Provision Newsletter

Have you considered what’s on the agenda, such as how often you see yourself eating out and whether you want to travel domestically or afar?

If you’re in or approaching retirement, you may be prioritising things such as living costs, utility bills, health care and even potentially helping the kids out with their future financial goals.

With many Australians looking at a retirement (which in reality, could span a few decades), another thing to give some thought to is keeping some money aside for your own recreation and social life.

What activities are on your to-do list?

Think about what you enjoy doing, what you’re likely to want to do more of, or even get into with more time on your hands.

• Eating out – restaurants, beach barbecues, picnics, food fairs

• Travel – interstate breaks, overseas holidays, road trips, caravanning

• Entertainment – cinemas, concerts, events, stage shows

• Sport – golf, tennis, cycling, yoga, pilates

• Hobbies – fishing, sailing, photography, drawing, woodwork

• Volunteering – hospitals, soup kitchens, animal shelters

• Club associations – Rotary, Leagues, Surf Life Saving

• Tournaments – trivia, bridge, chess.

How can you budget for the things I enjoy?

If you need a guide, the Association of Superannuation Funds of Australia (ASFA) benchmarks the annual budget needed to fund a comfortable and modest standard of living in retirement, with figures based on an assumption people own their home outright and are relatively healthy.

According to September 2018 figures, individuals and couples around age 65, looking to retire today, would need an annual budget of $43,200 and $60,843 respectively to fund a comfortable lifestyle, or $27,595 and $39,666 respectively to live a modest lifestyle¹.

According to ASFA, a comfortable retirement lifestyle would enable an older, healthy retiree to be involved in a broad range of leisure and recreational activities, whereas a modest retirement lifestyle would enable an older healthy retiree to afford more basic activities².

How much are you likely to spend on recreation anyway?

According to research, singles and couples (aged 65 to 85) living a comfortable lifestyle in retirement would spend about $180 and $270 of their weekly budget respectively on leisure and recreation³.

This takes into account a broad range of recreational activities, including⁴:

• Lunches and dinners out

• Domestic and international holidays

• Movies, plays, sports and day trips

• Things like streaming services

• Club memberships.

Making your money go further for the fun stuff

• Make use of your Senior’s Card for transport concessions and other discounts

• If going overseas isn’t in your budget, you could consider a road trip interstate

• If you enjoy dining out, find two-for-one deals nationally via sites like TheHappiestHour

• Pack a rug, food basket and esky, and head to the park or beach for a picnic

• Swap a visit to the day spa with a DIY manicure and candle-lit bubble bath

• Have the troops over for a poker night or take turns hosting dinner parties

• Find cheap accommodation on Airbnb or consider listing your own place to earn money while you’re away.

Meanwhile if your seeking further assistance on this topic , please contact us on |PHONE| 

Source : AMP January 2109 

1, 2 ASFA Retirement Standard table 1
3, 4 ASFA Retirement Standard – Detailed budget breakdowns – September quarter 2018 page 4

Important information:

This information is provided by AMP Life Limited. It is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances and the relevant Product Disclosure Statement or Terms and Conditions, available by calling 13 30 30, before deciding what’s right for you. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability for any resulting loss or damage of the reader or any other person

Scepticism about China’s economic success amongst (mostly western) investment commentators has been an issue for as long as I can remember. The current China worries mainly relate to slowing growth, high debt and the trade dispute with the US. China is now the world’s second largest economy and its biggest contributor to growth so what happens in China has big ramifications globally. This is particularly so in Australia as China is its biggest export destination. This note looks at the main issues and what it means for investors and Australia.

Is growth slowing a little or a lot?

China slowed through 2018. GDP growth for the whole of 2018 came in at 6.6% which was a bit above our expectation of 6.5%, but it was down from 6.8% growth in 2017 and momentum slowed to 6.4% year on year in the December quarter. Some commentators argue that China’s actual GDP growth is much weaker – maybe just half the reported rate. The argument often runs along the lines that the GDP data comes out too early after the end of each quarter, it’s too smooth to be believed and that it’s made up to suit the annual growth target. This speculation has long been around and I’ve always thought it’s a bit of a distraction: it stands to reason that emerging countries like China have less to spend on stats so they may be less accurate than in rich countries, and if China’s economy is really a lot smaller than it claims then why is the rest of the world so concerned about a slowdown in its economy? And why is the US concerned about its rising economic clout? The bottom line is that it’s all too academic to get too hung up on and so I tend to see the GDP data as a rough, but admittedly imperfect, guide.

