$12 billion budget blowout

Small business advocates have delivered a mixed response to Prime Minister Julia Gillard’s announcement yesterday of a $12 billion budget shortfall, saying now is a good time to introduce some much-needed tax changes.The Australian Chamber of Commerce and Industry released a harsh response to yesterday’s announcement.

Head of economics and workplace relations Greg Evans said the latest writedown “puts the onus on the government to properly deal with spending”.

“Business is indicating that a major cause of uncertainty is the inability for the government to get its fiscal house in order and to set out a pathway back to surplus.”

“This has become our number one economic priority as without a sustainable budget there is no scope for the major economic reforms required such as delivering a tax system that promotes incentive and enables productivity improvements.”

“Further cuts to tax concessions and revenue can have a detrimental impact on that early boost to confidence.

just that little bit more.....

 it seems 90% of people quit when they are 90% of their way towards reaching a goal and why that last 10% of any goal is so hard to crack. The main reason we do this is actually not because the last 10% is too hard to crack, it is because we simply don't know when we are 90% of our way there. Let me explain.

Over the years I have observed that this phenomenom tends to take place when someone embarks on some serious undertaking, such as:

• Building a Property Portfolio;
• Growing a Business;
• Launching a Product into the Market;
• Maintaining a Personal or Business Relationship;
• Building a Working Career;

Whatever activity it is that we are undertaking, we often find at some point that we meet with stiff resistance towards what we are trying to achieve. This is usually when we start to doubt that we will ever achieve our goal, and quite interestingly it is usually around this time that we will find other "easier" and "better" ideas to start focusing our attention on and so gradually we start reducing the efforts we are expending towards our original goal. Using the above list as examples we can see how this would affect the following activities:

• Building a Property Portfolio: you may reach a point where you feel your portfolio is "stuck". About this time some "exotic" investment idea, that seems to be able to make a lot more money more quickly, will suddenly come to you and divert your attention and focus.
• Growing a Business: you may reach a point where you do not see much future in your business. Suddenly some other "easier" and "better" business opportunity will appear to make your original business seem even worse.
• Launching a Product into the Market: you may reach a point where it seems not many people want your product, then along will come some other "easier" and "better" products to convince you that you must have the wrong product.
• Maintaining a Personal or Business Relationship: you may reach a point where you don't think the relationship is working any more, then some other party or parties will appear who look much better than the ones you are in a relationship with.
• Building a Working Career: you may reach a point where you think you are in a dead end job, then a "better" job comes along to convince you to quit this one, then the cycle sets itself up to repeat not long after that.

All of this can occur because our mind is very powerful. It can bring to us what we really want to see. In the above examples, the way I interpret them all is that when a person is actually 90% "there", they usually meet with stiff resistance from the world around them as that last 10% tends to require a lot more focus than the previous 90% just to get the job done. In these situations, our mind starts looking for an easier way out instead of striving to crack that last 10%.

While you are in this "selective" looking mode, you will tend to only be able to see how easy it is for other people to achieve a better outcome by not doing what you're doing. You can end up completely ignoring the fact that there are people who have cracked that last 10% and are doing well in what you're doing.

People often spend a long time and a lot of effort to get to that 90% point. Then suddenly they quit and go for something else as it seems to be easier to start another thing and do the first 90% for that new activity. So they end up never confronting that last 10%. The irony is, that without them achieving that last 10%, they often end up achieving nothing.

The outcome is simply not there. This is evidenced by the fact we all know people who seem to have done a lot and know a lot, but have never achieved the desired outcome they originally intended to achieve in the first place. They just never got there, because they never did that final 10% that will breakthrough for them.

This is how you can crack the last 10% of whatever you're doing so that you can achieve the intended outcome:

• Do not give or allow yourself to consider any alternatives until you get this last 10% done, as we can all become extremely determined when there are no other alternatives ☺
• Face the issues and confront any past failures as if these were your best chance to make a breakthrough, because the odds are that most people in a similar position would be unwilling to do this. This provides you with a better chance to make it happen for you.

Finally, if do you find yourself starting to disperse your energy into other potentially "easier" activities, remind yourself that this is probably a strong sign that you may be at the 90% point of whatever it is you are currently doing. Try to remember that the other apparently "easier" activities will eventually reach the same 90% point when they become difficult, so you might as well just keep going and crack that last 10% of what you're doing right now, as it is probably quicker in the end, to get you to your desired goal.

This is the big picture.

If you look at the Westpac Consumer confidence survey, the 'now is a good time to buy a
dwelling' index has increased 19.6 percent over the past year. We're still a ways off boom-
time levels, but confidence is making a strong come-back.

And you can see it in the auction data too. In both Melbourne and Sydney we've seen a huge
number of auctions in the early part of the year. And auction clearance rates are moving
between 60 and 70 percent. Again, this isn't booming, but it certainly indicative of a healthy
market.

And across the board, all the signs are that we've only just entered the on-ramp.
Unemployment is still a very healthy (and on a global scale, phenomenal) 5.4 percent.
Consumer confidence is also up over 12 percent in the last six months, to the highest level
since 2010. And as this recovery gains more and more traction, it will see a cyclical drive return to house
prices.

