members noted that, if sustained, this would imply less of a drag on consumption in the year ahead than had previously been envisaged.”

Interesting too was the section noting “stabilisation in housing loan approvals suggested that financial conditions may not have been as tight as they had previously judged.”

Central Banks up the ante on the fight against inflation

Last night’s 0.5 per cent increase in rates by the Bank of England surprised markets by how aggressive they were after the UK’s inflation rate looks stuck at 7 per cent.

So this week Central Banks around the world showed they are willing to keep raising rates to fight inflation:

1. UK: Raised rates by 0.5 per cent… more than expected, for 13th rate hike.

2. Switzerland: Raised rates by 0.25 per cent.

3. Norway: Raised rates 0.5 per cent… more than expected, for 11th rate hike.

4. Turkey: Historic 6.5 per cent (no I haven’t got the decimal place wrong) rate hike to 15 per cent.

5. US: Two more rate hikes may be needed.

Central Banks have made it very clear: inflation is still a problem.

So do we have to change our thinking? According to one of my favourite economists, and a regular on www.ausbiz.com.au, Warren Hogan, we need to lift our rate expectations.

This morning he said:

“Bank of England hikes their interest rate by 50bp to 5 per cent. This is now the third economy in Australia’s peer group to take rates to 5 per cent after NZ (5.5 per cent) and US (5.25 per cent).

"Driving the decision was a shock jump in core inflation to 7.1 per cent in May. It is looking increasingly likely that Australian rates are headed above 5 per cent given our economy is stronger than most others and our latest inflation numbers are still hovering just under 7 per cent.

"Next week’s inflation report for May will be absolutely critical for the RBA at the July meeting. It’s now a genuine 50/50 bet on a further 25bp hike in July and another in August.

"The reality is that it is looking more and more likely that Australia’s cash rate is heading above 5 per cent in 2024 as we play catch up to the rest of the world.”

Is easier eligibility for a home loan really better for you in the long run?

As I’ve explained before, higher interest rates not only bring higher mortgage repayments but, for new borrowers, the amount that can be borrowed falls. That’s because when the banks assess a borrower’s eligibility to repay the loan they stress test the applicant by assessing their ability to service the same loan with a 3 per cent higher interest rate than what they’ve applied for.

Many potential borrowers would need to dramatically cut the amount borrowed to meet the stress test.

But now, CommBank (CBA) has announced it will lower the stress test on select refinance applications from 3 per cent to just 1 per cent.

The guidelines from regulator APRA require banks to stress test all new mortgage applications to ensure the borrower can still afford their repayments if rates climbed 3 per cent above the original rate they applied for, even if the application is a refinance.

As a result, some borrowers, typically those who bought at capacity when rates were at record lows, can no longer refinance to a cheaper lender because they don’t pass this serviceability test at higher rates.

From today, refinancers who do not pass CBA’s standard serviceability test on a 30-year loan term, can be re-tested using the bank’s new “Refinance Alternate Assessment”, which includes a 1 per cent buffer, provided it is above the bank’s floor rate, which is currently 5.40 per cent.

CBA’s lowest variable rate for an owner-occupier paying principal and interest with a 20 per cent deposit is currently 6.34 per cent. This means a potential refinancer applying for this loan could be stress-tested at 7.34 per cent, rather than 9.34 per cent.

To qualify, refinance customers must have a loan-to-value (house value) ratio of at least 80 per cent, a good track record of paying down all existing debts in the last 12 months and be refinancing to a principal and interest loan of a similar or lower value.

Critically, the loan must be refinanced back out to a 30-year term, which has the capacity to cost some borrowers thousands of dollars in the long term.

RateCity.com.au research shows that someone who took out a $500,000 loan three years ago in June 2020 with a big four bank could see their repayments drop by $235 if they refinanced to CBA’s lowest variable rate loan with a 20 per cent deposit under this new option.

However, because they would be extending out their loan term by an additional three years, they would end up paying an extra $32,117 in interest over the life of their loan, compared to if they had not refinanced at all.

