Provision Newsletter

Global listed infrastructure has become increasingly popular with investors who are looking to improve the resilience and diversification of their equity portfolio. This article examines investment case for infrastructure and also listed infrastructure specifically.

Firstly, let’s take a step back and look at why more and more investors are looking at allocating to infrastructure in general:

Stability

Infrastructure assets provide essential services to society, such utilities, oil and gas pipeline networks, communications and transportation infrastructure. These assets can offer stable and predictable cash flow supported by long term contracts or regulation, with monopolistic characteristics and high barriers to entry.

Yield

Global listed infrastructure also has offered an attractive income component as part of the overall total return historically. The asset class had traditionally offered higher yields than global equities. The current dividend yield spread is at 1.57% compared to the historical median of 1.40% ^[1]

Growth

The need for infrastructure investment is a never-ending cycle. Investment in infrastructure helps stimulate sustainable long-term economic growth. That growth then creates a need for further infrastructure. McKinsey forecasts that US$57 trillion investment is required in core infrastructure alone between 2012 and 2030 ^[2]. Heavily indebted governments can’t afford to spend that money themselves. Listed infrastructure companies must be part of the solution to fund this shortfall and are well positioned to benefit from attractive investment opportunities.

Now let’s focus on why the number of investors allocating to listed infrastructure has increased significantly over recent years. Global listed infrastructure is a relatively young asset class, but there is a growing recognition that the asset class delivers significant benefits to portfolios, such as:

Diversification

Investors can access a broad set of liquid investment opportunities across geographies and sectors that may not be available through direct investment. Regulatory frameworks and contracts’ structures vary greatly from sector to sector and from region to region, as they are based on and exposed to macro variables in different ways. Diversification can help mitigate risk in concentrated exposure to regional economic downturns and regulations.
Liquidity

Listed infrastructure companies offer liquid access to illiquid assets. According to Preqin, the dry powder from unlisted infrastructure funds is now at a record high at US$176 billion^[3]. In contrast, the liquidity of listed infrastructure enables new allocations to be deployed with a high degree of efficiency
Valuation dislocation

In many instances, assets are co-owned by listed infrastructure companies and direct investors, and as a result, both should deliver similar returns in the long term.

Although listed and unlisted infrastructure assets with the same economic exposures will respond similarly to changes in the economic environment, valuation leads and lags do arise between both unlisted and listed infrastructure, and the volatility in daily pricing can create opportunities for an active listed infrastructure manager.

Recent macro and geopolitical events have caused an increase in volatility within the asset class. However, we believe that this has led to significant dislocations between fundamental value and prices which offers attractive medium and long-term investment opportunities.  

The outlook for global listed infrastructure remains very positive, supported by robust economic activity and stable funding markets. We continue to see the potential for future outperformance as investors seek quality defensive assets that provide sustainable yield profiles in the current low interest rate environment.

^[1] Past performance is not a reliable indicator of future performance. Source: AMP Capital, Bloomberg. Period: 31 January 2003 – 30 June 2018. Global Listed Infrastructure is represented by the Dow Jones Brookfield Global Infrastructure Index and Global Equities is represented by MSCI World AC Index.

^[2] McKinsey Global Institute, 2013. Infrastructure Productivity: How to save $1 trillion a year. www.mckinsey.com/insights/engineering_construction/infrastructure_productivity

^[3] Preqin online database. Data as at August 2018

Source: AMP Capital 18 October 2018

Author: Giuseppe Corona, Head of Global Listed Infrastructure

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.

The long-term rise in Australian home prices has led to a huge inter-generational transfer of wealth from the young to the old. A material reversal in property values will go some way to unwinding this, creating winners and losers amongst the generations.

Australia has long had a love affair with home ownership, which is illustrated by the strong growth in residential prices over the past two decades. Prices accelerated particularly strongly over the five years to 2017 amid a strong domestic economy, low mortgage rates, tax-breaks for domestic investors and sustained interest from overseas buyers, especially from China.

These factors were supported by ongoing immigration, a widespread cultural desire in Australia to own property and a highly limited supply of new land available in the capital cities in which most Australians live and work. A flood of virtual reality tv shows based on home ownership and renovations struck a chord with aspirational Australians. A political consensus in favour of measures supportive of property owners came to be established.

This included borrowers being able to take advantage of historically low interest rates to purchase more expensive homes.

However, 2017 saw the peak in prices as lenders came under regulatory pressure to constrain lending multiples, review prospective borrowers’ spending commitments more closely and limit interest-only loans.

Furthermore, rising global interest rates have pushed up Australian mortgage rates despite domestic interest rates remaining at their historic low of 1.5%.

The withdrawal of investment buyers from the market has been followed by a more hesitant mood amongst owner-occupiers, who are either unable or unwilling to borrow the funds and provide the deposits necessary to maintain the housing market’s momentum.

Australians are likely to find themselves in very different situations depending on their home ownership history. They may be grouped into three distinct demographic cohorts, many of whose members share some broad characteristics.