At the same time, interest rates remain pinned to the floor. Markets are currently pricing in
little change in official interest rates through the rest of the year, leaving them anchored to a
record low of 3.0 percent. And a rebounding economy and surging house prices won't trouble the RBA much. They've made it pretty clear that their biggest concerns are the high Aussie dollar and uncertainties on the global stage.

We've got a property market with solid fundamentals, backed by a rebounding economy, all while the RBA keeps the pedal to the metal. But watch out! The establishment phase is coming to an end. Soon the bargains will have run dry, and we'll be back in the boom phase.

I think the market as a whole is under-priced, and there are some spectacular opportunities
out there if you know where to look.

Housing boom leveling

The Reserve Bank says home prices are likely to grow slowly, if at all, now that the low-inflation driven boom of the late 1990s and early 2000s has ended.

The RBA says the move to inflation targeting in the early 1990s , and resulting lower consumer price rises, meant home buyers could borrow roughly twice as much as before.

This bank's head of financial stability, Luci Ellis, says this ability to borrow more explains a lot of the massive rise in home prices, both in absolute terms and relative to income, over the late 1990s to early 2000s.However, she says this transition to a low inflation environment now appears to have run its course."It also takes time for this additional borrowing capacity to bid up housing prices.

But the transition does end after a while, and it is our assessment that it has now ended," she said in a speech to the Citibank Property Conference yesterday.Dr Ellis says the household debt to income ratio has been fairly steady since 2005 and the ratio of average home prices to incomes levelled off around a year before that.She also notes that household saving has been around 10 per cent of income since the global financial crisis."But given it has actually been quite stable for the past five years, it seems reasonable to suppose that where we are is at, or close to, a 'new normal'," Dr Ellis said.

The Reserve Bank's chief watcher of Australia's financial system's health says that means households, banks and businesses in the property sector should brace for much slower and patchier house price growth than they were used to in the period before the GFC.

"Trend housing price growth will be slower in future than in the previous 30 years," Dr Ellis forecast."We don't have a strong view about whether the ratio of prices to income should be mildly rising, falling or constant from here. We do not have a target for this variable.But we think it is very unlikely to return to its 1970s levels, or to rise rapidly once again.

"Nor would we want to see another boom like the one a decade ago." The Reserve Bank warns that this slower housing market will lead to more periods when house prices are falling, meaning purchasers and financial institutions need to be wary of respectively borrowing and loaning too much of the purchase price, as they might find the outstanding loan becomes bigger than the value of the home - a situation known as negative equity.

This slower property market is also likely to have implications for bank profits.

"If trend growth in housing prices will be slower in the future than in the past, trend housing credit growth will necessarily be slower too. This has obvious implications for the rate of growth of bank balance sheets and profits," Dr Ellis observed. However, she warns banks against lowering lending standards to try and boost loan growth and profits, particularly in light of the risk of periods where home prices fall.

Instead Dr Ellis concludes that bank shareholders need to get used to lower returns.

Empty cities In the second major theme of her speech, Dr Ellis observed that demographic forces combined with the financial forces she described earlier would probably drive more Australians into medium and high density housing.The trend towards higher density housing was partly being driven by the high cost of homes, which Dr Ellis said cannot be blamed on a lack of land release on the urban fringes.

"If constraints on land supply were the most important factor explaining high housing prices, we would see prices rising fastest where those constraints were most binding - the greenfield sites on city fringes.But that is not what we see," she argued.Neither state government levies on developers or the cost of vacant land on urban fringes are the major culprits for high home prices either according to Luci Ellis.

"Rather, it turns out that construction costs are the largest contributor to the total costs of production, and they seem quite high compared with the total cost of a newly built home in some other developed countries," she added.

Dr Ellis also argues that a lack of medium and higher density housing closer to city centres is a much more significant reason for Australia's relatively high home prices."Part of the reason why land seems in such short supply is that we each consume so much of it.Australian cities are the least dense, in terms of population per square kilometre, than the cities of any other sizeable country, developed or emerging," she concluded.

"Even with slower population growth, the price of our low-density life has become unaffordable for some.

It therefore seems likely that our cities will become denser over time." However, Dr Ellis says there are impediments to an adequate supply of apartments and medium-density dwellings which may cause problems as developers continue adapting to the trend for higher density housing."It takes longer to build a block of apartments on a brownfield site than the same number of dwellings as detached houses at the fringe," she observed."Dwelling investment has already become less cyclical in the past 10 years than it was in the previous 20 years.

It might well be that construction lags - and concerns about supply - will become even more acute." However, despite the many challenges and slower growth for Australian housing, Dr Ellis is not too worried about the possibility of a property price crash."We are pretty sure that the boom we saw in the early 2000s managed to end with a fizzle, not a bust.So we don't expect a sharp reversal from a starting point described by the situation we face now," she predicted."But we certainly can't rule out the possibility of a major housing downturn in the longer-term future."

property silver lining

Well, let me put to you a counter argument to the normal rhetoric for property growth.

In a down market,  inflation is low and GDP is low.

When inflation and GDP is low, interest rates are kept low in an attempt to stimulate the economy.When interest rates are low, one has more cash left over to pay down ones principle on their loans. Whilst  same payments are maintained on your mortgage, a larger portion of the payment comes off the principlebecause the interest portion is less. When one is able to accelerate the payment of principle,  they are one step closer to creating a positive cash flow position, where rents collected is sufficient to cover all costs and interest so the property becomes self funding.

