needs v wants

at the Gold Symposium a few weeks ago, it was stated that you should expect to see inflation in the things you need and deflation in the things you want. Cars and white goods and plasma TVs are getting cheaper in a world with excess productive capacity and over production. But where the rubber meets the road in daily life for billions of people, inflation is pushing up food and fuel prices.

Blowout

The Federal Government is expecting a bigger budget deficit this financial year than originally forecast.
The updated budget papers predict a $41.5 billion deficit, which is almost $1 billion more than the July forecast.
Key points: Budget to return to black in 2012/13 with $3.1b surplusProjected budget surplus in 2012/13 down $400mBudget deficit to increase to $41.5b in 2010/11Unemployment rate to fall to 4.5% by June 2012
Treasurer Wayne Swan's release of the Mid-Year Economic and Fiscal Outlook (MYEFO) confirmed predictions that a rising Australian dollar would hinder the Government's bottom line.
But while the 2010-11 budget forecast has blown out, the Government is still on track to return a surplus of $3.1 billion in the 2012-13 financial year.
This compares with the $3.5 billion predicted by Treasury and Finance in the Pre-election Economic and Fiscal Outlook (PEFO) released in July.
The economic update also shows employment conditions will continue to strengthen, with the jobless rate falling to 4.5 per cent by 2012.
A return to surplus by 2012-13 was one of the Labor Government's key election pledges.
Mr Swan says it is the fastest positive turnaround in the budget in more than 40 years.
And he says the Government is determined not to repeat the mistakes of the past.
"We put our fiscal rules in place in February last year because we understood that as we moved to strengthen the economy we had to formulate the exit strategy for the future," he said.
Mr Swan says he is optimistic about Australia's economic future.
"A strong economy is an economy that creates jobs, creates opportunities for people," he said.
"What they (the figures) represent is hundreds of thousands of more Australians in work.
"To be coming back to surplus in three years, well ahead of any other major advanced economy, is something that we should all be optimistic about."
Mr Swan also defended changes to the revenues generated from the minerals resources tax.
He says the revised forecast for the tax relates to the change in the exchange rate.
"What we're dealing with is solely here the exchange rate effect. That's why tax [revenues] overall are down about $10 billion. It largely reflects lesser company profitability," he said.

fiat currency

when a countries economy is backed and based on a fiat currency, that is one that has no real value other than the paper its printed on without an intrinsic physical value then this currency becomes useless and when the population registers this in their consciousness and devalues it in their mind, then the country faces financial and economic ruin. this is where america is now. the empire is crumbling at the foundation, the chain reaction was started quite some time ago and will now rapidly deteriorate

AUS $

Mr Swan told Saturday AM the Government will lose billions in revenue because of the high value of the Australian dollar. He says profits for Australian exporters will fall and this will have consequences for the Government's tax take."There's no doubt we're going to cop a fairly significant whack to our revenue in the mid-year budget update, that's just the reality of having a higher dollar," he said."The Australia dollar has appreciated by around 15 per cent against the US dollar in recent months. What that does is really hit the profitability of our exporters and as a result of that is reduces companies and resource taxation."Some estimates say the Government's mid-year economic outlook - due within days - will show a $10 billion loss in revenue over the next four years.Mr Swan would not confirm that number, but says the impact of the lost revenue will be significant."None of that alters our determination to continue the budget discipline that we've put in place over the past couple of years and to make sure that our public finances remain the strongest in the developed the world," he said.

