Reading the RBA tea leaves + what REALLY drives our property market

Hi everyone,

Greetings from Frankfurt as Libby and I begin our trip to visit our new granddaughter Heidi in London. We’re on a bit of a milk run so we could get the best rewards seats. A night in Tokyo (at least we got to see the Shibuya Crossing, which was a real scramble), stop in Frankfurt and then fly into London City Airport which I haven’t done before.

So I’ve had plenty of time to write this newsletter on planes. 😊

In this week’s newsletter covering the most important things I think you need to know about your money:

• Reading the RBA’s latest tea leaves

• Should you be scared of Shock-tober? You’ll be surprised

• The best quarter of superannuation returns in 15 years

• The best guide to what drives the property market, with thanks to Nerida Conisbee

• Why Australia is so significant in the global gold market

Reading the RBA’s tea leaves

The Reserve Bank’s September Board minutes were released on Tuesday and, as usual, every word was analysed to see if there was any change in the Board’s thinking around interest rates.

Yes, the minutes are pretty boring, but they can move markets - and this time they did. There was a change in wording indicating the RBA Board is now more inclined to start easing interest rates.

The final paragraph in the August Board minutes stated that, “based on the information available at the time of the meeting, it was unlikely that the cash rate target would be reduced in the short term, and that it was not possible to either rule in or rule out future changes in the cash rate target.”

The final paragraph in the September minutes only noted that, “it was not possible to either rule in or rule out future changes in the cash rate target at this time.”

It removed the line, “it was unlikely that the cash rate target would be reduced in the short term.”

Financial markets took this to mean that the RBA was changing its forward guidance to something a bit softer than the hard line of previous months.

The Minutes considered two scenarios that would justify the easing of rates:

• if the economy proved to be significantly weaker than expected and this placed more downward pressure on underlying inflation than expected (due to higher household savings and/or if the labour market weakened more sharply than forecast), or

•  if inflation proved less persistent than assumed, even without weaker‑than‑expected activity.  

CommSec believes the introduction of these two scenarios that would justify less restrictive financial conditions provide an insight into the Board’s reactions that could see the RBA commence an easing cycle this calendar year.

However, the view of most economists is that the first interest rate cut will be next calendar year.

CommSec expects the combination of a weaker set of national accounts than the RBA expects, coupled with a weaker CPI, could see the RBA cut the cash rate by 0.25 per cent at the December Board meeting. And CommSec continues to look for 1.25 per cent in rate cuts by the end of 2025 which would take the official cash rate down to 3.1 per cent from the current 4.35 per cent.  

Eeek ... it’s Shock-tober!

This is the month when I get a bit uneasy about global sharemarkets as I remember the record-breaking drops in October 1987 and 2008. These market crashes shocked the world, and my uneasiness is known as the October Effect.

But I’ve wondered whether the October Effect has just become the October Myth and whether markets do actually lose more money in this month?

US investment commentator Jon Erlichman decided to look back at the past 50 years’ worth of performance for the S&P 500 and, while there have been some rough months, it’s certainly not an overwhelmingly negative stretch. In those five decades, there have been 29 positive October periods. So, a positive finish 58 per cent of the time.

Not spectacular, but that’s still a positive finish in the majority of those years.

So, there are the facts ... but I’m still emotionally scarred and wary. 

An old investment adage has always been “buy low, sell high”. I love this graphic – it says it all.

Despite all the economic and political turmoil around the world, global sharemarkets remain near record highs. It has been a remarkable year. But, I don’t know about you, I get increasingly nervous about putting new money into the market when values are at such lofty levels. I can’t help but think there is a correction around the corner.

That’s the emotion and psychology around markets.

But as is the case now, with sharemarkets at record highs, should you be buying at these levels or just selling? Can they go higher? 

The answer is ... nobody knows!

But history would suggest that, for the market overall, buying at an all-time high is not that different from investing any other day, assuming you stay in the market for a reasonable amount of time.

And that’s the kicker: “assuming you stay in the market for a reasonable time.”

