What the CPI figures actually mean + All you need to know about reverse mortgages

Hi everyone,

Greetings from Memphis as Libby and I come to the end of our road trip from Washington DC to Dallas. Back home on Wednesday.

It’s been a fun and fascinating trip away after visiting our new granddaughter in London. Washington, Gettysburg, White Sulphur Springs in West Virginia, Versailles in Kentucky, Nashville, Memphis and Dallas.

Fun fact: Andrew Jackson has been the only US President to pay off all government debt and that was during his term from 1829 to 1837 ... that’s a long time ago.

This week we’ve also had those all-important quarterly CPI figures and weak retail sales. So in this newsletter:

• What the quarterly CPI figures mean for interest rates.

• It’s a good time to take a road trip with dropping petrol prices.

• The property market continues to cool with Sydney property values starting to fall.

• Could a reverse mortgage be for you?

• The graph that proves it’s good to be bald.

As I’ve been saying ... no interest rate cut until 2025

Before Wednesday’s quarterly CPI figure was released, financial markets had factored in a 30 per cent chance of an interest rate cut at the December Reserve Bank board meeting. After the September quarterly CPI, markets have cut that possibility to a 20 per cent chance.

Don’t be fooled by the headline CPI figure which rose by 0.2 per cent for the quarter. This was below the expected 0.3 per cent, which produced an annual rate of 2.8 per cent - which is within that Reserve Bank target range needed to cut rates.

The RBA ignores the headline CPI and prefers the “trimmed mean” which takes out all the volatile and one-off factors like state and federal governments artificially reducing energy prices though subsidies to consumers.

That trimmed mean for the quarter was 0.8 per cent and annually the rate dropped from 4 per cent to 3.5 per cent ... still above the target range. That’s why virtually all economists are saying no rate cut until at least the February RBA board meeting.

The large gap between the quarterly change in the headline and trimmed mean CPI reflects a big 17.3 per cent decline in electricity prices due to federal and state government energy rebates.

The annual rate of goods inflation is running at a much softer pace than services inflation. The annual change in services inflation was boosted as a result of the July 2023 Child Care Subsidy dropping out of the annual calculation.

There will be a similar impact when the energy rebates stop and that’s why the RBA is wary of these short-term factors.

The big sticking point, which is keeping the CPI higher than the RBA would like, continues to be rents and insurance premiums.

While rental increases are starting to slow, they remain high. As for insurance premiums, I have to say, the size of the premium rises is scandalous. There have been no natural disasters to justify this and, as I’ve pointed out a couple of months ago during earnings season, the major commercial insurers are making huge profits.

So it looks as though those premium increases are just going straight to the bottom line of insurance company profits.

Now more than ever, as consumers, we have to be checking our insurance coverage and comparing it with others to make sure we have the best deal.

On the plus side of the CPI figures, there has been the big drop in petrol prices. Have a look at this image - unleaded petrol prices are near a two-year low. Make the most of it.

And just to put our inflation rate in perspective, this is why the rest of the world are starting to cut interest rates. Our inflation rate is still above our major trading partners and needs to come down for a rate cut to follow.

Sydney property prices fall in October

CoreLogic’s national Home Value Index (HVI) recorded a 0.3 per cent rise in October - the 21st month of growth since the cycle commenced in February last year.

The small lift in values was driven by the mid-sized capitals, led by Perth with a 1.4 per cent rise over the month, offsetting declines in Darwin (-1.0 per cent), Canberra (-0.3 per cent), Melbourne (-0.2 per cent) and Sydney (-0.1 per cent), as well as regional Victoria (-0.2 per cent).

As the market cools, annual growth in national home values continues to ease, reducing to 6 per cent (over the 12 months ending in October). This is down from a recent peak annual growth rate of 9.7 per cent in February.

The 0.1 per cent fall in Sydney home values was the first monthly decline since January 2023, following a short sharp 12.4 per cent drop in values between February 2022 and January 2023.

Weaker conditions have been led by the most expensive market areas, with a 0.6 per cent fall in upper quartile house values over the month, and a 1.1 per cent drop over the past three months. In comparison, Sydney’s lower quartile house and unit values both recorded a half a per cent rise in values in October.

Affordability issues are seeing buyers and investors focus in on the lower priced end of the market.

While the mid-sized capitals are still leading the pace of value growth, these markets are also losing momentum. Perth continues to lead the nation with a 1.4 per cent rise in values over the month, but this is well down from the growth seen over the February to June period when monthly gains were averaging more than 2 per cent.