Big banks and Aus economy

A "sound financial system" is a big reason Australia had one of its "mildest" recessions in the post-War period while the US and several European countries had one of their "most serious", Reserve Bank of Australia governor Glenn Stevens said in April.
One is a cooling housing market. After rising for 16 consecutive months, capital city house prices were virtually unchanged in April, according to the RP Data-Rismark Hedonic Home Value Index. Weak demand for home loans – the number approved in April was the lowest since March 2001 – suggests other capital cities might soon follow Brisbane, Perth and Darwin, where prices are already falling.
If this happens, bank profits are sure to follow. Why? Because the share of home loans in banks' total lending stands at 58 per cent, according the RBA. Falling house prices spell fewer buyers, borrowing less and paying banks less interest.
If they fall enough, house prices can drag down an entire economy. This is what happened in the US in 2006 when falling prices led to a jump in the number of Americans unable to pay their mortgages and, a year later, a sharp rise in unemployment. The newly jobless swelled the ranks of defaulters until the losses tipped thousands of US banks and mortgage firms into bankruptcy and the global financial system into crisis.niversity of Western Sydney economist Steve Keen can see something similar happening in Australia. He says households are so indebted – the ratio of mortgage debt to gross domestic product has quintupled to 85.7 per cent over the past two decades – they can borrow no more."Our current level of economic performance is dependent on an increasing level of debt to GDP," Keen says. "As soon as you have a stabilising, which we are seeing now, then you are in trouble."
The head of the RBA's financial stability department, Dr Luci Ellis, counters that the recent US experience is historically anomalous. "Financial crises are normally sparked by other sources," she told a conference in May. "These [sources] include commercial property, property development, leverage buyouts, sovereign debt and so on."Which is why the developing sovereign debt crisis in Europe provides a second reason to worry about local banks. While the big banks have little exposure to European governments in difficulty, the RBA's Stevens concedes the most important effects in Australia will come through "the impact on world and Asian growth, on resource prices and on the cost and availability of global capital"."A collapse in China – or even a global slowdown – will have an impact on the economy, Australian income growth, and that would certainly feed into house prices," Australian School of Business researcher Glenn Otto says. "The impact of unemployment is also crucially important for house prices; an economic shock pushing up unemployment would have even more consequences for house prices."While few economists are as pessimistic, most agree the big banks are now too big for any government to let fail. "They are all too systematically important to fail," real estate funds manager Rismark's managing director, Christopher Joye, says. "That is one reason why taxpayers offered the major banks deposit and liability guarantees during the GFC."
Fortunately, they did not have to draw on those guarantees. But what if they do in the future? Is the government's balance sheet big enough to cover the big banks' deposits and liabilities?"The Armageddon outcome would be the complete implosion of the banking system if taxpayers were not there to backstop institutions in the case of a crisis, which could cause extreme credit rationing and precipitous price falls," Joye says.According to a former chief economist of the International Monetary Fund, Simon Johnson, Australia's big banks pose a bigger risk to the economy than the biggest US banks do. Johnson thinks no single bank should own assets (mainly housing, small business and corporate loans but also derivatives and other investments) worth more than 4 per cent of a country's economic output.
Yet NAB owns assets equal to 54 per cent of Australia's GDP, followed closely by CBA 51 per cent) and Westpac (49 per cent).Even the bank with the fewest assets, ANZ (42 per cent) is almost three times the size, in relative terms, of the biggest US bank, Bank of America (which owns assets worth 15.6 per cent of US GDP)."One of the lessons of the global financial upheaval was that sometimes simple is best – and mutuals are very sound, with straightforward balance sheets, conservative funding, high-quality assets and high capital," she says. "Global collapses and bail-outs were about very big, very complex, aggressive and 'creative' institutions."For this reason, Rismark's Joye is more concerned about the overseas expansion of ANZ and NAB than he is about a collapse in house prices."The major banks' peers in the UK and Europe had far greater direct exposures to the US sub-prime crisis through their overseas expansion strategies," he says."My single greatest concern with the major banks right now is their offshore expansion plans, which directly undermine their greatest source of strength during the GFC."Like Joye, Keen is also cool on a size cap, believing banks would successfully lobby it away during stretches of economic and political stability. He favours a cap on the size of home loans instead – equal to 10 times the rental income from a property – and other measures to reduce demand for credit in the first place.Of course, the failure of a big bank is still an unlikely, if no longer a preposterous, idea. According to John Laker, chairman of the Australian Prudential Regulation Authority (APRA), the main bank regulator, the big banks would survive a Chinese and global economic downturn severe enough to raise unemployment to 11 per cent and lower house prices by 25 per cent.However, as Laker admits, a future downturn will "not play out as specified" in APRA's so-called "stress-test". "It is just one of a myriad of future possible outcomes," he said in early June.Among clear lesson of the global financial crisis is that the unlikeliest outcomes become possible in a crisis. After all, the best computer models said US house prices would fall by 20 per cent only once every 10,000 years.

OECD says rate rise for Australians

A global economic research body has warned Australians that interest rates will rise by up to 1.2 percent in the coming year.In its global economic outlook, the Organisation for Economic Cooperation and Development (OECD) said that while there are risks to the Australian economy from the current crisis gripping European markets, the Reserve Bank will push interest rates up.The OECD says official interest rates wil rise from their current 4.5 percent to 5.7 percent by June 2011.That would likely push real mortgage interest rates towards 9 percent.However, Australian economists are calling for the RBA to pause after its raising rates six times since October last year.The OECD has warned that there are negative risks to Australia's rosy economic outlook from the uneven pace of the global recovery and volatility in financial markets.It says there are substantive risks related to sovereign debt markets which, while originating in some euro-area economies, has spread to other euro members and other parts of the world."Overheating in emerging market economies also poses a risk," it says."A boom-bust scenario cannot be ruled out, requiring a much stronger tightening of monetary policy in some non-OECD countries, including China and India."For Australia, it also says rising confidence and more favourable international trade conditions may lead to more buoyant demand that needs a more rapid rise in interest rates.These risks aside, the OECD expects the Reserve Bank of Australia (RBA) will in any case have to add to its six rate rises so far."After weathering the crisis well in 2009, the Australian economy is projected to experience strong growth in 2010 and 2011, above its trend rate," the OECD says.It is forecasting economic growth of 3.2 per cent in 2010, accelerating to 3.6 per cent in 2011, after 1.4 per cent growth in 2009.This growth will be driven by booming exports and domestic demand.It expects the unemployment rate - currently at 5.4 per cent - to fall below five per cent by the end of 2011, while inflation will be moderate.This, it says, will keep confidence among households at high levels, although the pace of decline in the jobless rate will slow as working hours expand.It expects the consumer price index to hit the top of the RBA's two to three per cent target band in 2010, before easing to 2.7 per cent in 2011.The Paris-based institution says for Australia, managing the exit strategy from the global crisis is "less problematic" than in most OECD countries, and the tightening of both monetary and fiscal policy is welcome given the rebound in activity.It says rising private demand, fuelled by investments and stockbuilding by companies, is expected to replace public demand as the main force driving the recovery in 2010 and 2011."Companies in the mining sector should benefit in particular from the dynamism force of Asian markets and the significant pick-up in the terms of trade," it says."These developments, coupled with the rise in real estate investments, are likely to improve the employment situation."Responding to the report, Treasurer Wayne Swan said it highlighted how Australia's economic growth and employment outlook were among the best in the OECD."The OECD report is a reminder of the strong economic management that has seen Australia fight off global recession and which is returning the budget to surplus three years early and halving peak debt," he said in a statement.Mr Swan also welcomed the OECD's observation that mining companies would benefit from Asian demand and an improvement in Australia's terms of trade.But he pointed out the underlying weakness in Europe was a threat to global recovery.

