Provision Newsletter

The story so far…

• After sharp interest rate cuts by the Fed at the outset of the global financial crisis, quantitative easing (QE) began in November 2008 with the Fed buying US$1.25 trillion of mortgage-backed securities and $175 billion of agency debt in order to boost money supply.

• With few signs the US economy was recovering the Fed embarked on a second program of bond purchases, buying US$600 billion of longer-term US Treasury securities from November 2010.

• The third round of quantitative easing commenced in September 2012 and involved the Fed purchasing agency mortgage-backed securities. The targeted total value and timeframe were open-ended and initially involved purchases totalling US$40 billion per month which grew to US$85 billion per month.

• With the US economy showing signs of stabilising, the Fed announced in June 2013 that it planned to begin tapering its bond-purchasing program – with the value of bonds purchased to be gradually reduced in accordance with how the recovery was progressing.

• This tapering commenced in December 2013, and saw monthly bond purchases gradually decrease to the current level of US$15 billion per month.

Update on QE tapering and the outlook for interest rates

 On the one hand, the US economy has improved enough to allow the Fed to continue tapering its quantitative easing program throughout 2014 without causing too many dramatic disturbances in investment markets. On the other hand, it’s unclear that conditions are strong enough to warrant interest rate hikes just yet. This is something the Fed is grappling with, but the conclusion seems to be that – with inflation and wages growth at low levels and excess capacity in the labour market remaining – the Fed is unlikely to rush into raising rates.

The Fed currently states that it anticipates a ‘considerable time’ between the ending of quantitative easing and the first rate hike, with this taken to mean six months or more. With quantitative easing ending in October, we expect the first rate hike is likely to be in the June quarter of 2015.

What does this mean for investment markets?

With quantitative easing ending in the US and interest rate rises on the cards within the next 12 months, implications across each asset class vary.

• Equities: The experience around the initial flagging of tapering last year which saw shares fall 5-10% warns of the risk of a correction in the run up to and/or in response to the first rate hike. But beyond a short-term upset, the initial monetary tightening is unlikely to be a huge problem for shares. Historical experience tells us that the start of a monetary tightening cycle is not necessarily bad for shares. This is because in the early phases of a tightening cycle, higher interest rates reflect stronger economic and profit growth. It’s only as rates rise to prohibitive levels that suppress inflation that it becomes a problem.

• Fixed income: The commencement of a monetary tightening cycle in the US is expected to put upwards pressure on US and global bond yields in response to the uncertainty as to how high rates will ultimately go. A 1994-style bond crash is a risk but is unlikely – as the more constrained US and global growth and inflation backdrop this time around will likely mean that the monetary tightening cycle will be more gradual than in 1994.

• Real estate: Higher longer-term bond yields will likely make the relative yield from real estate slightly less attractive. As one of the beneficiaries of the reach for yield in the absence of attractive yields being offered by bonds, direct and listed real estate is vulnerable to a sharp rise in bond yields should it occur.

• Australian dollar: Progress towards eventual rate hikes in the US will put further downwards pressure on the Australian dollar.

Generally speaking, the end of quantitative easing and eventual US interest rate increases should be viewed by all investors as a good sign – after six years the US economic recovery is well underway and solid enough to withstand the start to more normal monetary conditions.

While uncertainty regarding the timing and magnitude of US interest rate increases is likely to keep flaring up periodically, on balance the move is a positive indicator as it signifies a brighter long-term outlook for the US economy (and therefore investors).

The fact that each assets class will be impacted in a differing way – and to a differing extent – is a timely reminder of the importance of maintaining a well-diversified portfolio.

About the Author  Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

The story so far…

• After sharp interest rate cuts by the Fed at the outset of the global financial crisis, quantitative easing (QE) began in November 2008 with the Fed buying US$1.25 trillion of mortgage-backed securities and $175 billion of agency debt in order to boost money supply.

• With few signs the US economy was recovering the Fed embarked on a second program of bond purchases, buying US$600 billion of longer-term US Treasury securities from November 2010.