Once the property becomes self funding it is now working for you instead of you working for it.

When there's a turn in the market and we start experiencing capital growth again,  you are now making money whilst you are sleeping.If you are a  long long term investor then a down market is welcoming from time to time. It's probably the only time you get a chance to do this.

The longer the down turn, the longer the interest rates remain low, the longer the opportunity to pay down principle without changing the amount you have been paying towards the loan.

If you are a long term investor than it does not matter when capital growth begins again unless you were planning to sell your properties and retire on the proceeds or you were planning to leverage on the increased equity to purchase more properties. It's more important to get the properties to become self funding as soon as possible. 
Let's look at the position when the property market is booming and property prices are growing.When property values are booming it leads to higher inflation and higher GDP which leads to higher interest rates by the RBA in an attempt to reduce inflation and slow the economy.

When interest rates go up it means there is less money left over to pay down principle which means we can only rely on increasing rents for it to become self funding.Relying on Rental growth to achieve positive gearing is much slower.

In summary:  there's always a silver lining in any economic condition, all it takes is to have a different mindset and to think outside the square.

but wait , there's more

Do you think what happened in Cyprus can’t happen in America or Australia? The fundamental issues are the same: governments borrow and spend, taking ‘revenues’ for granted. When ‘revenues’ fall due to lower economic growth (which is not responsive to lower interest rates), the spending remains. You have a deficit.

Australia has a budget deficit now. One way the current government wants to reduce that deficit is to change the tax rules on what it calls high-income savers. This amounts to a ‘budget bailout’ by raiding the retirement accounts of self-funded retirees. That’s not much different than what happened in Cyprus, where lifetime savings were shaved by 40% in the cause of ‘saving’ the financial system. 

Here in Australia, last year’s budget stipulated that if you earn over $300,000 and plan on funding your own retirement, your contributions to your own retirement will be taxed at 30% now instead of 15%. The government is also considering taxing the earnings on your retirement savings at twice the current rate, from 15% to 30%.

This is done in the name of ‘sustainability.’ But that word is a polite mask for theft. That is, for the government to keep spending your money on the people and things it prefers, it must either take more of your money or cut spending. Guess what it’s going to do? 

The government will eliminate ‘concessions,’ or the amount of your own money it allows you to keep. Using the word ‘concessions’ to describe the tax rate on self-funded retirees is also a transparent attempt to turn the tables on savers. A ‘concession’ is something that someone gives to you. As such, it can be taken away. Using the word ‘concession’ implies both generosity to begin with and the moral authority to change the rules for ‘the greater good’.


This isn’t just class warfare. It’s war on common sense and economic liberty

Cyprus continues

The Cyprus drama continues behind the scenes. Today’s the big day depositors find out what will happen to their money.

Here’s the breakdown: Deposits greater than €100,000 will lose 37.5%, with another 22.5% frozen in case more is needed later. The remaining 40% of the cash will be released today.

A little-reported fact is the linchpin of the deal. The government isn’t taking the deposits. They’re being converted into bank shares to re-establish the amount of equity needed under international bank law.

Nobody seems to know whether you can sell the shares, or what they’ll be worth. But here’s what we do know: Cyprus just sold a huge proportion of its banks to a bunch of Russian oligarchs who had deposited cash in Cyprus to evade taxes. Russian oligarchs owning your banking system...that doesn’t seem like a great idea.

The cash for shares deal also doesn’t actually fix the Cypriot government’s  financial status.

Cyprus’ economy is in deep trouble, so the temporary bank fix is likely to be...temporary.

Thoughts to ponder:

*banks only keep a small proportion of the cash you ‘deposit’. They lend out the rest

*When a bank goes bankrupt, depositors stand alongside creditors to get some fraction of their deposits back. 

*Depositors are in reality lenders to the bank, not depositors of money.

Of course, it’s not supposed to happen like this. Governments guarantee deposits in most countries, explicitly or implicitly. But what happens when the government itself is the source of the financial instability? Who will bail out your deposits then?

Its time to wake up and realise that depositing money into your bank account is lending, not safekeeping

Cyprus & Australia

What is happening in Cyprus is something that we must watch and see how the repercussions could fan out to our own economy.

The details of the events in Cyprus are as follows. The assets of the country's banking system are between five and eight times the size of its GDP. It's alleged that a great deal of the assets in the banking system belong to Russian oligarchs and global tax dodgers. Nonetheless, Cyprus was in need of a bailout.

--Instead, it got a hold up. Savers with guaranteed deposits in the banking system were assessed a 'stability levy' over the weekend. Depositors with over €100,000 in the bank will be taxed 9.9% of their savings. If you have under €100,00, it's a 6.75% tax. This 'up-front' and 'one-off' levy on insured accounts will raise an estimated $5.8 billion of bailout funds from bank depositors. The remainder of the money will come from the International Monetary Fund (IMF) and the European Central Bank (ECB) in the form of loans.

--The IMF said it didn't want to commit to a larger loan because then it would leave Cyprus with an unbearable government-debt-to-GDP ratio for such a small country (since when has that mattered in Europe?!). The result is that creditors to Cyprus will be paid in full at the expense of savers. 