Land prices

The price of the average residential block of land has risen to a record high in the December quarter, a new survey says. The Housing Industry Association (HIA)-RP Data land residential report for the December quarter found the weighted median price of a vacant housing block increased by 2.2 per cent in the December quarter to $185,222.Over the year to December 2009, the weighted median land price rose by 14 per cent, the fastest annual rate since mid-2004, the report said. HIA chief economist Harley Dale said land values rose substantially quicker than building costs and the rate of inflation during the previous upturn in the housing cycle. Dr Dale said new house prices (excluding land) rose by an annual rate of 2.8 per cent in December 2009, building materials increased by one per cent, yet median land prices increased by 14 per cent."Only six months into a new home building recovery this situation is happening all over again," Dr Dale said."If this situation continues then the recovery will stall, the housing shortage will worsen, and there will be upward pressure on rents and on existing home values that could have been avoided."Sydney had the dearest median price of residential land in Australia, $275,000. This report has obviously not taken into consideration the ACT where land prices are well over $350,000.The cheapest market in Australia was the northern region of South Australia ($59,165), followed by Mallee in Victoria ($75,000).RPData.com national research director Tim Lawless said policy makers had to act to arrest the recent drop in the number of land sales."With Australia's population growing at a rapid rate and housing undersupply worsening we should be seeing land releases and consequent sales volumes rising not falling," Mr Lawless said."... without further construction of homes we are likely to see affordability worsen and more prospective buyers looking towards an already very tight rental market for their accommodation requirements."We believe that policy markers must act to provide additional residential land which affordable as well as being close to necessary amenities."

Goldman Sachs accused of fraud

17/04/2010 2:12:21 PM

The US government has accused Wall Street's most powerful firm Goldman Sachs & Co of fraud. They sold mortgage investments without telling the buyers that the securities were crafted with input from a client who was betting on them to fail, which they did to the tune of $US1 billion ($A1.07 billion).A hedge fund, capitalised on the housing bust. The civil charges filed by the Securities and Exchange Commission are the government's most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession.The news sent Goldman Sachs shares and the stock market reeling as the SEC said other financial deals related to the meltdown continue to be investigated. It was a blow to the reputation of a financial giant that had emerged relatively unscathed from the economic crisis but who continued to play the same games that brought down the US economy in the first place

The fraud allegations focus on how Goldman sold the securities. Goldman told investors that a third party, ACA Management LLC, had selected the pools of subprime mortgages it used to create the securities. The securities are known as synthetic collateralised debt obligations.

The SEC alleges that Goldman misled investors by failing to disclose that Paulson & Co. also played a role in selecting the mortgage pools and stood to profit from their decline in value. Two European banks that bought the securities lost nearly $1 billion, the SEC said. The global game continues."Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party," SEC Enforcement Director Robert Khuzami said in a statement.

economy and property

The Australian economy has returned to debt-driven growth, with the household sector carrying the full burden for the private sector. Will this period of debt-driven growth last as long as in previous bubbles when our private debt to GDP ratio was half what it is today?
Banks & mortgage lenders have been biggest beneficiaries as mortgage debt has risen from under 20% of GDP in 1990 to over 85% at end of 2009.
So how does Australia keep house prices high? By encouraging households to get into yet more debt.The rise against GDP is far more dramatic than against household disposable income because other government policies—the stimulus package itself and the RBA’s 4% cut in interest rates—boosted disposable income dramatically in 2009 (but even so, mortgage debt is now a higher proportion of household disposable income than before the GFC). The Boost-inspired house price bubble was financed by households adding another 6% of GDP to their already unprecedented debt burden, when prior to The Boost they were on track to reduce mortgage debt by about 3% of GDP in 2009.We’ve avoided hitting the ground of deleveraging by climbing to a higher cliff but stepping off the cliff will eventuate unless there is a totally new solution to the dilema. Saying all this we have Grace on our side because we are still an expanding relatively new country with a growing population that does need a place to live.
Australia’s still unburst bubble drove the real price of housing to 140 percent above the level of June 1986–that is, real house prices are now 2.4 times what they were in mid-1986
Australia's Debt Bubble has kept going while other countrie's have already popped is the same old reason-debt. This is the biggest debt bubble in our history. The previous two record highs were in 1882 at 104% of GDP, and 1931 at 77% of GDP. Record debt is 158% as of March 2008.
large reason why Australia has had such a mild GFC so far is because Australian households were enticed back into debt by the First Home Vendors Boost, and by the impact of the Government stimulus package upon household disposable incomes.Households were reducing their mortgage exposure prior to the introduction of The Boost: mortgage debt had peaked at 81.3% of GDP in June 2008, and was trending down prior to the Boost. It then hit a bottom of 80.3% in December 2008 before rising to an all-time high of 86.8 in January 2010.The change has been less extreme when mortgage debt is measured against Household Disposable Income (HDI), since the Australian government’s stimulus package and the interest rate cuts by the RBA boosted household incomes by almost ten percent last year. As a result, mortgage debt fell only slightly as a percentage of HDI, from 133.6% to 130.3%, and it took longer to fall. But ultimately, even though incomes had been boosted so substantially, the increase in mortgage debt last year finally exceeded the increase in incomes: by January 2010, the mortgage debt to HDI ratio had hit a new peak of 134.2% The overwhelmingly important reason why this happened is the policy that the Government called the First Home Owners Boost.