• The third round of quantitative easing commenced in September 2012 and involved the Fed purchasing agency mortgage-backed securities. The targeted total value and timeframe were open-ended and initially involved purchases totalling US$40 billion per month which grew to US$85 billion per month.

• With the US economy showing signs of stabilising, the Fed announced in June 2013 that it planned to begin tapering its bond-purchasing program – with the value of bonds purchased to be gradually reduced in accordance with how the recovery was progressing.

• This tapering commenced in December 2013, and saw monthly bond purchases gradually decrease to the current level of US$15 billion per month.

Update on QE tapering and the outlook for interest rates

 On the one hand, the US economy has improved enough to allow the Fed to continue tapering its quantitative easing program throughout 2014 without causing too many dramatic disturbances in investment markets. On the other hand, it’s unclear that conditions are strong enough to warrant interest rate hikes just yet. This is something the Fed is grappling with, but the conclusion seems to be that – with inflation and wages growth at low levels and excess capacity in the labour market remaining – the Fed is unlikely to rush into raising rates.

The Fed currently states that it anticipates a ‘considerable time’ between the ending of quantitative easing and the first rate hike, with this taken to mean six months or more. With quantitative easing ending in October, we expect the first rate hike is likely to be in the June quarter of 2015.

What does this mean for investment markets?

With quantitative easing ending in the US and interest rate rises on the cards within the next 12 months, implications across each asset class vary.

• Equities: The experience around the initial flagging of tapering last year which saw shares fall 5-10% warns of the risk of a correction in the run up to and/or in response to the first rate hike. But beyond a short-term upset, the initial monetary tightening is unlikely to be a huge problem for shares. Historical experience tells us that the start of a monetary tightening cycle is not necessarily bad for shares. This is because in the early phases of a tightening cycle, higher interest rates reflect stronger economic and profit growth. It’s only as rates rise to prohibitive levels that suppress inflation that it becomes a problem.

• Fixed income: The commencement of a monetary tightening cycle in the US is expected to put upwards pressure on US and global bond yields in response to the uncertainty as to how high rates will ultimately go. A 1994-style bond crash is a risk but is unlikely – as the more constrained US and global growth and inflation backdrop this time around will likely mean that the monetary tightening cycle will be more gradual than in 1994.

• Real estate: Higher longer-term bond yields will likely make the relative yield from real estate slightly less attractive. As one of the beneficiaries of the reach for yield in the absence of attractive yields being offered by bonds, direct and listed real estate is vulnerable to a sharp rise in bond yields should it occur.

• Australian dollar: Progress towards eventual rate hikes in the US will put further downwards pressure on the Australian dollar.

Generally speaking, the end of quantitative easing and eventual US interest rate increases should be viewed by all investors as a good sign – after six years the US economic recovery is well underway and solid enough to withstand the start to more normal monetary conditions.

While uncertainty regarding the timing and magnitude of US interest rate increases is likely to keep flaring up periodically, on balance the move is a positive indicator as it signifies a brighter long-term outlook for the US economy (and therefore investors).

The fact that each assets class will be impacted in a differing way – and to a differing extent – is a timely reminder of the importance of maintaining a well-diversified portfolio.

About the Author  Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

Australian housing remains overvalued

Australian housing remains overvalued on most measures. But then again this has been an issue for more than a decade. For example, while a bit more extreme than my own view at the time, the OECD estimated that Australian house prices in 2004 were 51.8% overvalued. This compared to just 1.8% for US housing and 32.8% for the UK. While real house price weakness through 2010 to 2012 saw the degree of overvaluation diminish, the problem is returning with a vengeance:

• According to the 2014 Demographia Housing Affordability Survey the median multiple of house prices to household income in Australia is 5.5 times versus 3.4 in the US.

• On the basis of the ratio of house prices to rents adjusted for inflation relative to its long term average, Australian houses are 30% overvalued and units 17% overvalued.

• The ratios of house prices to incomes and rents in Australia are 23.5% and 40.9% above their long term averages respectively, which is at the higher end of OECD countries. This contrasts with the US, which is near the lower end in the OECD.