If they instead took out Westpac’s lowest rate loan with a 20 per cent deposit, which has a current introductory rate of 5.94 per cent, they would see their repayments drop by $242 ($7 a month more than the CBA offer), even if they kept their loan term the same at 27 years remaining.

Over the life of the loan, that person would pay $45,078 less in interest than the ‘do nothing’ option, and $77,195 less than the CBA option.

Impact of refinancing and extending out loan term by an additional 3 years

Movements on savings rates continue

Since my last newsletter the banks continue to massage their rates on savings accounts after the last rate rise.

CBA will pass on the full hike to each of its key savings accounts.

Both ANZ and NAB have decided to pass on the full hike to the majority of their savings accounts with two notable exceptions:

• ANZ Plus Save has only risen by 0.15 per cent.

• NAB’s iSaver has only risen by 0.15 per cent for existing customers.

Westpac has said it will increase its Life account with the full 0.25 per cent. However existing eSaver customers have missed yet again, with their rate remaining at a dismal 1.1 per cent.

The bank has also increased its Spend&Save rate, for Australians aged 18 – 29, to a healthy 5.2 per cent, provided customers meet certain terms and conditions.

Big four bank savings account rates post RBA

Latest property market outlook from Domain

According to real estate platform Domain, Australia’s housing market will be in a well-established, steady recovery over the 2023-24 financial year.

House prices in Sydney, Adelaide, and Perth, and unit prices in Brisbane, Adelaide and Hobart, could have fully recovered from the 2022 downturn by the end of the next financial year. Adelaide and Perth house prices are predicted to rise slowly and may avoid a downturn but see a period of modest or sideways growth (for which Adelaide is renowned).

A quick snapshot of the Domain report:

• House prices in Sydney, Adelaide and Hobart will record the largest gains.

• House prices in Sydney, Adelaide, Perth and the combined capitals will be at a new record high.

• Brisbane house prices will be close to a new record high.

• House prices in Adelaide and Perth are predicted to avoid a downturn and instead revert to subdued positive growth.

• Unit prices are predicted to have more modest growth than houses. Although, unit prices generally saw a shallower downturn and therefore have held up overall.

• Unit prices in Brisbane, Adelaide and Hobart could be at a new record high.

• Unit prices in Sydney and the combined capitals will be close to a new record high.

• Sluggish growth is projected for units in Melbourne and Canberra.

• Gold Coast houses and unit prices will be at a new record high.

• Regional Australia will see slower growth than the combined capitals.

House and unit price forecast to the end of FY24

And… properties are selling faster than they were pre-pandemic

Nationally, as the market returns to more normal conditions houses took an average of 44 days to sell over the 12 months to April, nine days longer than the previous year, but down from 64 days over 2019.

Despite a steep rise in interest rates since this time last year, analysis by PropTrack shows houses and units in Adelaide and Perth are selling faster now than they did a year ago, while units in Brisbane are also being snapped up quicker.

Houses and units in Hobart are currently selling faster than in any other capital city, according to PropTrack ‘days on market’ figures, which measure the time a property is on realestate.com.au before it's declared as sold.

Houses in Hobart took a median of 29 days to sell over the 12 months to April, though this was 19 days longer than the previous year. Units took 31 days to sell, 23 days longer than a year ago.

Melbourne's houses shifted the second fastest, taking 36 days to sell, 11 more than a year ago. Brisbane houses took 39 days to sell, 16 days longer.

Similarly, it took houses in Sydney an extra 16 days to change hands in April when compared to the same time in 2022, at a median pace of 42 days.

Adelaide houses found a new owner in 43 days, two days less than a year ago, while houses in Perth took 45 days to sell, four days faster than the year prior.