Gearing and Super

ONE way to get around the non-concessional contribution caps for superannuation is to use gearing. Under super tax rules, to avoid paying excess contributions tax of 46.5 per cent, you are allowed to contribute only $150,000 a year in non-concessional contributions. However, you can utilise a three-year cap by making a one-off contribution of up to $450,000 if you are under 65 and then not contributing any more than that for another two years.So if you have a commercial property worth more than $450,000 that you want to transfer into your self-managed super fund through an in-specie contribution, you could run into difficulties.By using gearing, however, you can borrow the value of the property either from a financial institution or from yourself or your business at a commercial rate.This is because whatever you borrow is not included as a contribution provided the borrowing arrangement complies with the conditions set out in the law.In fact, you can borrow as much as the fund can service. It's worth noting, however, that most commercial lenders apply an interest cover ratio where the fund's investment income must be a set multiple of the interest cost of the loan. Failure to meet this ratio may give the lender the ability to call on the loan.You can use this strategy to bolster your superannuation balance, regardless of what you make in non-concessional contributions.Of course, gearing into superannuation is not for everybody. Whether it's to invest in shares, property or works of art, it's a complex process that requires sound financial advice and a cost-benefit analysis to make sure it's the optimum route for your circumstances.And it is not cheap either, with estimates running into the thousands of dollars just to establish the loan. Additional costs may include legal advice to establish proper trust and other arrangements, transaction and stamp duty costs and asset administration fees. The importance of establishing the loan and trust arrangements properly cannot be understated as there may be unnecessary capital gains tax and-or stamp duty costs if you don't.Before 2007, superannuation funds were not allowed to borrow to purchase assets. However, uncertainty about whether instalment warrants and instalment receipts involved borrowing meant there was a need to change the legislation.The new rules not only allowed SMSFs to invest in more traditional instalment warrants and instalment receipts generally involving shares, but also in non-traditional instalment warrant arrangements over such assets as property. However, it's important to be aware that the normal investment rules that apply to SMSFs also apply to investments that are purchased using an instalment warrant borrowing arrangement. For example, you cannot make an in specie contribution of a residential property into the fund although you are at liberty to buy residential premises on the open market as long as it is not purchased from yourself or a related party.However, a number of grey areas in the treatment of instalment warrants within super have proved a deterrent to gearing in SMSFs.Last month, the government moved to clarify how instalment warrants will work, particularly in relation to capital gains tax.When an SMSF buys a property or shares through an instalment warrant, it has to set up a separate trust. This separate entity is known by a variety of names: a bare trust, a security trust, a warrant trust or a debt instalment trust. They are basically all the same thing.
If your fund were buying a property under an instalment warrant arrangement, it must be held in the trust until the debt is paid in full, at which point it is transferred into the SMSF. The grey area was always whether that transfer triggered capital gains tax.But last month, Financial Services, Superannuation and Corporate Law Minister Chris Bowen announced an amendment to the tax law so that a superannuation trustee entering into a limited recourse borrowing arrangement to purchase an asset would be treated as the owner of the asset for income tax purposes."The changes will ensure that trustees to superannuation funds who have entered into permitted limited recourse borrowing arrangements will not face CGT obligations at the time the last instalments are paid," Bowen says.Another grey area was whether the super fund trustee or the instalment warrant trustee should be the one to declare any income earned on an asset.The latest announcement confirms it is the super fund trustee who should declare the income. And equally, the fund can claim a tax deduction from earning that income."If structured properly, it will look as though the investment trust does not exist," says Philip la Greca, technical services director at Multiport. "Income flows through to the fund; dividends and depreciation flow through to the fund. It looks as though the fund owns the asset directly."La Greca goes on to say the issue of CGT has been a big concern given that an asset held for five or 10 years could have a reasonable capital gain.Another issue is stamp duty, which, rather than being a federal tax like GST and CGT, is administered by the states and territories. Generally speaking, however, the transfer of a property from a bare trust to an SMSF should be exempt.The recent announcement also brought gearing property into SMSFs into the framework of financial products.As a result, providers have to be licensed. In the past, real estate agents and property developers had been promoting the strategy and this has caused some concern. The move to licensing underlines the importance of having sound financial advice to ensure the strategy is right for your SMSF's circumstances.A downside of having property in your SMSF is that not only is it an illiquid asset but it can also be a large chunk of your fund's investments.What would happen, for instance, if one of the members of your SMSF were to die early and the fund had to make a payout?Deb Wixted, head of technical services at Colonial First State, says in such circumstances it could take time to unwind the arrangement and could be expensive.She also comments that although the latest government announcements have cleared up a number of issues, there is still a lot of scope for interpretation."The Australian Tax Office is still sifting through the issues, so what you do now could still be called into question in the future," Wixted says.But there are other positives in gearing, not least that if the fund still holds the property when it enters the pension phase there will be no capital gains tax payable on the sale of the property. But the wisdom seems to be that the gearing should be well and truly completed by then, otherwise you may have problems with cashflow at the time you may be needing to draw an income out of your super on which to live.Another plus is that once you are in the pension phase, the rental income will no longer be tax assessable, although that also means the interest costs won't be deductible.Of course, gearing into super is not all about property. Indeed, most reports are that while there are plenty of inquiries about borrowing to buy property within super, very few actually end up going down that road.Far more popular is the use of instalment warrants for direct share purchases or to invest in managed funds, although with the latter it may be simpler to invest in a geared managed fund rather than have your SMSF undertake the gearing.Graeme Colley, national technical manager at ING Australia, says borrowing to buy shares in your SMSF means the fund can enjoy the benefits of franking credits. With fully franked dividends taxed at 30 per cent already and your SMSF only paying 15 per cent tax on its earnings, the fund can use the 15 per cent difference to offset other income in the fund.And if you are gearing into these shares, then, assuming the market remains positive, you benefit from the extra exposure. Of course, if shares tumble then you will take a bigger hit.On the shares front, Macquarie, for example, has Equity Lever, which allows you to get leverage in an SMSF.Peter van der Westhuyzen, head of sales and marketing at Macquarie Margin Lending, says Equity Lever has been on the market for some 18 months and has enjoyed strong support."Equity Lever gives you increased investment size in a tax effective environment along with diversification," van der Westhuyzen says. Just as the banks want a low loan-to-value ratio when customers are borrowing for property, the LVR for Equity Lever is below 50 per cent.The initial investment can be as low as $20,000 but the interest rate on the product is 9.55 per cent. borrowing to invest, whether inside or outside super, can be fraught.But if the fund makes the right investment and can service the loan, you could be bolstering your super benefits.And given that superannuation payments are tax-free to those aged over 60 and there is no capital gain on assets sold when in the pension phase, it makes for a reasonably solid argument.If the limited recourse loans start to offer competitive rates of interest and the grey areas of gearing are cleared up, it may well prove an effective strategy for your SMSF.
Gillian Bullock From: The Australian April 14, 2010