So what does other data say? As can be seen in the next chart, growth in industrial production, retail sales and fixed asset investment all slowed through 2018 to multi-year lows, albeit it’s all still pretty solid compared to most other countries. 

Source: Thomson Reuters, AMP Capital

Annual growth in exports and imports also went negative in December and the weakness in exports could have further to go given that they were arguably artificially boosted as Chinese exporters/US importers sought to “front run” US tariffs.

Source: Bloomberg, AMP Capital

Chinese manufacturing conditions PMIs have also fallen sharply. See the next chart.

Source: Bloomberg, AMP Capital

For those sceptical of official Chinese data, I have shown the private sector Caixin survey but it’s a similar message from the official PMI survey, ie manufacturing has slowed.

While concerns about the trade war may have contributed to the slowdown, the main driver so far appears to be tighter credit conditions aimed at slowing debt growth via the less regulated “shadow banking” system. This would explain why smaller businesses are doing it tough relative to larger businesses.

However, it’s not all doom and gloom. First, the housing sector has been doing well with house prices rising.

Source: Bloomberg, AMP Capital

Second, while manufacturing has slowed, services has continued to hold up well. This is evident in relatively solid readings for the services conditions PMIs (in both the official and Caixin PMIs) of around 54 in contrast to weaker manufacturing PMIs – see the second chart above. Services are less affected by trade wars and the services sector is expanding relative to the manufacturing sector. Out of interest this may partly explain why GDP growth in China is now smoother and does better than expected with most commentators focusing on the old manufacturing sector.

Finally, policy stimulus is ramping up…

Policy easing

In response to the growth slowdown, China has moved to start providing significant policy stimulus with the People’s Bank of China cutting the required reserves that banks have to keep (allowing them to lend out more) and the government recently announcing fiscal stimulus focused on tax cuts for households and small businesses but also infrastructure spending amounting in total to 2-3% of GDP for this year. With public debt and inflation relatively low there is little constraint on policy stimulus except to avoid another big ramp up in debt, which is why stimulus is now more focused on tax cuts than debt-related investment. Which in turn means more of a boost to services demand in China than to global commodity demand and a less certain impact than was seen from the 2008 and 2015-16 stimulus programs.

Growth and inflation outlook

We expect Chinese growth this year to slow further in the short term particularly as exports weaken after front running, but policy stimulus should help head off a deeper downturn and see growth improve in the second half. But it’s more aimed at preventing a sharp downturn in growth rather than pushing growth a lot higher. So overall growth is expected to be around 6.2% this year which is still a bit slower than last year’s 6.6% growth rate. Inflation is likely to remain low.

What about China’s “debt time bomb”?

This is the most commonly expressed concern about China, with the ratio of non-financial debt to GDP having increased very rapidly from around 150% a decade ago to nearly 300% now. This has caused some to fear a financial catastrophe for China. However, China’s debt problems are different to most countries. First, China has borrowed from itself – so there’s no foreigners to cause a foreign exchange crisis. Second, much of the rise in debt owes to corporate debt that’s partly connected to fiscal policy and so the odds of a government bailout if things go wrong are high. Finally, the key driver of the rise in debt in China is that it saves around 45% of GDP (roughly double that in developed countries) and most of this is recycled through the banks where it’s called debt. So unlike other countries with debt problems, China needs to save less and consume more, and it needs to transform more of its saving into equity rather than debt. Chinese authorities are aware of the issue and overall growth in debt has slowed but slamming on the debt brakes without seeing stronger consumption makes no sense. But boosting consumption will take time and will involve moving to a more progressive tax system and enhanced social welfare.

What about the trade war?

While the tariff increases that have actually been implemented so far in the US/China trade war are relatively small the threat of more to come has clearly adversely affected confidence (and thus investment) in both countries. Trade negotiations between the US and China are reportedly progressing well but big differences apparently still remain. The pressure from slowing growth on both sides means that both China and the US are under pressure to reach a deal though – notably President Trump who doesn’t want to see recession or an extended bear market derail his 2020 re-election prospects. As such we see roughly an 80% chance that a deal is reached – either before the March 1 deadline for negotiations or after an extension.