Source: OECD, AMP Capital

• And on my favourite measure, real house prices have been running above trend since 2003.

Source: ABS, AMP Capital

What’s to blame for high house prices?

There are two main drivers of the surge in house prices over the last two decades. The first was the shift to low interest rates. Lower rates enabled Australian’s to borrow more for a given level of income and so pay each other more for homes. As can be seen the shift in house prices from below trend to above (as derived from the last chart) has gone hand in hand with an increase in the ratio of household debt to income.

Source: ABS, RBA, AMP Capital

The trouble is that the shift to low interest rates occurred in many other countries and most did not have anywhere near the surge in house prices or household debt Australia had, implying a heavy speculative element in driving prices higher as well. I have long thought this surge in household debt and relative house prices represents Australia’s Achilles’ heal. Should anything go wrong with the ability of households to service their debt Australia would be at risk. Fortunately it’s hard to see the trigger for this in anything but a small way.

The second reason is a lack of supply. While the US saw a property price surge into 2006 matched by a supply surge, supply in Australia has been subdued due to restrictive land supply policies and high stamp duty and infrastructure charges. The National Housing Supply Council estimated a few years ago that since 2001 Australia had a cumulative net shortfall of over 200,000 dwellings. Reflecting this, residential vacancy rates remain relatively low.

Source: REIA, AMP Capital

Given the supply shortfall, most of the scapegoats that various commentators have come up with to explain high home prices are a sideshow. Foreign and SMSF buying is no doubt playing a role in some areas but looks to be small. Negative gearing is more contentious, but it’s likely that curtailing access to it when stamp duty remains very high will have a negative impact on the supply of property to the extent that it will have the effect of reducing the after tax return to property investment. Restricting negative gearing for property would also distort the investment market as it would still be available for other investments.

Rising risks

 Our assessment is that the Australian property market is not at the bubble extreme it was at a decade ago: the overvaluation is a bit more modest; annual housing credit growth for owner occupiers and investors is running at around one third the pace seen in 2003; Australians don’t seem to be using their houses as ATMs against which debt can be drawn suggesting they are less comfortable regarding the outlook and debt; and the home price gains now have been over a shorter period and are concentrated in just Sydney & Melbourne. However, danger signs are emerging:

• After a cooler period during the first half of the year the property market seems to be hotting up again. National average home prices rose at an annualised 16.8% pace over the 3 months to August according to RP Data and auction clearance rates are at or above last year’s highs.

Source: Australian Property Monitors, AMP Capital

• The proportion of housing finance commitments going to investors is now back to around the 50% high seen a decade ago, suggesting that the market is becoming more speculative. And there are signs that home buyers are starting to extrapolate recent strong price gains into the future which is very dangerous.

• Finally, The Block is back on top as the most watched show on TV highlighting a return to very strong community interest in the property market.

Taken together these indicators warn that the housing market is getting a bit too hot.

Policy implications

The heat in the home buyer market is clearly starting to concern the Reserve Bank with its Financial Stability Review indicating that it’s becoming concerned about speculative activity in the property market and the risks this poses to the broader economy when the property cycle eventually turns down. Normally with the property market hotting up the RBA would start to think about raising interest rates but right now it’s loath to do this given uncertainty regarding the rest of the economy and the risk a rate hike would put upwards pressure on the still too high $A.

As a result APRA is more closely monitoring the banks and the RBA and APRA are now discussing steps that could be taken to ensure sound lending practices are maintained with a focus on investors. The latter would involve the use of macro-prudential controls to slow the housing market – which is really just a fancy term for the old fashioned credit rationing that used to be applied prior to the 1980s. This could involve limits on loan to valuation ratios, forcing banks to put aside more capital or forcing banks to impose tougher tests when granting loans. Such approaches all have problems: they tend to work against first home buyers; if they target investors as looks likely they work against a group of lower risk borrowers; people can start to find their way around them; and their impact is hard to gauge.

The best approach is for the RBA to first ramp up its efforts to warn home buyers of the need to be cautious. But if that fails in quickly cooling the property market, expect an announcement from APRA and the RBA on lending restrictions likely targeting investors in the next few months.