GFC

While GDP certainly decreased during the GFC, Australia avoided sliding into an official recession. And while the unemployment rate rose (reaching a high of 5.8% in June 2009), those that retained employment actually experienced an overall increase in disposable income.Many Australians are actually in a better position now than before the downturn – what with significantly lower interest rates (currently at 4%, compared to 7.25% at the start of September 2007) and greater national disposable income (estimated by IBISWorld to reach $194,500 in the March 2010 quarter compared to about $181,000 million in late 2007).Add to this lower fuel-prices (now at US$80 per barrel compared to US$145 per barrel in mid-2008) and it's not surprising that household spending has been relatively strong over 2009-10.

Where to from here?

Average Australian households remain better off now than before the GFC and the first home owner boost encouraged many Aussies to enter the mortgage market – meaning we are just as indebted now as pre-GFC. Interest rates, fuel and electricity prices have all risen and many Australian families will again feel the pinch this year and onwards.Nonetheless, conditions are forecast to continue to improve, with IBISWorld projecting that slow economic growth in the March 2010 quarter will be replaced by solid growth for the remainder of the year, as households continue to spend and businesses join the fray.IBISWorld also expects the unemployment rate to continue to trend downwards and, barring any reversal of the improving trend internationally, the Australian economy will remain strong for the foreseeable future.

John Edwards of Residex speaks

The markets across Australia are indicating that they have passed the first peak in a normal part of a growth cycle. For most capital cities this means that we will see a slowing in the rate of growth (but still growth) during autumn and winter and a move back to higher rates of growth in the second part of the growth cycle.

This second phase or part of the growth cycle is usually longer and stronger than the initial growth period. The cycle has moved to being more normal, with upper cost areas of the market now leading the way forward. This is as one should expect as confidence among the ranks of our executive and upper management groups become stronger. It will flow on to other areas as corporate profits improve and there is lower unemployment and some wages growth.

Slowing is evident from the number of slightly negative growth numbers in the month of February for houses. The relatively strong performance in the unit market is evidence that investors have become much more active.

Here are the house and unit market statistics for February 2010.

Houses
		Growth	Growth
Area	Median value	Feb 09 to Feb 10	10 year average
ACT	$501,500	9.45%	10.74%
Melbourne	$547,500	16.32%	10.16%
Brisbane	$469,000	6.52%	11.81%
Sydney	$634,000	13.28%	6.62%
Perth	$481,000	2.00%	11.67%
Hobart	$362,500	5.20%	11.98%
Darwin	$501,500	11.20%	11.28%
Adelaide	$400,000	7.95%	10.48%
Units
		Growth	Growth
Area	Median Value	Feb 09 to Feb 10	10 year average
ACT	$394,000	7.84%	10.98%
Melbourne	$422,000	16.39%	9.85%
Brisbane	$357,500	3.10%	10.36%
Sydney	$444,500	10.41%	6.00%
Perth	$391,000	7.27%	11.08%
Hobart	$277,000	9.01%	12.50%
Darwin	$410,500	17.02%	11.09%
Adelaide	$306,000	8.01%	11.57%

Darwin houses are at last taking a breather and the growth for the month was for the first time negative in more than a year. Its rental yield remains the highest of all capital cities and will cause further investor interest which will continue to drive prices but at a lower level given the cost of property which is now relatively high by comparison to the other opportunities. The cost of an unit investment here is now only very marginally lower than in both Sydney (8%) and Melbourne (3%).

Graph 1: Major Capital City Trends

Graph 1 Major Capital City Trends clearly shows that the market is now softer than it was in September/October 2009.

The auction clearance rate in Sydney last week was approximately 65% while the clearance rate in Melbourne was in the 80% range. The impact of the RBA to increase interest rates has been more noticeable in Sydney but is a reasonable outcome given the higher cost of housing and the larger mortgage position for most when you consider that Sydney has been more expensive over a longer period. The momentum and confidence of Melbourne property buyers in a city which is growing strongly is likely to carry its growth phase for longer than in Sydney. However, both cities are exhibiting a slowdown as we move into winter. In both capitals investors are active in the unit market and prices are moving forward.

Our other cities are also exhibiting a softening but it is not as noticeable as in the two majors (see Graph 1). Again, this result is probably an expression of the lower impact of unaffordability and the RBA´s move on interest rates. (see Graph 2 Minor Capital Cities Trends).