The Chinese share market

Chinese shares have bounced 9% from their December low. But they had a 32% top to bottom fall last year and are still cheap trading on a price to forward earnings ratio of just 10 times (compared to 14.7 times for Australian shares) which is about as cheap as they ever get. See the next chart.

Source: Thomson Reuters, AMP Capital

They may have a short-term pullback as growth slows further in the first half, but with valuations cheap they should perform well on a 12-month horizon as growth and hence profits improve through the second half.

Implications for Australia

A sharp slowdown in China would be a double whammy for the Australian economy coming at the same time as the housing downturn. But while it’s a risk it’s not our base case. Rather our outlook for China’s economy to stabilise and growth to pick up a bit in the second half implies a reasonable – but not spectacular – outlook for commodity prices. Combined with the spike in iron ore prices on the back of Vale’s problems (albeit temporary) it points to reasonable growth in export earnings, which will be one source of support helping to counter the housing downturn. Reasonable commodity prices will help prevent a sharp drop in the $A, but we still see it falling into the $US0.60s as the RBA cuts the cash rate to 1% this year.

Source: AMP Capital 7 Feb 2019

Important notes: 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.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy grew above trend in 2018, although it slowed in the second half of the year. Unemployment rates in most advanced economies are low. The outlook for global growth remains reasonable, although downside risks have increased. The trade tensions are affecting global trade and some investment decisions. Growth in the Chinese economy has continued to slow, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, headline inflation rates have moved lower due to the decline in oil prices, although core inflation has picked up in a number of economies.

Financial conditions in the advanced economies tightened in late 2018, but remain accommodative. Equity prices declined and credit spreads increased, but these moves have since been partly reversed. Market participants no longer expect a further tightening of monetary policy in the United States. Government bond yields have declined in most countries, including Australia. The Australian dollar has remained within the narrow range of recent times. The terms of trade have increased over the past couple of years, but are expected to decline over time.

The central scenario is for the Australian economy to grow by around 3 per cent this year and by a little less in 2020 due to slower growth in exports of resources. The growth outlook is being supported by rising business investment and higher levels of spending on public infrastructure. As is the case globally, some downside risks have increased. GDP growth in the September quarter was weaker than expected. This was largely due to slow growth in household consumption and income, although the consumption data have been volatile and subject to revision over recent quarters. Growth in household income has been low over recent years, but is expected to pick up and support household spending. The main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities.

The housing markets in Sydney and Melbourne are going through a period of adjustment, after an earlier large run-up in prices. Conditions have weakened further in both markets and rent inflation remains low. Credit conditions for some borrowers are tighter than they have been. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased to an annualised pace of 5½ per cent. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

The labour market remains strong, with the unemployment rate at 5 per cent. A further decline in the unemployment rate to 4¾ per cent is expected over the next couple of years. The vacancy rate is high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development. The improvement in the labour market should see some further lift in wages growth over time, although this is still expected to be a gradual process.

Inflation remains low and stable. Over 2018, CPI inflation was 1.8 per cent and in underlying terms inflation was 1¾ per cent. Underlying inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual and to take a little longer than earlier expected. The central scenario is for underlying inflation to be 2 per cent this year and 2¼ per cent in 2020. Headline inflation is expected to decline in the near term because of lower petrol prices.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Source: Reserve Bank of Australia, February 5th, 2019

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Email: rbainfo@rba.gov.au

Deciding on a school could be as simple as geography but sometimes other factors, like your finances, play a part in the selection process.

If you’re thinking about what school to enrol your children into, it might be a more complicated decision than merely opting for something in the local area.

Family values, student facilities, extra-curricular activities and your financial situation could all come into play. We look at some of the things to consider and what you can expect to pay.

1. Choosing a school close by

Attending a school close to home can have its advantages—your kids’ classmates will often live nearby and as a result, also be involved in the same sports or extra-curricular activities.

Time and money can also be saved on commuting when school is a short stroll, lift or bus trip away.

2. Family values and personal preferences

You may want to think about whether a school’s culture, philosophy, religious affiliations or emphasis on academia, arts or sporting achievements align with your own family ideals.

