mortages

Next time someone tells you that Australia is a country with an affordability crisis and households suffering from mortgage stress, refer them to the official figures on mortgage delinquencies, which means people behind on their repayments.

Mortgage delinquencies are currently 0.9%, according to Fitch Ratings. In other words, less than 1% of households with mortgages are behind on their repayments. Those who are 90 days behind are only 0.4% of the total.

apartment living

Apartment living in Melbourne
off-the-plan apartments in central Melbourne have lost about 11% in value

That could mean buyers needing to find additional equity as high as $68,000. That’s not true for all apartments, but the trend is big enough to give the banks a worry.

There are multiple problems with the apartment market. There’s already too many. Vacancies are high and rental growth poor. Prices have flatlined at best over the last few years.

But here’s the biggest problem of all: most people don’t want to live in one
Latest market update

Highlights over the three months to March 2016: Best performing capital city: Hobart +6.5% Weakest performing capital city: Perth -0.9% Highest gross rental yields: Darwin & Hobart houses at 5.1%, Darwin units at 5.4% Lowest gross rental yields: Melbourne houses at 2.9% and Melbourne units at 4.1% Most expensive city: Sydney, with a median dwelling price of $730,000 Most affordable city: Hobart, with a median dwelling price of $341,500

Budget 2014

It's been a year since I last posted here at the 2013 budget time. Seeing this post is budget oriented it's fitting to start at 2014 budget and go forth from here. Currently our Debt is sitting at $320 billion net and when John Howard took over from Labor he took over a Net Debt of $105 billion. So we are 3 times worse off than when John Howard took office.

As we all know, it took 10 years for the Howard government to pay off the debt that the Keating government had left and when Rudd took office Howard handed over a government with $20 billion cash in the bank.  In other words Howard left the country in a very healthy position to weather any storm such as the GFC which occurred in 2008.

Howard sold off assets such as Telstra and various others in an attempt to pay off Labor’s debt, but Abbott has not indicated selling off any assets although he did say that the budget was the beginning and not the end and there is more pain to come.

We are currently paying off $12 billion a year in interest payments or $1 billion per month which could have gone back into the economy.

Even though the current debt is much higher than when Howard took office, the measures the current government have taken is much softer than what the Howard government implemented in their first budget.

Whilst we are constantly told that our debt is small when compared to other countries by those who put us into this debt position, I simply cannot buy this argument.

For me what is troubling is the trajectory that we were on. We were heading into much more debt without even an acknowledgement by the previous government that we had a problem. This was dangerous territory.  If we do not acknowledge that we have a problem then no one is even looking for a solution.We are also told that we needed to stimulate the economy to ensure that people kept their jobs during the GFC.  I think most people accepted that we needed to stimulate the economy but I think most people were upset by the waste, inefficiency and poor implementation whereby we will be leaving a debt that our children will have to pay off.

We could have spent half the money for double the stimulus and effect if things were managed much better.  I believe that is what the Australian electorate demanded and consequently, removed an extremely poor government to achieve.

The Federal budget pretty much left property investors alone. Whilst there was a push by some towards eliminating negative gearing to save $8 million dollars a year in tax benefits it seems that the message has been loud and clear that public government housing only accounts for around 4% of investment properties. Should they disincentivise property investment by removing negative gearing we would see the government having to shoulder the weight of providing a much larger percentage of properties for tenants. This would in effect cost the government much more than the $8 million dollars a year it is forgoing in negative gearing benefits.

So thank goodness there was some clear thinking shown around negative gearing.

However negative gearing is only one piece of the jigsaw puzzle when it comes to the property market and many other factors such as jobs, interest rates, confidence, supply, etc. have far greater effect on the property market than negative gearing.

We need to have a growing economy which leads to increased revenues for the government.  As businesses do well and are able to hire more people and create more jobs, our standard of living is improved. This will ensure the property market is stable and continues to grow steadily.

As the mining boom only provided around 2% of our economy and job prospects and as it transitions into a production phase from a construction phase we need to stimulate the other 98% of the economy that provides the majority of our economic growth and job prospects.

We have never supported property investments in mining towns despite the great rents and as the mining boom subsides many more people will be stuck with properties in mining towns that they cannot sell. We will continue to see these properties drop in value.

There were tax cuts of 1.5% for companies, (except big companies) which is an incentive for companies to invest more and hire more people which should increase economic activity and reduce the unemployment rate.

However we have probably seen the middle class shoulder a large percentage of fixing the budget with the elimination of many family tax benefits, whilst the wealthy has been asked to pay a 2% levy on income above $180,000. Whilst I believe this budget was a step in the right direction (i.e. at least it acknowledged we had a debt problem), I believe the Abbott Government has a long way to go in fixing the budget and getting our economy going.

They still have to get the support of the other parties and by the way the dialogue is at the moment I think Abbott will have his hands full in convincing the others that this is a Budget in the national interest.

Only through a strong economy can we have a strong country and only through a strong country can we look after those in need and the average Australian’s hope to have a better standard of living.

$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."