Graph 2: Minor Capital City Trends

I have recently been reading suggestions and arguments about a price bubble in Melbourne forming.

I can see no evidence of this. Yes, houses are too expensive across Australia but that position is unlikely to change for at least a decade as it will take that length of time for governments to correct the stock shortage issues.

Further our population needs to expand to satisfy the fundamental needs of a growing resource sector. Add to this – the recent breaking of the drought and it is clear that Australia is in very good shape with the population more likely than not to see growth in wages, and reductions in unemployment than anything else. Add to this – a banking network that is strong and has the capacity to continue to lend to this sector and needs to, to maintain profits and we have a recipe for moderate to good total returns from our housing assets. Please note that I speak of total returns as the affordability issue will lead to renting becoming more normal than in the past and creating moderate capital growth, but at the same time causing rentals to rise.

But I digress a little. The RBA interest rate increases are having a slowing affect and the data is clearly showing that the rate of growth is moving back a little. This in itself points to a "bubble" being avoided as the growth rate would need to be increasing for there to be the potential of any major problem. One last point on this; our more than 170 years of data tells us that capital growth rates in the last 60 years are less each cycle and hence as property becomes more expensive, bubbles become harder to create. Having said that, we have to bear in mind, any long period of moderate growth with excessive bank lending with higher leverage being allowed or encouraged can lead to problems if the economic circumstance of the country turns down.

Our banks are well controlled and governed so a rapid adjustment to our housing values to make them affordable looks very unlikely.

With the market moving to a normally quieter period during winter, it is a good time to identify opportunities. For me winter is the best time to purchase as there is less competition in the market and sellers at this time are usually more anxious. You probably have a better opportunity to negotiate that bargain, particularly in Melbourne.

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new banks entering the market

The decision by Credit Union Australia and AMP Bank to slash variable interest rates on home mortgages is good for the property market and will spur competitive activity, industry experts have said.The move by the two lenders came as Westpac chief executive Gail Kelly reportedly told a private briefing the bank would continue to raise interest rates due to cost pressures despite political pressure from Canberra.Credit Union Australia announced a 25 basis point cut in its variable rate to 6.37%, putting its products well below the interest rates offered by the big four banks. The closest competitor is NAB at 6.74%."We agree with the Treasury Secretary that the banking sector has become more concentrated over the last few years. There is a crying need for more competition and we are taking an active step in driving that competition," chief executive Chris Whitehead said in a statement."At the end of the day our profits go to our customers, not shareholders, in the form of investment in more competitive products and services. We are already a leader in the delivery of great service – this reduction in our SVHL rate means we are keen to take a leadership position in the products we offer as well."The statement comes as the property market is heating up. AMP Bank cut its rates late last week to 6.27%, while Aussie Home Loans also continues to finalise a $1 billion funding program in a return to the industry. Additionally, Macquarie Bank issued nearly $500 million worth of low-doc loans earlier this week.CommSec chief economist Craig James says he was a little surprised by the move, but says it makes sense as more players fight for the lower-end of the market."I think it's a move which has grabbed a lot of attention and I feel CUA will win a little bit of market share out of it. When you see Macquarie getting into the game again with low-doc loans, I think it shows there are more players coming into the market.""Economically speaking, it isn't a surprise, and if it's true that the banks are starting to gouge, the barriers to entry will remain high and give these lenders somewhere to move. There is a new context for the new players, and it's a good thing for the market which may make the banks watch their backs a little more."SQM Research founder and Advisor Edge property researcher Louis Christopher says the broad message of these cuts indicate the market is moving into a more competitive state, indicating a good time for investors to enter the market."The good news for borrowers is that there is now a lot of choice, and it's merely a case of doing your homework on these sorts of things. Certainly the expectation is that rates will continue to rise rather than fall, and people need to take that into their outlook. Also consider it may be a competitive deal now, but rates are going to rise no matter what.""But certainly in terms of the fact there is some competition, it is a good thing for the broader economy and borrowers, and has the potential to encourage other lenders and encourage greater growth."

Iron ore and world economy instability

Chinese Premier Wen Jiabao not only warned the world of a possible return to recession, but was subject to impassioned pleas by steel makers over the enormous price rises looming in iron ore. The Australian economy depends more than any other in the world on the Wen Jiabao forecast and the iron ore strategic discussions.Whether we have a global recession will depend in part on whether the world cost of money rises substantially as the US, European and other governments step up their borrowing. In turn, that will partly depend on how much of the global money demand China can fund.But when it comes to iron ore pricing, it is China that caused the problem and Wen Jiabao has made the first moves that may lead to a big fall. The spot market for iron ore is double the 2009-10 contract prices, so the Chinese are looking at a truly enormous rise in costs, which will flow right through the Chinese economy. That spot iron ore price increase was mainly driven by incredible spending by the Chinese on infrastructure and dwellings as part of their response to the global financial crisis. In turn, that forced the Chinese steel mills to pay big prices on the spot iron ore market to gain material to satisfy the demand.A lot of the Chinese infrastructure spending was very productive, but a vast amount was wasted. The Chinese have built empty blocks of apartments, roads and rail that they will not need for years.This took place because the bulk of the capital expenditure was undertaken by local governments. Imagine what would happen if our local councils or state governments had the ability to borrow virtually unlimited amounts of money. Almost certainly they would spend it to satisfy local vested interests. The Chinese behaved exactly as you would expect equivalent bodies in Australia to do.According to JPMorgan, Chinese local governments were responsible for some 80 per cent of the capital spending and therefore dominated demand for our iron ore and are the main drivers of the price rises. It is also a force fuelling overall inflation in China.Even though it is the wasteful spending that is causing the problem, reversing the policy will be hard. But Wen Jiabao has taken an important first step removing the guarantees that enabled the local councils to borrow. In theory at least, the central government will then have a much bigger say over what takes place, but slowing the economy means many jobs will be lost.The stance of BHP is that annual iron ore price talks are just too disruptive, but a switch to spot prices would see the price sky rocket. Gradually, Rio Tinto and Brazil's Vale are coming to a similar view although they are sensitive to the Chinese demand for certainty.But one way or another, iron ore pricing is going to be much more orientated to the spot price and/or other short term price mechanisms.If Wen Jiabao is successful in curbing the expenditure of the local governments, then we will see a significant fall in the demand for iron ore late in 2010 or 2011, assuming current tasks are completed. Such forecasts have been made in the past and have been wrong as the demand for iron ore just keeps rising. But Wen Jiabao's prediction of a possible global recession is unprecedented.Both BHP and Rio Tinto believe that the Chinese growth story will not be a straight line graph and will have big variations. We will need to watch the curbs on Chinese local government work. And if the Chinese do pull back, Australia will bear a lot of the short term pain.