--Now in the scheme of things, the bailout amounts are small beer. Spain got bailed out for $41 billion, Portugal for $78 billion, Ireland for $85 billion, and Greece for $380 billion. By comparison, the situation in Cyprus is urgent but not terribly important, at least in terms of monetary amounts (and assuming you aren't one of the people who just had your savings confiscated).

--But the precedent established by the ECB's decision is what's important here. Guaranteed deposits will simply be confiscated to pay off bond-holders. ECB and EU officials had the bad taste to defend this on grounds of progressive social justice. They have claimed that since it is Cyprus being 'saved', all of Cyprus must pay

What does this say to the everyday person who may have some small savings or first home buyers saving for that deposit, can this happen here if the economy, even with its resouces boom, starts to slide into unwanted territory

jobless rate

While economists and the RBA say the jobless rate will climb towards 6 per cent, I speculated that it might start falling this year.“This would be a game-changer,” and will force the RBA to remove its extreme stimulus.”

So it proved. The official statistician reported that employment surged last month by the most in 12½ years. As expected, fixed-rate bond prices are getting smoked as long-dated interest rates advance off their historically low base.The yield on three-year Australian government bonds is now up 120 basis points off its April 2012 record of 1.96 per cent.It leapt 20 basis points after Thursday’s jobs data alone.Importantly, three-year yields are above the RBA’s current cash rate for the first time since July 2011.

This tells us pessimistic bond market bandits are starting to countenance the RBA normalising ultra-loose policy.But don’t expect any swift moves from Martin Place. The RBA is already behind the eight ball, and it is likely to remain sluggish.There will be tremendous community and political resistance to any rises before the election.The low-rate lobby is loud, and over-represented on the RBA’s growth-seeking board.

All else being equal, higher interest rates mean softer share prices (since rates are used to discount cash flows back to the present), weaker housing demand as purchasing power diminishes, and fixed-rate bond losses as prices decline to make buyers indifferent to the better yields on offer.

Of course, loftier rates are not a universal evil. They usually signal that the RBA thinks our economic prospects are rosy.The risk is that demand outstrips the nation’s capacity to produce the things we desire, which precipitates inflation in the prices of the goods and services we buy, and a relative corrosion of our incomes.Raising rates does effect a transfer of wealth from net borrowers to savers. Some might say that it rewards thrift while thwarting hedonists.

These are just a few of the reasons why getting an edge on the RBA’s next step captivates the hearts and minds of financial markets.This is especially true in Australia, where household debt is comparatively high and mostly priced in variable terms.As I’ve explained before, the RBA acknowledges it has difficulty forecasting even the near future.

This is why I’ve argued that deep “pre-emptive” rate cuts based on rubbery predictions of what might pass are internally inconsistent and arguably hazardous to financial stability.

The community, and investors more specifically, are being conditioned to expect crisis-level rates every time markets get the yips.Since the doomsday risks that rationalised the RBA’s insurance have not materialised, it is likely to focus more energy on “now-casting”.This means figuring out the real state of the present, or our jumping-off point into the uncertain future. And it’s not as easy as it seems.

Almost all the data we get on the economy’s actual pulse – inflation, jobs, gross domestic product, credit, wages, house prices – are reported with a chunky lag of between one and three months, and then subject to major revisions.

To get a lead on delayed data, the more talented analysts build “real-time” measures of demand across the economy.They then construct “financial conditions indices” that purport to tell us how stimulatory RBA policy settings really are.This way one can get a bead on where rates might be heading.UBS’s interest rate strategist Matthew Johnson produces several real-time indicators.

These include a monthly “demand index”, which incorporates 110 different inputs (like job ads and business surveys), and a “financial conditions index”, which employs 60 variables, and signals how supportive interest rate and currency levels are, given the state of his index.

“The UBS financial conditions index strips out the current business cycle to give us a read on how expansionary or otherwise interest rates and the currency are. It is, therefore, a predictor of growth, inflation and interest rates,” Johnson explains.

“The dollar might, for example, be elevated because our growth prospects are peachy. Financial conditions could be very stimulatory in the absence of tighter monetary policy.

“But equally the currency could be high because central banks want to diversify their reserves away from the US, Europe and Japan, even though Australia’s growth pulse is weak.“So a strong currency could coincide with restrictive financial conditions without further interest rates relief.”

To create the indices, Johnson leverages off the RBA’s own research, which he has improved through iterative application.

According to this analysis, Australian demand started deteriorating in the second half of 2010 through to the third quarter of last year.

Demand has, however, been recovering since, although it remains below the model’s estimate of trend.One needs the demand index to work out whether current rates and the trade-weighted currency are collectively enhancing or detracting from growth.UBS’s financial conditions index implies that RBA policy settings were restrictive in August 2011 when the cash rate was at 4.75 per cent.“Financial conditions have subsequently eased markedly, which suggests a pick-up in growth over the next two to three quarters,” Johnson says.

“Conditions are now around as easy as they were during the years prior to 2008 when growth was healthy.”“One reason rates are lower today is because of our strong currency.”

Notwithstanding the recent bounce, UBS’s research still implies an equilibrium RBA cash rate trough of just above 2.5 per cent (ie, more cuts), a big change from only a month ago.

“Due to the recent easing in UBS’s financial conditions index, our RBA cash rate model, which takes all other indices into account, has lifted the target cash rate bottom from 2 per cent to 2.6 per cent,” Johnson says.