It’s also worth considering whether you have preferences around things like class sizes, assessment techniques, disciplinary policies, single-sex or co-ed environments, and teacher/parent communication.

3. Facilities, support and additional programs

Other things that may be important to you and your family might involve the amenities and services on offer, such as:

• Library, computer room, science lab

• Facilities for sport, music and art

• Playgrounds and cafeterias

• Counselling services and first aid

• Before and after-school care 

• Extra-curricular activities and programs

• Language, literacy and numeracy tutoring

• Financial support or incentives, including scholarships.

4. What you can expect to fork out

According to figures from ASG, for a child born today, the total cost of schooling in a capital city (from ages 0 to 17) is estimated to be around1:

• $68,007 if they attend government schools

• $252,085 if they attend systemic/catholic schools

• $499,593 if they attend private schools.

For many families, money will play a part in the decision-making process, which is why it’s a good idea to start planning for your children’s education early on—think school fees, uniforms, travel, stationery and additional activities.

While there’s a significant variation in cost, expensive schools don’t necessarily guarantee a greater experience or better results.

5. Government subsidies

Depending on where you live, you may be eligible for financial benefits to help with things such as transport, textbooks, extra-curricular activities and other education-related expenses.

Check out our article for a bit of a rundown on what’s available in different Australian states and territories – Are you eligible for school subsidies?

6. Waiting lists and entry requirements

Some schools have waiting lists and entry requirements which may depend on academic or sporting achievements, or whether you’re located in the school’s district.

It’s worth researching these things early on because while you may think you have plenty of time to decide, realistically you may not, with some schools advising to enrol your kids immediately after birth.

7. Ways to narrow down your shortlist

If you’ve narrowed down your shortlist, but are still undecided, a bit of extra research could help. You can check out performance data online via My School, which includes recent NAPLAN results.

Numbers aren’t everything though, so look to other sources of information to gauge school attitudes and strengths, such as the school website, annual reports, open days, information nights and associated online networks.

Talking to staff, the principal, other students’ parents and the wider community could also go a long way.

Source : AMP January 2019 

 Important information:This information is provided by AMP Life Limited. It is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances and the relevant Product Disclosure Statement or Terms and Conditions, available by calling 13 30 30, before deciding what’s right for you. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability for any resulting loss or damage of the reader or any other person

Are you a woman who’s in control of her finances?

With many women likely to become solely responsible for their financial wellbeing at some point in their lifetime, you might very well want to be.

Higher rates of divorce coupled with women living longer than men¹ brings to light an important point, if you’re a woman, and that’s the likelihood that at some stage in your lifetime you’ll be responsible for your own financial wellbeing (if you aren’t already).

If you’re thinking, (meh!) my other half will always take care of me, you might be interested to know that according to a study published by UBS Wealth Management in the United States last year, eight out of 10 women will become solely responsible for their financial wellbeing at one point or another².

We take a look at some of the insights that came out of the report, as well as what tips women had for other women in regard to their money matters.

Findings from the report

Some of the statistics that came out of the study included the following³:

• 59% of divorcees and widows wish they’d been more involved in long-term financial decisions.

• 56% of divorcees and widows discovered financial surprises after the fact, such as high debt, outdated wills and hidden accounts.

• 53% would have done fewer household chores to find more time for finances.

• 98% encouraged other women to take a more active role in their money matters.

Cross-generational differences

According to the report, younger women were perpetuating rather than transforming the status quo, with 61% of Millennial women leaving financial decisions to their partner, compared to 55% of Generation X women and 54% of Baby Boomer women⁴.

Despite this, younger women were also more likely to believe they should be doing more to better manage their finances than their older counterparts⁵.

Meanwhile, the reasons why women minimised their role in major financial decisions, included men being seen as financial providers, men often being the bread winners within the household and time constraints providing challenges for women, as they often took on the majority of household duties, which included paying bills and tracking day-to-day spending⁶.