This article first appeared on Business Spectator.

Is there trouble on the horizon?

THE world's top central bankers began arriving in Australia Feb 6, 2010 as renewed fears about the strength of the global economic recovery gripped world share markets. Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet at a secret location, the Herald Sun reports.
Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies.
Speculation that the chairman of the US Federal Reserve, Dr Ben Bernanke, would make an appearance could not be confirmed.The event will be dominated by Asian delegations and is expected to include governors of the Peoples Bank of China, the Bank of Japan and the Reserve Bank of India.The arrival of the high-powered gathering coincided with a fresh meltdown on world sharemarkets, sparked by renewed concerns about global growth and sovereign debt.
Fears countries including Greece, Portugal, Spain and Dubai could default on debt repayments combined with disappointing US jobs data to spook investors.Australia's ASX 200 slumped 2.4 per cent, to its lowest close since November 5, echoing a sharp fall on Wall Street.Asian share markets were also pummelled, with Japan's Nikkei 225 down almost 3 per cent and Hong Kong's Hang Seng slumping 3.3 per cent.The damage was also being felt by European markets last night with London's FTSE 100 down sagging 1 per cent in early trade.Sovereign debt fears rippled through to the Australian dollar which was hammered to a four-month low of US86.43 and was trading at US86.77 cents last night."This does feel like '08 and '07 all over again whereby we had these sort of little fires pop up and they are supposedly contained but in reality they are not quite contained,'' said H3 Global Advisors chief executive Andrew Kaleel."Dubai should have been an isolated incident and now we are seeing issues with Greece, Portugal and Spain.''
It wasn't all bad news with the RBA yesterday upping its Australian growth forecasts and flagging more interest rate rises this year.The central bank estimates the economy grew 2 per cent in 2009, and will expand by 3.25 per cent in 2010, and by 3.5 per cent in 2011.
The outlook for global growth is likely to be a key theme of the high level central bank talks.
The gathering also comes at an important time for the BIS as it initiates an overhaul of the global banking system which will include new capital rules applying to banks and more stringent standards regulating executive pay.A key part of the two-day talkfest will be a special meeting of Asian central bankers chaired by the governor of the Central Bank of Malaysia, Dr Zeti Akhtar Aziz.Influential BIS general manager Jaime Caruana is also expected to take a prominent role in the talks.Federal Treasurer Wayne Swan will address the central bank officials at a dinner on Monday night. On the Australian market 31 billion was wiped off as the all ords plunged by
2 1/2%
In addition:
EUROPE'S top central banker Jean-Claude Trichet yesterday cut short his visit to Australia as fears intensified in global bond markets that Greece, Portugal and Spain would default on sovereign debt this year and trigger a new financial crisis. Mr Trichet, the president of the European Central Bank, left a meeting of central bank governors in Sydney a day early to attend an emergency summit of European Union leaders later this week. His sudden departure came as risk premiums continued to blow out on bonds issued by debt-laden European governments such as Greece, Portugal, Italy and Britain. Mr Trichet arrived in Sydney at the weekend where he had high level talks with the governor of the People's Bank of China, Dr Zhou Xiaochuan.
European financial leaders are agitating for China to invest in bonds issued by troubled European countries in an effort to head off a regional financial crisis in the region.Rumours last week that China was set to invest in southern European sovereign debt triggered a rally in Greek bonds, but this was short-lived after the speculation was rejected by officials. Without support from China it is doubtful whether Greece will be able to refinance 54 billion ($A79 billion) of debt due this year.Global equity and money markets have come under extreme pressure in the past two weeks as worries of a second wave financial crisis have gripped traders.The Dow Jones index slumped almost 8 per cent since January 19, while falls on European markets have been more severe.Australia's $65 billion Future Fund yesterday moved to allay concerns that it had significant exposure to Euro-zone bonds after its general manager Paul Costello appeared before the Senate estimates committee.Mr Costello said the Future Fund was not holding any bonds issued by countries such as Spain and Portugal.
The rising risk of government defaults is believed to have figured prominently in the deliberations of central bankers in Sydney on Sunday and Monday.But the outcomes of those high-powered meetings have been kept secret by participants, which included Mr Trichet and representatives from 24 central banks.One of the key players in the meetings was the general manager of the Bank for International Settlements, Jaime Caruana, who is scheduled to speak in Melbourne today.The BIS is developing a new regulatory framework for the global banking system, which also covers new remuneration principles on executive pay.In a speech given yesterday at a symposium organised by the Reserve Bank of Australia, Mr Caruana said that some central banks were not properly equipped to maintain financial stability in their banking systems.