“The financial market has already delivered a strong easing of monetary conditions via equities and house price inflation, so the RBA need not reduce their policy rate as far.”

My own sense is the next move is more likely up than down. UBS’s chief economist, Scott Haslem, agrees.

Do you use your bank account regularly?

The ‘Australian Government’ is now set to ‘legally’ seize money from citizens bank accounts without their knowledge or approval.
After legislation was rushed through parliament, the government will from May 31 be able to transfer all money from accounts that have not been used for three years into their own revenues.

Legislation amended late last year means any account that has not seen activity within three years can be transferred into the Commonwealth’s hands – previously the rule was seven years.This will mean that accounts with anything from $1 upwards that have not had any deposit or withdrawals in the past three years will be transferred to the Australian Securities and Investment Commission and thus hundreds of millions of dollars in inactive bank deposits are likely to flow to the Federal Government from May.

The money can be reclaimed from ASIC but the process can take months.

As the new law comes into effect at the end of May 2013 banks are advising customers to make transactions as small as a dollar to ensure they are not transferred to ASIC.

Experts warn this will have a negative impact on people that may have put money away in a special account for their children’s education or decided to put an inheritance in a separate account for a rainy day.The banking industry believes the Government’s changes to inactive bank accounts legislation is just revenue raising.Mr Munchenburg says the legislation was rushed through at the end of last year.

“A lot of suspicion at the time that the Government is rushing this through because they were more concerned about their own financial bottom line than they were about reuniting consumers with their accounts,” he said.“It was never clear to us why it had to be rushed through if it was only focused on reuniting consumers with accounts.”Mr Munchenburg says three years seems an arbitrary time limit as the Government failed to consult the industry on the change.“I don’t know why three years has been chosen over seven,” he said.

“Certainly, if the Government believed that seven years was too long, we would have expected them to talk to us about what is an appropriate timeline or how to deal with accounts where people have deliberately left them alone, and then we’d avoid some of the problems that we are concerned will affect customers.”

This cash grab comes as economists warn the government is on track to hand down a $15 billion budget deficit in May as company tax receipts collapse.Before Christmas, Treasurer Wayne Swan junked the government’s previously “rock solid” promise to produce a surplus in 2012-13. The government had also been committed to surpluses in future financial years, too.
In the UK this practice also exists and has for quite a number of years, with the exception that in Britain the dormancy period is a far greater one before assets are seized from such, supposedly, dead accounts.

While, it would appear, in Australia the money seized from such “dormant” accounts will be gobbled up by the treasury in the UK, at least, the money goes for so-called “good causes”, though decided upon and administered by the government.The act of the Australian government, as the banking expert said, appears to be aimed at bolstering the country’s finances and nothing more.

Article Source

http://www.abc.net.au

Rate Cycle

Every economy has cycles and we may be approaching the end of one that has been good for mortgage holders.

For more than two years the cash rate – the benchmark for variable mortgage rates – has been falling, from November 2010 when it was 4.75 per cent, to the current 3.0 per cent.
This past week, the RBA held the cash rate at 3.0 per cent and the markets are expecting the local and global economy to pick up slightly which will keep rates steady and perhaps bring some rate rises before the end of this year.
I don’t follow market expectations too religiously, but you get the idea: 3.0 per cent is as low as we’ll probably get this time around.
While the economy has been finding its feet, another factor has emerged. The banks’ cost of sourcing funds from the capital markets has eased.
This is an interesting confluence of forces, because it means as the cash rate rises, it may not hurt mortgage borrowers as much as it should; and with funds relatively available from wholesale sources, the banks won’t have to offer premium yields on cash deposits in order to attract those funds.
Regardless of how this plays out, rising interest rates affect people in different ways. Firstly, people relying on cash investments should be shopping for institutions who stay in step with cash rate rises.
This is crucial, because with a resurgent economy also comes inflation, and rising inflation is the enemy of cash investors.
Those who need to retain cash as their core investment should keep their money in the best-yielding term deposits and cash accounts, while also looking at bonds and dividend yielding (conservative) shares as a way of keeping their risk low and returns relatively high. Simply sticking to ‘safe’ cash ignores the danger that inflation takes your gains.
Secondly, if interest rates rise this year, but bank funding costs also ease, this year mortgage borrowers should be alive to the prospect of refinancing.
There’s already a daily spread of around one per cent between variable rate mortgages, which represents a difference on a $250,000 loan of around $140 per month.
As cheaper funding comes back into the Australian lending system while mortgage rates rise, this spread between lenders will probably become wider as lenders position themselves for market share and the incumbents try to stop inroads into their customers. Stay open to deals.
Thirdly, if we do see a couple of rate rises later in the year, business borrowers must stay vigilant about their interest rates and loan security. It can be difficult researching how much you should pay for business credit, because all sorts of deals are done that mean you can’t always compare apples with apples. One way to ensure you’re not paying too much is to use a finance broker who stands in the market for you and who knows what other business owners are paying.
Lastly, remember this: you can’t beat the cycle, but by staying informed and being prepared to act, you can profit from it.
Mark Bouris

global housing markets

Some of the key signals I previously outlined here that local and global monetary policy is too loose are already coming into play.

I’ve told you to watch out for Australian auction clearance rates piercing the all-important 70 per cent barrier, and it has happened sooner than even I anticipated.