Critical minerals are the new sharemarket gold

According to global strategic consultants, Bondi Partners, critical minerals are now officially worth more than their weight in gold… at least on the ASX. A basket of 33 major ASX-listed critical minerals stocks is now worth A$86.2b, a 10 factor increase from a decade ago when the basket had a market cap of A$8.7b. For comparison, the Gold Index (which includes 25 companies) was worth A$86.1b.

The true value of the sector is worth even more than suggested by the basket of stocks, picked by The Australian Financial Review, which excludes large diversified miners like BHP and Rio Tinto and copper miners.

Minerals including lithium, rare earths, graphite and nickel have come into focus as investors have realized they’re essential to both decarbonisation and national security, while the Biden Administration has rolled out generous incentives (including for Australian companies) through the Inflation Reduction Act.

While Australia is a top global producer in most critical minerals, the supply chain is overwhelmingly dominated by China, prompting western governments to reassess the importance of the sector as geopolitical tensions have risen.

With the global supply of microchips, computers, hydrogen fuel cells, traction motors, LEDs, solar panels, health devices, robotics, and drones are all reliant on critical minerals, some investors are arguing there could still be a way to run.

How long does it take to turn $10,000 into $1 million? 

I follow Bloomberg US host John Erlichman on Twitter and he always has some fascinating quirky historical facts. One post that caught my eye this week was how quickly $10,000 invested in specific US listed stocks turned into $1 million.

One theme to come out of this list is that investing in successful disruptors of the time who built powerful brands is key.

• Nvidia: 2013 (10 years ago)

• Tesla: 2013 (10 years ago)

• Lululemon: 2009 (14 years ago)

• Netflix: 2008 (15 years ago)

• Domino’s Pizza: 2008 (15 years ago)

• Booking: 2006 (17 years ago)

• Apple: 2005 (18 years ago)

• Monster Beverage: 2005 (18 years ago)

• Amazon: 2003: (20 years ago)

• AutoZone: 2000 (23 years ago)

• Adobe: 1998 (25 years ago)

• eBay: 1998 (25 years ago)

• O’Reilly Automotive: 1998 (25 years ago)

• Starbucks: 1995 (28 years ago)

• Microsoft: 1994 (29 years ago)

• Best Buy: 1992 (30 years ago)

• Home Depot: 1991 (32 years ago)

• Nike: 1990 (33 years ago)

• Costco: 1990 (33 years ago)

• Berkshire Hathaway: 1989 (34 years ago)

• Deere: 1986 (37 years ago)

• McDonald’s: 1984 (39 years ago)

• Walmart: 1983 (40 years ago)

• Disney: 1980 (43 years ago)

• Coca-Cola: 1974 (49 years ago)

Stocks Of The Week: Coles… and Woolworths

The Australian grocery sector is dominated by Coles and Woolworths, followed by Metcash and then the unlisted German-based Aldi.

Australian investors love Coles and Woolworths because they are seen as a hedge against inflation and, because they dominate the sector, they are seen as price setters rather than price takers. In other words, they set the price they want their suppliers to deliver at rather than take the price suppliers want. And because consumers don’t have much choice, they are more accepting of price levels.

Being in such a dominant position goes a long way to protecting their profit margins.

So they are seen as a safe, if boring, haven for investors.

Both stocks came up on The Call this week (midday www.ausbiz.com.au) on separate panels and provided a good discussion. And, just like their business rivalry, it was hard to split between them for investment potential.

The expert panels giving their views were Carl Capolingua from ThinkMarkets, Michael Wayne of Medallion Financial, Rudi Filapek-Vandyck from FNArena and Philip Pepe from Shaw and Partners.

All four experts agreed that while not the most exciting stocks, Coles and Woollies were favoured by big index fund managers and SMSF investors who wanted a set and forget, sleep at night investment.

Both panels gave both stocks a “hold” recommendation for existing shareholders, but when Woollies came up on his panel Philip Pepe preferred Coles as a buy, saying it had more room for improvement to make up market share.

But Carl Capolingua (when Coles came up on his panel) said he preferred Woolworths as a buy as its share price chart looked a lot better.