Housing as an investment

Notwithstanding the rising risk of macro prudential controls, in the short term further gains in house prices are likely until the RBA starts to raise interest rates probably around mid-next year, soon after which another 5 to 10% property price down cycle is likely to start.

Beyond the short term it’s worth noting residential property has provided a similar long term return as Australian shares, with both returning around 11 to 11.5% pa since the 1920s. They are also complimentary to each in terms of risk and liquidity and are lowly correlated. All of which means there is a case for investors to have exposure to both.

At present though, housing looks somewhat less attractive as a medium term investment. The gross rental yield on housing is around 3.2% and for units is around 4.4% giving an average of just 3.8%. After costs this is just below 2%. Shares & commercial property both offer much higher yields.

Medium term capital growth is also likely to be limited, with the overvaluation likely to see real house prices stuck in a 10% or so range around a broadly flat trend. This is consistent with the 10-20 year pattern of alternating secular bull and bear phases evident in the second chart in this note.

Taken together this suggests that a realistic expectation for total returns from residential property over the medium term is just around 4 to 5% pa.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital
 

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Introduction

How did we get here?

It’s worth putting things in context and recalling how we got to this period of extraordinary easy monetary conditions. At its simplest it was just part of the cycle: growth weakened and so monetary conditions were eased. But the GFC related slump was deeper than normal leaving households and businesses far more cautious. So once interest rates hit zero and it was apparent the recovery was still sub-par, the focus shifted to measures to boost the supply of money. This became known as quantitative easing and involved the Fed printing money and using this to buy government bonds and mortgage backed debt. It helped growth by cutting borrowing costs, injecting cash into the economy, forcing investors to take on more risks, and to the extent it drives shares higher, it helped build wealth that helped spending.

Has ultra-easy US money worked?

The short answer is yes. A range of indicators suggest the US economy is now on a sounder footing: bank lending is strengthening; the housing construction recovery is continuing; consumer spending growth is reasonable; business investment looks stronger; business conditions indicators are strong; employment is back above its early 2008 high and unemployment has fallen to 6.1%. In particular, after a contraction in GDP in the March quarter, US growth bounced back strongly in the June quarter and solid growth looks to be continuing in the current quarter.

Source: Bloomberg, AMP Capital

How will the Fed tighten?

Reflecting the success of extraordinary monetary easing its little wonder the Fed is edging towards starting to return monetary conditions to “normal”. In the past doing this was easy as the Fed would just start raising interest rates. Now it’s more complicated. The first step was the tapering of its QE program. QE3 started at $US85bn a month in bond purchases in 2012 and following the start of tapering in December last year has now been cut to $US15bn a month. It’s now on track to end at the Fed’s late October meeting.

The second will be to actually tighten. This will come in the form of raising interest rates and reversing its QE program (ie unwinding the bonds it holds). Raising interest rates is simple, but unwinding its bond holding is a bit more complicated. At this stage it looks like it will primarily aim to do this by not replacing bonds as they mature.

How long till the first hike & what's "normal"?

For some time the Fed has said that it expects a “considerable time” between the end of QE and the first rate hike. This has been taken to mean around six months or more and so if QE ends in October this means the first hike will occur around the June quarter next year. While the Fed is still retaining the “considerable time” language its clear from Fed Chair Yellen’s comments that the timing of the first rate hike is conditional on how the economy is performing. Our best guess though remains that the first hike will come in the June quarter. While the economy is on the mend, there remain several reasons why the Fed is not in a great hurry:

• Growth is still far from booming and the difference between actual and potential GDP is around 4%.

• Labour force underutilisation, which includes unemployment and those wanting to work longer, at 12% is well above the 9.4% average that applied when the Fed started raising rates in 1994, 1997, 1999 and 2004.

• Wages growth remains very weak at just 2.1% year on year, which is where it’s been for the last four years now.

• Inflation on the Fed’s preferred measures is just 1.5%.

Finally, global economic conditions are still subdued including in Europe and the emerging world and this is a dampener on demand for US exports.