Actions you could take today

Some insights that came out of the research included⁷:

• Know what assets and liabilities you have

• Know what you want in life

• Know what cashflow you have to meet your short-term expenses

• Know what you’ve got behind you for your longer-term needs, like retirement

• Know what you want beyond that, such as whether you want to leave an inheritance

• Have the money talk with your partner

Please contact us on |PHONE| if we can be of any assistance on this topic 

1-7 UBS Report – Own your worth (How women can break the cycle of abdication and take control of their wealth) pages 1, intro, 2, 3, 5, 6, 9

Source : AMP January 2019

 Important information:This information is provided by AMP Life Limited. It is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances and the relevant Product Disclosure Statement or Terms and Conditions, available by calling 13 30 30, before deciding what’s right for you. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability for any resulting loss or damage of the reader or any other person

The housing cycle and house prices always incite high interest in Australia. Until recently it was all about surging prices and poor affordability – particularly in Sydney and Melbourne. Over the last year it’s turned into how far prices will fall and what’s the impact on the economy. Global issues and the election aside, the housing downturn is likely to be the main issue for Australia in 2019. This note provides a Q&A on the main issues.

How far have home prices fallen?

According to CoreLogic data, up until December capital city dwelling prices are down 7% from their September 2017 high. This masks a wide range though with Sydney down 11% from its July 2017 high, Melbourne down 7% from its November 2017 high, Perth down 16% and Darwin down 25% from their mid 2014 mining investment boom highs but other cities continuing to trend up to varying degrees. Recently the declines have been led by Sydney and Melbourne. House prices are on average down more than unit prices and prices in regional centres have generally held up better than capital cities.  

Source: CoreLogic, AMP Capital

What is driving the falls?

The fall in property prices comes after a boom – most recently over the five years to 2017 that in particular saw Sydney prices rise 72% and Melbourne prices gain 56%. This, on top of gains since the mid-1990s, saw a sharp deterioration in affordability, prices become overvalued relative to income, rents and their long-term trend and reach expensive levels by global standards. The surge in home prices went hand in hand with a surge in debt that has seen the ratio of household debt to income go from the low end of OECD countries to the top end. High prices and high debt left Australian housing very vulnerable. What has changed in the last two years is that:

• It’s become harder to get a loan as regulators forced banks to tighten lending standards and the Royal Commission seems to have made banks even more cautious. 

• A big pool of interest only borrowers are switching to principal and interest driving higher debt servicing costs.

• Banks have cut lending to SMSF funds to invest in property.

• The supply of units has surged to record levels.

• Foreign demand has fallen sharply.

• As rising prices fed on themselves by driving expectations for more price gains (FOMO – fear of missing out), falling prices are driving reduced price expectations and leading to reduced demand and FONGO (fear of not getting out).

• Investors are starting to factor in less favourable negative gearing and capital gains tax arrangements if there is a change of government.

• Problems regarding the Lacrosse and Opal buildings have dented confidence around building standards. 

• Its unlikely interest rate cuts will quickly end this property cycle downturn as occurred in the 2008 and 2010-12 downswings. Rates are already low & debt is much higher.

What will be the impact of tax changes?

The Australian Labor Party’s policy since the last election has been to limit negative gearing to new property and double capital gains tax on investments held for more than 12 months. This is aimed at improving housing affordability which means lower prices. Put simply, such changes would make it less attractive for investors to invest in residential property which would be negative for prices. A study by Riskwise Property Research and Wargent Advisory found that this would lower property prices ranging from 2 to 3% in Tasmania to around 9% in Sydney. While the tax changes are proposed to be grandfathered, it’s likely it’s already reducing investor demand as investors worry that when it comes time to sell their property if the tax changes occur then there will be less demand.

How far will home prices fall?

For Sydney and Melbourne our base case has been that prices would have a top to bottom fall of around 20% out to 2020. However, the further plunge in auction clearance rates and acceleration in price falls late last year suggest a deeper fall possibly of around 25% (although it’s impossible to be precise). This suggests around another 15% fall in Sydney and more in Melbourne. A 25% top to bottom drop would take prices back to where they were in late 2014/early 2015.  

Source: Domain, AMP Capital

While prices in other cities are being affected by credit tightening they were less speculative and so are less vulnerable. Perth and Darwin have already seen prices fall back to decade ago levels. Other capital cities and regional centres generally didn’t have a boom and so are unlikely to have a bust. So for the rest of Australia flat prices to modest gains are likely. Taken together this suggests a top to bottom fall in national average prices of 10 to 15%, with another 5 to 10% this year.

Will home prices crash?