Looking specifically at the US S&P 500 since 1950, the average one year, three year, and five year returns when you invest at an all-time high are fairly close to the historical averages when you buy on all other dates.

In years when the S&P 500 has gained between 15-20 per cent in the first nine months of the year, fourth quarter gains end up being roughly 6 per cent - and that’s about 50 per cent higher than the average return in the fourth quarter.

It reinforces, again, the view that the secret to share investing is TIME IN the markets rather than TIMING the market.

The best September quarter superannuation returns in 15 years

September was a steady month for superannuation investment funds. Superannuation research house SuperRatings estimates that the median balanced option super fund returned 1.1 per cent, which is expected to be the first time in five years that most funds’ returns will deliver a boost to member balances over the month.

The result brings the estimated return for the first quarter of the financial year to 3.4 per cent for the median balanced option, which would make it the strongest first quarter return since 2013.

The median growth option grew by an estimated 1.3 per cent in September, while the median capital stable option grew by a more modest 0.8 per cent.

Pension returns also rose over the month, with the median balanced pension option increasing by an estimated 1.2 per cent, the median capital stable pension option rose 0.9 per cent while the median growth pension option was up 1.4 per cent.  

It’s a good start for the first quarter of the new financial year, however, escalating tensions in the Middle East and the looming US elections could make this quarter’s returns more volatile.

A comprehensive guide to what drives the property market

Obviously demand and supply is a key driver of the property market but, just as obviously, it’s a lot more nuanced than that. And currently the property market is at a real turning point. 

An interest rate cut looks to be just a few months away, the Melbourne and Sydney markets are slowing down rapidly, while southeast Queensland and Perth continue their strong run. There is a lot happening with property at the moment. 

This week I received a terrific research paper from Ray White Chief Economist, Nerida Conisbee, where she assessed each of the property drivers. It was a terrific rundown that everyone can learn from.

I reckon every politician, from all sides of politics, should read it to get a better understanding of the property markets and what drives them. Then they might stop making simplistic policies on how to supposedly solve the housing crisis.

1. Interest rates

House prices are highly correlated with interest rates at a national level. Not surprisingly, as it becomes more expensive to pay off a loan, people can borrow less. Once you move beyond aggregates however, there are often other drivers that override this. Overall, Sydney and Melbourne are the most sensitive to interest rate changes primarily because of high debt levels. In more affordable locations, the link is a lot weaker. And in markets like Perth and Darwin, commodity cycles can have a much bigger impact. 

2. The number of properties for sale 

Simplistically, the more properties for sale suggests that price growth will moderate. However, markets can move in either direction depending on what is driving the growth in listings. For example, during the pandemic, we saw a big jump in properties for sale. Sellers were motivated by strong market conditions, and we didn’t see a slowdown in pricing until interest rates started to rise.

Conversely, a lot of properties are coming to market at the moment. Melbourne and Sydney are seeing price moderation as a result; however, this is being driven by higher taxes and high interest rates. Interestingly, more properties are coming up for sale in Brisbane and Perth and a similar slowdown is not occurring. 

3. Access to finance

Restrictions to finance slow down property markets, as can less competition between banks. At present restrictions to finance are fairly high, particularly the mortgage serviceability buffer at 3 per cent. When being considered for a loan, buyers need to show that they can afford to pay a mortgage at a rate 3 per cent higher than the current rate.

Competition between banks is also relatively low at the moment but is likely to become higher when rates are cut. More competition can lead to more loans being written and pressure on pricing. 

4. Economic growth

In a strong growth economy, people are less worried about losing their jobs and when it comes to housing, their ability to pay off their loans. As a result, sentiment towards housing tends to be stronger.

This was most sharply seen following the start of the pandemic. Although initially house prices declined, once it became apparent that the economic downturn would be short lived, prices bounced back quickly. 

5. Population growth

More people need more housing and population growth unsurprisingly results in house price rises. The evidence on this is most striking in small regional towns when there is some form of economic stimulus. The opening of a new mine, for example, can dramatically increase house prices; similarly very strong growth in tourism can have the same effect. The impact of strong population growth has also been seen since the end of the pandemic, when prices grew despite interest rates rising rapidly. 