Australian Property Monitors reported stunning clearance rates of 73 and 76 per cent in Melbourne and Sydney, respectively, over the weekend.

On Friday we had another portent that Australian and global economic growth could surprise on the upside in 2013.

China’s National Bureau of Statistics revealed that in January “new” house prices appreciated in 53 of the 70 cities it covers. Existing house prices also climbed in 51 of 70 cities in January, which was an improvement over the 46 city increase recorded in December.

China’s central bank has not touched its policy rate since the middle of last year. Yet the head of Asian research for TD Securities, Annette Beacher, argues that “consensus is slowly coming to the view that not only is the easing cycle over, but the acceleration in Chinese property prices implies that a tightening cycle may arrive by year end.”

There has been a notable synchronicity in the recovery in housing markets across Australia, New Zealand, the UK, US and China since early to mid 2012.

In his submission to parliament on Friday, Reserve Bank of Australia governor Glenn Stevens highlighted that Australian home values were inflating on the back of the best affordability in over a decade.

“Housing prices have been rising since last May,” Mr Stevens said, confirming analysis originally published by The Australian Financial Review.

“Share prices have also risen quite significantly, and if anything by a little more than in comparable markets overseas.”

While the RBA remains hesitant about the local economic outlook, and will closely monitor the results of a crucial capital spending survey released on 28 February, it is slowly coming around to the view that ultra-easy monetary policy is lubricating activity.

Mr Stevens’ sanguine testimony on Friday surprised financial markets, triggering a modest jump in government bond yields. While he has resisted the suggestion that the RBA’s monetary policy settings are at “emergency” levels, Mr Stevens concedes that borrowing rates are “not far from their historic lows.”

The inability to secure sufficiently attractive returns from once-appealing bank deposits has compelled households to search for superior yields elsewhere.

“The returns available to savers on safe assets – like bonds and bank deposits – have fallen by enough to prompt Australian savers to consider shifting their portfolios towards other assets. These are channels of monetary policy at work”, Mr Stevens said.

Positive data flows this year have forced some economists to flee their gloomy rate cut forecasts quicker than a Pamplona crowd.

In December ANZ slashed its 2013 cash rate projection to just 2 per cent (or four standard cuts below the current mark). It has now lifted this back to 2.5 per cent. Market Economics has junked its 2.5 per cent cash rate prediction in favour of no move this year.

It is clear that perceptions about the global economy are in a chaotic state of flux. The debate amongst members of the US Federal Reserve Board on the risks of unremitting money printing is a harbinger of the protracted difficulties central bankers will face unwinding the easiest monetary policy in human history.

article by Christopher Joye

Housing values

Housing affordability is now at its best level in a decade, so there is every chance capital growth will accelerate this year. This has ramifications for buyers and sellers, builders and developers, investors seeking to resolve asset allocation questions and the Reserve Bank of Australia’s monetary mandarins.

In the middle of last year some misanthropes were not prepared to accept that the RBA’s 75 basis points’ worth of rate cuts over May and June, coupled with the 50 basis points salvo in late 2011, had reinvigorated Australia’s moribund residential market.

Seven Network’s David Koch was a prominent sceptic. In July, “Kochie” rejected evidence from RP Data that Australian house prices were climbing again. “[House price rises are] just not happening yet,” he wrote, predicting that “tough times for Australian property appear set to continue”.

One source of his conviction was Louis Christopher, a property commentator with SQM. After the publication of RP Data’s June house price index results, Christopher issued a media release to say that the numbers were simply wrong.

“I do not believe for a moment that house prices are now rising in Sydney or Melbourne as RP Data have claimed,” Christopher said. There were “no other measurement[s] . . ­. indicating that prices are rising”.

These conflicts are par for the course when it comes to the question of whether the cost of Australian bricks and mortar is rising or falling. It is no surprise that the issue attracts attention given that 60 per cent of household wealth is invested in residential property. House prices matter.

The bad news for those hoping to see housing depreciate further is that Kochie and Christopher were wide of the mark. We know this because we have the benefit of the 2012 house price data from the three benchmarks used by the RBA.

According to APM’s monthly index, Sydney and Melbourne prices have appreciated at annual rates of 6 per cent and 7 per cent respectively since June 2012. RP Data offers a similar picture with monthly dwelling values in Sydney and Melbourne rising at a 7 and 6 per cent annualised clip from their depths in May 2012.

The Australian Bureau of Statistics index, which ignores the apartment market and is only calculated on a quarterly basis, shows that free-standing house prices in Sydney and Melbourne have inflated at more modest rates.

The bottom line, all three measures broadly tell the same story: home values were increasing in the second half of 2012.

RP Data’s “hedonic” index, which controls for renovations and changes in the types of properties, suggests that dwelling values in the eight capitals have been expanding at a healthy 6 per cent annualised rate since the mid-2012 nadir. This is faster than wages and disposable household income growth.

House prices are being driven upwards by a tremendous improvement in affordability, the result of generous RBA rate cuts. UBS data show that mortgage repayments as a share of disposable income are at their lowest level in 10 years.

For those analysts who cling to the concept of a “prudent” Australian consumer who shuns risk and leverage and is squirrelling away more savings than they have done in 20 years, the next 12 to 24 months will be a formidable test.

According to UBS’s measure, housing affordability is now better than it was in early 2009 just before a spectacular run-up in national prices. In that year Australian home values jumped about 14 per cent.