This is a bit of an unhelpful question like the “are we in a property bubble” questions of a few years ago as it’s hard to define and implies a degree of inevitability in terms of the implications. A 25% plunge in Sydney and Melbourne may seem like a crash but given the extent of the prior gains it’s arguably not. But a 25% national average fall would probably be interpreted as a crash. Our assessment is that this is unlikely unless we see much higher interest rates or unemployment (neither of which are expected) driving a sharp rise in defaults and forced property sales or a collapse in immigration (which would collapse demand). Strong population growth is still driving strong underlying demand for housing. While mortgage stress is a risk, it tends to be overstated, and is unlikely to be a generalised issue unless interest rates or unemployment shoot higher. And, while Sydney and Melbourne are at risk, other cities have not seen the same boom & so are unlikely to crash.

Although many like to make comparisons to the US at the time of the GFC, there are two big differences. Australia has not seen the surge in sub-prime loans where money was lent to home owners who often had “no income, no job, no asset” (NINJA loans). Secondly, our mortgages are full recourse meaning we won’t see “jingle mail”, where home owners can send back the keys just because the house value falls below their debt, which then saw the bank put the property back on the market pushing home prices even lower.

However, the risk of a crash cannot be ignored given the danger that banks may become too tight and that investors decide to exit in the face of falling returns.

Have home prices fallen before?

A common property myth is that prices only ever go up and never fall. But a simple look at history tells us this is not so. Real house prices (ie prices after the impact of inflation) in Sydney fell 36% in 1934-35, 32% in 1937-41, 41% in 1942-43, 12% in 1947-48, 14% in 1951-53, 12% in 1961-62 and 22% in 1974-77. In nominal terms based on CoreLogic data Sydney dwelling prices fell 25% in 1980-83, 10% in 1989-91, 8% in 2004-06 and 7% in 2008-09. So a 25% fall this time around would be similar to that seen in the early 1980s.

What will be the impact on the economy?

The housing downturn will affect the broader economy via slowing dwelling construction, negative wealth effects on consumer spending (ie, our wealth goes down, we feel poorer, we spend less than otherwise) and if rising defaults drive a further slowing in bank lending. The first two will detract 1 to 1.5 percentage points from economic growth. Growth in infrastructure spending and business investment should help keep the economy growing but its likely to be constrained to around 2.7% which in turn will keep wages and inflation low.  

Source: ABS, AMP Capital

What is the impact on banks?

The main risk for banks is that the property downturn drives a rise in defaults. However, full recourse loans mean that just because home prices fall resulting in negative equity, defaults won’t necessarily rise. In the absence of much higher interest rates or unemployment making it harder for people to service their loans, a big rise in defaults is unlikely. However, it’s still a risk and the housing downturn will likely mean slower bank lending which will constrain bank profits.

What will it mean for interest rates?

Constrained growth due to the housing downturn resulting in lower for longer inflation will likely drive the RBA to cut interest rates this year, with two cuts taking the cash rate to 1% by year end. Our base case is that this will occur in August and November (giving the RBA chance to assess the election and tax cuts), but soft data could see it come earlier. Tax cuts from July are unlikely to be big enough (the Government is allowing for just $3bn pa in tax cuts which is just 0.1% of GDP) to head off the need for rate cuts.

Is the house price downturn good or bad?

This depends on who you are. For baby boomers who got in years ago, have paid off their debt and saw the value of their home rise to levels they never believed sustainable, a fall back to 2014/15 levels may be no big deal. For those who got in more recently and have a big mortgage price falls are more of a downer and its this group for whom negative wealth effects will be greatest. For millennials trying to get in its great news – assuming the housing downturn is not so great that it knocks the economy for six and they lose their jobs. For investors…

What does it mean for investors?

Over the very long-term, residential property adjusted for costs has similar returns to Australian shares. So, there is a role for it in investors’ portfolios. However, right now the slump in property prices in some cities is bad news for investors given that rental yields are often just 1-2% after costs. Falling rents in Sydney are a double whammy. Add to this uncertainty about tax and it’s not a great time for a property investor. That said, other cities and regional centres offer more attractive rental yields than Sydney and Melbourne and falling prices in Sydney and Melbourne will throw up opportunities at some point.

Source: AMP Capital 23 January 2019

Important notes: 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.