To raise rates or not?

Economists believe a rate rise next week is a near certainty after a rise in the cost of living in the final three months of last year. Australia's headline consumer price index (CPI) rose 0.5 per cent in the December quarter, for an annual rate of 2.1 per cent, the Australian Bureau of Statistics (ABS) said on Wednesday.Fruit, holidays, beer and house prices all rose, but were offset by lower petrol prices (lower petrol prices?gee folks, I must have missed that one!). Electrical goods and pharmaceutical prices also fell. The trimmed mean CPI rose 0.6 per cent in the December quarter, for an annual growth rate of 3.2 per cent.The weighted median CPI rose 0.7 per cent in the December quarter, with an annual rise 3.6 per cent.The median market forecast was for the headline CPI to have risen by 0.4 per cent in the December quarter, for an annual pace of 2.0 per cent.Economists had expected the average of the two underlying measures of inflation to rise by 0.6 per cent in the December quarter, for an annual pace of 3.35 per cent.The ABS calculates the trimmed mean and weighted median measures on behalf of the Reserve Bank of Australia (RBA), which uses them to gauge the underlying trend in inflation.
Unlike the headline CPI, the RBA's underlying measures are subject to revision due to the seasonal adjustment of some of their components.The RBA is still likely to raise official interest rates next week, economists predicted. (yeah, so what's new?)Commsec senior economist Craig James said the headline result was above than market expectations, albeit not substantially higher.The good news was that the annual growth rate of CPI inflation was within the RBA's two to three per cent target band, he said."If there is any risk, it is that it could end up bottoming out right at the top end of the band or slightly above, so I think on balance the Reserve Bank will increase interest rates in February," he said.But a rise in the cash interest rate after the bank's board meeting, to be held next Tuesday, was by no means certain."The Reserve Bank will be using a lot of strategy in terms of looking at interest rates over the next few months," he said.
"It may decide to wait in February and look at a bit more evidence on the economy." (yes! please do that. allow people a breathing space, recovery is slow and uncertain. don't blow it for Australia's economy, RB)Interest rates in Australia remain well below long term averages.
Mr James said the high point for the cash rate, currently at 3.75 per cent, in 2010 would probably be somewhere between 4.75 and 5.00 per cent."I don't think that's under threat, but clearly there's a lot of things the Reserve Bank has got to juggle in its own mind - things like the special stimulus being applied from tax breaks, the [federal] government's assistance payments and what the cessation of those measures is likely to do to the economy," he said. (yes! they need to look at how the tax breaks have eased the situation and how an increase in rates will make things so much more difficult)"I don't think the (latest result) is going to stop the Reserve Bank lifting rates up to more normal levels."He said inflation at this stage looked "reasonably controlled," but could creep higher if the economy picked up steam amid strong employment growth.The trajectory of rate increases throughout the year was still "an open question," he said.ICAP senior economist Adam Carr said he could not see how the RBA could pause on raising interest rates at its next board meeting on February 2."We are not looking at a subdued inflation backdrop," he said."We're looking at a situation where although core inflation is moderating, it's not really going down fast at all."It's grinding lower and going into what could be a very strong recovery."It's very dangerous to have core inflation well and truly above the target, or even at the top end of the target, so for a forward-looking central bank with an existing stimulatory policy setting I think they will be compelled to hike by 25 basis points."Mr Carr said the prospect of an interest rate pause by the central bank in March was "questionable"."There's no automatic resting point for the RBA."I think that's a misunderstanding by people in the market."He said the underlying inflation figure was the main driver for the RBA to lift interest rates next monthMr Carr predicted inflation would not fall much below three per cent by the end of the year."I think we will be at three per cent by the end of the year, notwithstanding RBA rate hikes."He forecast the RBA would lift interest rates by 100 basis points by the end of 2010. staff

'Mingles' and investment properties

What is a 'mingle'? Glad you asked. A mingle is the middle-aged single person from the baby-boomer generation as a social group which is becoming a force to be reckoned with in our property markets. So yuppies and dinks, make way for the "mingles" because here we come!
Mingles are single, independent and know what we want and probably have pets.
So what does this mean for the property investor? This means an increasing demand for smaller houses, units and pet-friendly apartments. While more 45 to 59 year olds are choosing this life style, some mingles do not live alone by choice but by divorce or the death of a partner.
Taken from Michael Yardleys article:
In 1976 the number of Australians in this age group who were single was 381,000," Salt says. "These mingles broke down into three more or less equal categories -- the widowed, the separated and divorced and the never married. The latter group would have contained most of the gay community in this age group at that time."Over the quarter of a century to 2001, the mingles managed to multiply to 834,000. In an era when the middle-aged population has increased by 66 per cent, those ensconced in singledom soared by 119 per cent."But some categories have multiplied faster than others.While the number of middle-aged widows of both genders shrank, the never-marrieds expanded. And the separated and divorced rocketed up in numbers by nearly 400 per cent to over 500,000.These half a million extra mingles underpin a huge demand for housing, so as a property investor it is interesting to understand the type of property that would attract these them.Unlike the young singles who are more likely to live in an inner city or near city high rise apartment, the mingles are more likely to prefer a smaller dwelling or a unit in the middle suburbs.
Remember these single baby boomers are not hermits. Many have a relationship, but they just don't want to live with another person. Particularly if they are recently divorced. Instead they prefer living with animals who require less emotional and physical “maintenance.”