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