Source: Bloomberg, AMP Capital

Reflecting this, the Fed can afford to take its time and when it does start to hike next year the process is likely to be gradual. In the past the “normal” or neutral level for the Fed Funds rate was thought to be around 4.5%, but Fed officials now put it at around 3.75% reflecting a more constrained growth environment due to more cautious attitudes towards debt and slowing labour force growth. So the Fed Funds rate may not rise that much above 3.75% in the upcoming tightening cycle, but it will take several years to get there.

What about the impact on the US economy?

Just remember that the Fed is only edging towards rate hikes because the US economy is stronger and so it can now start to be taken off life support. After the efforts of the last few years the last thing the Fed wants to do is to knock the economy back down again. Historically, it is only when interest rates rise above neutral and above the level of long term bond yields (which are now 2.6%) that the US economy starts to slow. At present we are still a long way from that.

What about the impact on the end of QE?

The more immediate issue is the end of QE next month. A concern for investors is that when QE1 ended in March 2010 and when QE2 ended in June 2011 they were associated with 15 to 20% share market falls. See the next chart.

Source: Bloomberg, AMP Capital

However, while the ending of QE3 may add to volatility it’s very different to the abrupt and arbitrary ending of QE1 and QE2. Back then the US economy was much weaker and global confidence was hit by the Eurozone crisis. Now the US economy is on a sounder footing.

What about the impact of rate hikes?

Shares – just as talk of tapering upset shares around the middle of last year (with a 5-10% correction), so too talk and then the initial reality of rising US interest rates could cause a similar upset. However, the historical experience tells us that the start of a monetary tightening cycle is not necessarily bad for shares. The next table shows US shares around past Fed tightening cycles. The initial reaction after three months is mixed with shares up half the time and down half the time. But after 12 and 24 months a positive response dominates. The reason is because in the early phases of a tightening cycle higher interest rates reflect better economic and profit growth. It’s only as rates rise to onerous levels to quell inflation that it becomes a problem. But that’s a fair way off.

Source: Thomson Reuters, AMP Capital

It’s also worth noting that the rally in shares over the last five years is not just due to easy money. It has helped, but the rally has been underpinned by record profit levels in the US.

Bonds – the commencement of a monetary tightening cycle in the US is expected to put upwards pressure on US and hence global bond yields in response to uncertainty as to how high rates will ultimately go and as to how quickly the Fed will reduce its bond holdings. A 1994 style bond crash is a risk, but unlikely as the US/global economy is not as strong as back then. What’s more the monetary tightening will not be synchronised with Europe, Japan and China possibly easing further. As such the back up in bond yields is likely to be gradual and the broad environment will remain one of low interest rates and bond yields for some time yet.

US dollar – the combination of anticipated then actual tightening of US monetary policy at a time of easy/easing monetary policy in many other parts of the world will likely put further upwards pressure on the value of the US dollar.

Emerging market assets – tightening US monetary conditions could weigh on some emerging countries that are dependent on foreign capital inflows. It remains a time to be selective when investing in emerging market shares.

What about the impact on Australia?

The gradual move towards US monetary tightening has taken pressure off the $A allowing it to resume its downtrend which is likely to take it down to $US0.80 over the next year or two. This is necessary to deal with Australia’s high cost base and weakening export prices. While the Australian share market could underperform as the $A heads down as foreigners stay away, ultimately it will provide a huge boost as it helps trade exposed sectors become more competitive and boosts the value of foreign sourced earnings. Roughly speaking each 10% fall in the $A adds about 3% to earnings.

Concluding comments

With the US economy on a sounder footing, the Fed is getting closer to a tightening cycle. While this could contribute to short term share market volatility, the tightening is likely to be gradual given the constrained global economic recovery & we are a long way from tight monetary conditions that will seriously threaten the cyclical rally in shares.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

If you let your insurance lapse, you risk being unable to make a claim when you may really need to. Take a look at our claims statistics below and you’ll see that, more often than not, it’s our older customers who understand first-hand the true value of their insurance.

Source: Claims Paid 2013, AMP Life Limited and The National Mutual Life Association of Australasia Limited Claims.