Adelaide values have risen by more than 1 per cent each month since March, but conditions look to be slowing here as well with October’s 1.1 per cent gain marking the lowest monthly rise since June. Brisbane’s monthly gain of 0.7 per cent was the lowest since July.

Reverse mortgages: Could they work for you?

If you’re over 60 and own your home, a reverse mortgage could let you tap into some of that hard-earned equity without selling up or moving out. But reverse mortgages do have their cons as well as their pros, and they might even have a long-term impact on your finances and family.

I always talk about the magic and power of compounding interest on savings ... when you save over the long term, your balance gets the benefit of earning interest on previously earned interest. It’s a big boost to your savings.

But compounding debt interest can be dangerous if you’re unaware of the consequences.

Having said that, here’s why reverse mortgages might make sense - or not - for your current financial situation.

What is a reverse mortgage?

In simple terms, a reverse mortgage is a loan that lets you borrow against the equity in your home - without needing to make regular repayments. Instead, the interest builds up over time and is only paid back when you sell your home, move into aged care or pass away.

Exactly how much you can borrow will be dependent on things like your age, the value of your property, your lender and a few other details. If you’re 60, for example, then you might be able to access around 15–20 per cent of your home’s value; at 65, you might be able to borrow around 20–25 per cent.

Here’s where it gets interesting: you can choose to take the loan as a lump sum, a regular income stream, a line of credit or a mix of these. Having a bit of flexibility can help cash flow and fund things like medical expenses, renovations or even give your regular income a boost - without the hassle of moving house.

Why would you consider a reverse mortgage?

If you’re retired and finding that your super or pension just aren’t enough to cover your living expenses, a reverse mortgage might be able to help ease the strain. Many retirees simply downsize to a smaller home and bank the profit on the changeover. But there are some who want to stay in their own home and that’s where reverse mortgages can be an option.

It’s appealing if you want to stay in your home but need have a little bit more cash on hand for your immediate needs - whether that’s healthcare, making the home more comfortable, supplementing your lifestyle or something else entirely.

Let’s say you need some funds to pay for home modifications or to cover medical bills. A reverse mortgage can give you the flexibility to get the cash you need while continuing to live in your home. Plus, there’s the bonus of negative equity protection on all reverse mortgages issued after September 2012, meaning you won’t owe more than your home is worth.

And that’s the big issue. The reverse mortgage loan could end up eating away all the equity in your house.

So don’t jump in just yet. Reverse mortgages aren’t for everyone.

Pros and cons of a reverse mortgage

Reverse mortgages could be the retirement lifeline you’ve been searching for – but they’re not without their downsides. Make sure you look into both the advantages and disadvantages:

Pros:

• No regular repayments: You don’t have to make any monthly repayments while you’re living in your home, meaning your cash flow is free.

• Flexibility in pay outs: You can choose how you want to receive the funds: lump sum, income stream, line of credit, etc.

• Stay in your home: Unlock your home’s value without having to sell or move, which is a huge plus for many retirees.

Cons:

• Compounding interest: Interest is charged on the loan amount and compounds over time, meaning your debt can grow quickly.

• Impact on pension: Depending on how you use the funds, a reverse mortgage can affect your Age Pension eligibility, so make sure you check with Services Australia before making a decision.

4 important questions to answer

1. Do I have other options? Before committing to a reverse mortgage, think about whether there are other ways to access cash. Could you be eligible for government benefits, a no-interest loan or even consider downsizing? A reverse mortgage should generally be a last resort, as the compounding interest and long-term debt can catch up with you pretty quickly.

2. How will it impact my family and inheritance? Taking out a reverse mortgage affects your estate, which means it’s worth having a frank chat with your family before signing on the dotted line. Explain how it works, and chat about the potential impact on their inheritance.

3. What are the long-term costs? Because interest compounds over time, even a small loan can balloon out if left unpaid. Lenders should give you a projection of how the loan will affect your home equity over time, so take this to a financial advisor and go over it in detail before making a decision.

4. Should I speak to a financial advisor? Yes, it’s well worth seeking out independent financial and legal advice. A financial advisor will walk you through how the loan could impact your future expenses, while a lawyer will help you make sense of the contract terms and fine print.

If you are considering a reverse mortgage, take your time, get expert advice and make sure it’s the right choice for your financial future. After all, retirement should be about enjoying life - not worrying about your finances!

The bald facts …

Given my personal follicle challenges, I found this graph interesting. It shows the percentage of bald men by country, and Australia is in the top 10 of the global leaders!

Interesting, don’t you think? Or maybe only to us who are hair deficient. I do love a graph, whatever it is, and this one makes me feel better 😊…

Have a great week, everyone.