To be sure, they had the tailwind provided by an enlarged first-time buyers’ bonus. Yet we also had a global economy in recession. Today local and global growth prospects are demonstrably more positive.

The last time Australian housing affordability was this good was in 2001. That year Australian dwelling prices surged 19 per cent. They ballooned again in 2002, by 16.7 per cent and in 2003 by 17.6 per cent.

One important difference in 2001 was that Australia’s household debt-to-disposable income ratio was a substantially lower 95 per cent. By 2006 it had hit 150 per cent, which is about where it is today.

In the early 2000s families could assume more leverage to bolster their purchasing power. They may not be able to do this again.

However, the signs of housing momentum are building. Australia’s largest mortgage broker processed more home loans last month than in any January previously.

RP Data’s CEO, Graham Mirabito, says that his valuation subsidiary, ValEx, which covers 80 to 90 per cent of all loan transactions,, last week mediated more valuation requests than ever before.

The RBA with its policy settings is certainly doing everything possible to fire up the embers. It says rates are not at “emergency lows” but they sure look like it.

During the GFC, the RBA pushed the average discounted home loan rate down to 5.4 per cent. Discount home loan rates today are only 30 basis points higher at 5.7 per cent.

Fixed-rate home loans are cheaper than ever. The average three-year fixed-rate loan in 2009 was 6.6 per cent. Today it is just 5.5 per cent. On Friday, Westpac announced a two-year fixed-rate product for just 4.99 per cent.

It is hard to imagine how these circumstances will not stimulate hearty asset price inflation.

Article by Christopher Joye

Latest data

Australian Property Monitors are reporting that national house prices grew 2.1 percent in 2012, accelerating towards the end of the year, and growing a very impressive 1.9 percent in the December quarter. To put that in perspective, that's a annualised growth rate of a little less than 8 percent a year. That's a decent clip, and as I said, we're just getting started.

Now just to drive this home, if you put in a 10 % deposit an you get an 8% return - that's a huge 75% cash-on-cash return...try getting that in another form of investing in 2013...

And what's more, the national figures hide some very strong performances by Perth, which grew 6.1 percent in the 2012, and Sydney, which was up 3.4 percent. Both cities have a full head of steam behind them. Only Melbourne seems confused about which direction it should be running.

Looking at some of the other datasets, which use different methodologies, the Residex measure was up 0.53 percent in the month of December, which is an annualised growth rate of 6.5 percent a year.

Residex Chief Economist Jon Edwards (nerdy looking guy, but super sharp) said it's the best performance in 18 months.

To top it off, the RP Data-Rismark measure was up 1.1 percent in January. That's an annualised clip of 14 percent a year. Any investor would be happy with that.

Hey, what I have quoted above are "averages." If you add a little real estate education, you could get 300% better return that the averages.

There is also a solid recovery underway in new home sales. It seemed that investors and existing homes were supporting the market through most of 2012. However, the Housing Industry Association Land Sales Report showed that residential land values increased 3.8 percent in the year to the September quarter. Not bad at all. And I think we'll see an even better result once the December quarter data come in.

The HIA measure of new home sales also bounced in December. They were up 6.2 percent in the month, and 3.3 percent in the quarter. This shows that the housing market is building a solid and broad base from which to launch its current run.

wow

The residential property market appears to have bottomed out and is set for a "mild cyclical recovery" over the next 12 months" says AMP Capital Investors chief economist Shane Oliver.

Oliver anticipates only short-term gains in property prices in the range of 5% to 7% over this period as "buyers remain cautious about taking on excessive debt, particularly as job insecurity remains high".

But he expects the property market to outperform both the bond market and what's available through cash deposits - a reverse of the performance of these markets over the past five years.

Shares, Oliver says, are the most attractive asset class "offering relatively attractive starting point dividend yields of around 5.7% with franking credits added in" though he warns investors against presuming a "smooth run" for shares in 2013.

But term deposit rates have fallen from as high as 8% a few years ago to 4% and continue to fall while Australian 10 year government bond yields have fallen from 6.3% to currently 3.5%

In comparison, Oliver says house and apartment yields are running around 3.7% and 4.8% respectively, which are well up from their lows last decade.

Despite offering a better return than cash or bonds, Oliver says capital growth in residential real estate is likely to be constrained over the next five to 10 years "by still very high property prices relative to incomes and rents and house prices still above their longer term trends".

"This suggests that a cyclical rebound in real estate prices over the next year should be seen as part of a broad range bound market for property prices in real terms as the market continues to work off the excesses that built up over the property boom that started in the mid 1990s and continued into last decade.

"Of course, good quality properties in sought after locations will do well, but the medium term back drop for property returns is likely to remain constrained, albeit better than that from cash and bonds," he says.

Oliver says there are two main risks to his forecasts.

The main downside risk to property is a hard landing in China, a risk he says is receding while the upside risk is that "the old housing bubble is reignited by the latest collapse in mortgage rates".

"Again this seems unlikely though given Australians' more cautious approach to debt since the GFC," he says.

What stops you from having financial gain in property investing

The main reason is most people wait too long to start

Most people can't wait to succeed; yet they are willing to wait to get started on the road to riches. 

Many investors are waiting for everything to be "perfect" before they get going.   