6. Construction costs

Sharp increases in construction costs have been a feature of the economy post-pandemic, morphing from what started as supply chain blockages to the largest number of construction companies going into receivership ever recorded.

Although it is now starting to be resolved, it remains a lot more expensive to build a new home now compared to pre-pandemic. This gap between the cost of building a new home and buying an existing one has been a driver of price growth over the past two years.  

7. Housing supply

If population growth is occurring but housing supply is constrained, house price growth (and rental growth) will occur due to the shortage. Although this is the most direct way to ensure affordability, it is also the most complicated and difficult to achieve.

Right now, we are in an environment of constrained housing supply due to rising construction costs and this is likely to be a key factor in keeping house prices high despite a rising interest rate environment. However, the Federal Government is focused on housing supply, with an aim to build 1.2 million homes over five years, a target that is not on track and has never been achieved. 

8. Sentiment towards property

Although interest rate increases can explain the most recent slowdown in house prices, sentiment towards housing is also a factor. Last year, it was a seller’s market - prices were moving quickly and the number of people bidding at auction hit record highs. Since the start of the year, the market has shifted in most locations, with the number of bidders per home at auction reducing. This has led to price growth softening.

9. Taxation

Taxation can be used as both a deterrent to buying, as well as an incentive. Generally, it’s used to drive certain behaviour. For example, negative gearing ensures we have enough rental housing while stamp duty reductions are used to encourage first home buyers. While it does achieve certain goals, it can often drive up (or down) prices. 

The impact of cutting tax incentives available to investors was most recently seen in New Zealand. The government cut tax deductibility of interest payments to investors in 2021. As a result, investment in housing halved with investor lending plummeting from $21 billion in 2021 to just $11.8 billion in 2024.

New Zealand is now the least affordable rental market in the world and the policy has now been reversed. House prices dropped over the same time, coinciding with very sharp increases in interest rates and low levels of population growth. 

10. Urban regeneration

Urban regeneration can result in significant price increases over a prolonged time period. Within large cities, this generally happens when older people move out of a suburb and young people move in in their place. It can also be driven by more subtle drivers such as a renewed retail precinct or traffic calming within a neighbourhood. Price growth driven by urban regeneration occurs over a prolonged period. 

11. Demographic change

Changing preferences for housing and demographic change can lead to prices rising. Average household size has been declining long term but at the same time, Australian housing is predominantly three bedrooms or more. This has resulted in a low number of people per home and a lot of spare bedrooms. Low levels of housing efficiency also drive price growth long term. 

12. Infrastructure improvements 

Significant infrastructure spending can completely change house values in the areas that they benefit. The announcement of the Western Sydney airport and the subsequent investment that has taken place since then has led to marked changes to housing demand in the surrounding area. Similarly, continued investment in transport links between Geelong and Melbourne have led to pricing in Geelong more closely resembling Melbourne pricing. 

However, not all infrastructure is equal in driving price growth. For example, a new major freeway may reduce price growth for places located adjacent to the new road. In comparison, homes a little bit further away would benefit from better connectivity and may see price increases as a result. 

13. Government policy

Government policy can change house prices. Easing up of planning controls can lower the cost of housing while policies that put more money in people’s hands can increase them. First home buyer incentives are particularly successful in getting more first home buyers into the market but as a Productivity Commission report has shown, also drives up prices at cheaper price points.  

14. Performance of other investment types

Property is a popular way to create wealth in Australia, however it is not the only way. Other investment types such as bitcoin, shares and savings accounts are also popular. In many ways, owning property is more labour intensive than shares (for example, maintaining the property, ensuring it is rented out, etc) and some people prefer a more hands-off approach, particularly if alternative investments offer better returns.

Why Australia is such a significant player in global gold

Australian gold miners are among the best in the world and, given the surge in the global gold price, they are also among the world’s most valuable.

To put Australia’s role in perspective, I came across this great graphic during the week. Our gold production is second only to Russia while our gold consumption is tiny compared to India, China and even the US.

Gold has become such a valuable export for us; and now you know why.