Based on the statistics above, if you’re over the age of 50 there is a higher chance you’ll need to make a claim on your policy at some point in the future. So it’s worthwhile considering the value of your insurance before and your personal situation before you let it go.

Health, age and changing legislation

If you let your insurance lapse, you need to think about whether you will be able to get the same cover back again, should you ever want to. And it’s important to know it’s not just age and health-status that can affect a new insurance application.

As an example, new legislation means some policy options[1] held in super are no longer available for new applicants at all. So for some people, cover that was once in place and then lapsed is now gone for good.

Investing where it counts

As your dependants leave home and your debt levels reduce you should probably reconsider the level of cover you need and have. While you need to understand your own circumstances and changing needs, often one of the main reasons customers let their insurance lapse is to save money. An insurance policy can seem like an unnecessary expense and with any luck it may not be necessary at all. But ironically, not being covered for an event that actually happens can be far more expensive than the cost of a policy.

There are a few ways to manage the affordability of insurance.

Insurance through super is an option where you don’t have to pay for your policy from your household budget however it does come out of your super. Accordingly, you need to carefully consider your personal circumstances and decide whether this option is right for you.

Insurance can give you peace of mind as you near retirement. If you need to claim, your regular super payments may be covered too so you’d be boosting your retirement savings even if you’re out of action.

The key is to make sure your insurance always meets your current needs―that way, the cost of your policy can reduce if your needs become less.

And if you’re 50 or older, make it a priority to speak with us today about your insurance needs.

[1] The own-occupation option is no longer available on new total and permanent disablement policies held in superannuation.

What you need to know Any advice in this document is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on the advice, you should consider the appropriateness of the advice having regard to those matters and consider the Product Disclosure Statement before making a decision about the product. AMP Life is part of the AMP group and can be contacted on 131 267. If you decide to purchase or vary a financial product, AMP Life and/or other companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.

According to research[1], the average renovation goes over budget by nearly $3,000 due to unexpected material and labour costs. But that’s not all.

The same research shows that the average renovation takes 58% longer than expected. If you’re renovating an investment property, extra time could also mean more time without a tenant, and less rental income which could really inflame costs.

What causes a renovation to go over budget? Renovation projects usually go over budget because costs are inaccurately projected.

Costs for any renovation—no matter how small—need to be calculated before any work is carried out. And for a prospective property in need of renovation, the renovation costs should be worked out before an offer to buy is even made.

That means instead of conjuring a ballpark budget figure of say $40,000, you need to work up from exact costs to a realistic total cost. For example, you need to factor in everything from the number of power points required to the doors that need replacing to arrive at a true cost – in time and money – rather than a vague estimation.

The solution to staying on track

Whether you’re updating or undertaking a complete overhaul, you can keep your renovation on budget—and on time—by keeping the unexpected at bay.

The AMP renovation budget tracker has been invaluable to the contestants on The Block—and the good news is it’s now available for you via http://tracker.qandamp.com.au

Manage all the costs of your renovation from your desktop, and make sure you stay on track throughout your project.

Top tips

Consider our tips for your keeping your renovation budget on track:

1. Use the AMP renovation budget tracker at http://tracker.qandamp.com.au

2. Thoroughly plan everything—for example, map out your floor plan in detail and finalise the placement of permanent fixtures in your kitchen and bathroom before undertaking any work.

3. Project-manage the renovation yourself but beware unexpected traps. Speak with professionals about realistic time frames and the time you’ll have to invest.

4. Shop around and negotiate—compare quotes for materials and tradespeople but remember cheapest may not always be best. Ask for references when choosing tradespeople and get referrals whenever possible.

What you need to know

The above tips should be used as a guide only. AMP and its related companies are not liable for any claims, losses, damages, costs and/or expenses sustained or incurred in connection with the above tips. Any advice on this page is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters and consider the Product Disclosure Statement before making a decision about the product. AMP Life is part of the AMP group and can be contacted on 131 267. If you decide to purchase or vary a financial product, AMP Life and/or other companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.