They wait for the right time in the cycle, the right property, the right economic environment or the right interest rates. Which means they never get going. 

The longer you wait to get started with your investing, the longer it will be before you get the money, success and freedom you want.
Here's the clincher- It takes time to grow real wealth. It takes time for the power of compounding to work its magic. 

You need to understand that the timing will never be perfect or you will never have all the information you want. 

You need to develop the confidence to make an investment decision based on knowing enough and realising that you will learn the rest along the way. 

What's the outlook for rental yields this year

As 2012 came to a close, there was a clear story to be taken from the
rental data.

Through the year, two cities broke well clear of the pack: Perth and Darwin.

The Darwin unit market was the best performing rental market in the country
last year, with median weekly rents increasing a whopping 19.6 percent,
according to Australian Property Monitors. The Perth housing market came
in a close second, increasing 17.5 percent.

Brisbane came in third place a long way back, with houses and unit rents
increasing about 2.6 percent. However, yields for Brisbane houses were still
the best in the country, at 5.3 percent, in equal top place with Perth.

However, Darwin unit yields were still a clear overall winner at 6.2 percent.

Around the rest of the country, the rental markets were essentially flat, with
housing rents even falling 1.4 percent in Melbourne, and 4.0 percent in Canberra.

It's a basic supply and demand story. Rental markets in Perth and Darwin are
incredibly tight.

According to SQM Research figures, Darwin has a vacancy rate of 1.1% and
Perth a vacancy rate of just 0.7%.

This is coming on the back of rapid population growth. Perth is growing by
1,500 people a week!

And what's driving this growth: mining, of course.

It should come as no surprise that W.A, the N.T and QLD are leading the way.
These are the states benefiting most from the mining boom.

Looking ahead, this story will continue to dominate, and Perth and Darwin will
continue to grow quickly. APM are also forecasting rental price increases in
Brisbane and Sydney, but there's little to get excited about around the other capitals.

The mining boom is still the big story in 2013. The broader economy is gathering
momentum, and this will eventually give a lift to the other cities. But until then, the
best returns are still to be found around the mining states.

who controls your loan?

Major banks control 77.5% of all loans

Commonwealth Bank (CBA) and its subsidiary Bankwest accounted for nearly 40% of all first-home loans processed in December 2012. Mortgage broker AFG's quarterly Competition Index shows that CBA accounted for 29.6% and Bankwest 9.3% of first-home loans. During 2012, Bankwest's market share declined from 12.6%, while CBA rose from 19.9%. CBA's strong performance lifted the major lenders' share of the first home buyer market to 77.5%. Suncorp remains the largest non-major lender with 5.5%, followed by Macquarie (3.6%) and ING (3.5%).

Property strategies

When it comes to property investment you’ll often hear two somewhat conflicting philosophies being bandied around. A common question beginning investors ask is – which is better?

Firstly there are the “Cash flow” followers; they suggest you should invest in property that has the capacity to generate high rental returns in an attempt to achieve positive cash flow. In other words, you want rental returns that are higher than your outgoings (including mortgage payments), leaving money in your pocket each month.

Then there’s the “Capital Growth “crew. Their favoured strategy is to invest for capital growth over cashflow. In other words, you need to buy property that produces above average increases in value over the long term.

In Australia, properties with higher capital growth usually have lower rental returns. In many regional centres and secondary locations you could achieve a high rental return on your investment property but, in general, you would get poor long-term capital growth.

Clearly if both exist there is a place for both so to answer the question of which suits you best, you really need to know what you want to achieve.

You see…property investment should be part of a wealth creation strategy, not just a purchase in isolation.

China's outlook on our property

The mining boom in 2013 was shaping the Australian economy at all levels, and its influence was felt everywhere. Of course the mining boom is bigger than just China. You can add India and the rest
of emerging Asia to the mix. But it's a good barometer of how things are tracking.

Things in China are looking a lot better than they were 6 months ago. Coming into 2012, the Chinese authorities were worried that the Chinese economy was over-heating. There were imbalances forming in the property and financial markets, and inflation was threatening to take off. So they tried to take some heat out of the economy and it worked too well.

Underestimating the headwinds coming out of the global economy, the Chinese economy came close to stalling. Australia watched nervously, worried that the demand that had kept the mining boom steaming along might suddenly evaporate.

Chinese authorities put their foot back on the accelerator, and at the beginning of 2013, China seems to have solid momentum behind it. The accelerator is infrastructure spending. China has announced a new round of massive investment in subways, airports and other 'mega-projects'. According to HSBC, investment is adding more to the economy now than at any time since 2009 - when China was doing everything it could to avoid the fall-out of the GFC.

And so at the end of 2012, exports were stronger than expected, credit was surging, and retail sales were improving. Industrial production was also stronger as was electricity output. As a result, economists were revising up their estimates of growth through 2012, to just under 8 percent. China looks like it's back on track. This is good news for Australia. The emphasis on infrastructure spending is particularly
good news for the mining industry. Steel demand seems likely to hold at stellar levels.

And the rapid urbanisation underway in China isn't letting up anytime soon. China will add another 100 million people to its urban centres by 2020, bringing the urbanisation rate up to 60 percent. The long-term drivers are solid. And it seems that in the short-term as well, through 2013 and beyond, China is on the right track. It looks like this year, Australian property investors can rely on China.