Millennials

Most Australians under the age of 35 have struggled to gain a foothold on the housing ladder. By the time they had found settled jobs and saved deposits, they found that house prices had risen beyond their reach.

Sometimes characterised as the ‘smashed-avocado generation’, this group has tended to prioritise experiential spending over property acquisition. This may be partly due to a cultural shift in society, but undoubtedly at least partly reflects the low possibility of purchasing even a very modest home within reasonable proximity to work.

Property purchases have tended to be restricted to those either on the highest incomes and/or those who have enjoyed the good fortune of parents or grandparents willing and able to help fund ever increasing deposit and stamp duty payments.

There are signs that some millennials on more typical income levels have simply given up on the Aussie dream of home ownership – at least until they become beneficiaries of a future inheritance.

Families

Australians in the 35-55 age group are much more likely to be property owners. However, the 20-year upward trend in home prices has left this generation suffering varying degrees of financial stress. This has been caused by the need to take on oversized mortgages to buy their first home, typically some years after their parents would have taken the plunge into the housing market.

They are now faced with increasing mortgage rates just at the time that living costs, such as utility bills, insurance and school fees are also rising.

Accordingly, this group faces the biggest challenge as they manage their spending in the face of rising demands on their lean layer of discretionary spending.

Baby boomers

This group comprises the retired and soon-to-retire, who in Australia have been the principle beneficiaries of the long-term boom in house prices, built on low interest rates and tax benefits, such as negative gearing.

Having entered the market at much lower price levels relative to incomes, members of this group are now largely mortgage-free and sit on valuable capital gains that some have realised as they retire, re-locate and downsize.

Some members of this demographic have used gains from the property boom to help their off-spring gather the deposits necessary to get onto the housing ladder. This trend is often described as the ‘Bank of Mum and Dad’, with some analysts referring to it as the fifth biggest bank in Australia.

The boom has led to a massive intergenerational transfer of wealth from the young to old as prolonged low interest rates led to massive asset inflation, which especially affected residential housing in Australia.

However, any decline in home prices will affect these three groups in significantly different ways.

Millennials

The cohort that remains largely outside the housing market is likely to have the most to gain and least to lose from a period of falling home prices in Australia.

A significant fall in home values is not the base case of most analysts, however the more extended the correction, the more millennials will find themselves coming into reach of home ownership. Therefore, this group is viewing any extended downward trend in prices relatively positively.

Such a market correction could focus on the sale of investment properties, which could reduce the supply of rental properties and put upwards pressure on rental levels. This would be a negative for millennials not able to take advantage of falling values to buy a first home, at least in the earlier stages of a slump.

A relatively small number of this group have managed to enter the market by taking on excessively large mortgages or have bought in secondary locations where selling could become challenging. Such buyers could well face financial stress, however, these are likely to be a minority of this group.

Families

These are the people who are most exposed to a slide in home prices in Australia. This group includes the most recent entrants to the property market and thus are likely to have bought at higher price levels with larger mortgages. Unlike those who are long established in the market, many in this group will not have benefitted from much of the rise in values and thus enjoy less protection from price falls.

They are already facing the financial stress described earlier and hence are much more careful with their spending, focusing on essentials and taking advantage of cost savings found online or in discount bricks and mortar stores. This is illustrated by the high numbers of baby and kids-focussed stores closing in Australia over the last few years.

This group stands to be further impacted if a significant fall in house prices leads to them receiving lower inheritances or post-downsizing gifts from their parents.

Baby boomers

This demographic is generally mortgage-free and unlikely to move home other than to downsize to a more suitable retirement property. Thus, they are unlikely to suffer the same stress faced by families.

Their ability to make lifetime gifts and leave bequests could well be affected though, however the real impact of this will be felt by younger demographics.

Baby boomers have been the principle beneficiaries of the buy-to-let boom, and hence some members who are heavily invested in residential property will be impacted by price falls. However, even these will be affected more in terms of their ability to make gifts from reduced capital, rather than falls in the achievable rental values that provide their income.

The housing market has appeared to be a one-way bet for a long time, and the wealth level of most Australians depends largely on the point in time at which they were able to enter the market.

Younger Australians stand to gain the most from lower housing prices but will inherit less. Families will likely experience increasing financial stress from this trend, especially the more recent home purchasers or those with less certain incomes in the face of rising living costs. Most older Australians will be less affected on a day-to-day basis but the ‘Bank of Mum and Dad’ may turn out to be less liquid than had been hoped by some anticipating sizeable withdrawals.

Source: AMP Capital October 2018

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.

Introduction

Every so often shares go through rough patches. We saw this most recently around February on the back of US inflation and interest rate concerns and the start of US tariffs which saw US shares and global shares fall roughly 10% and Australian shares fall 6%. Shares mostly recovered – even getting through the seasonally weak months of August and September surprisingly well – with US shares making new records and Australian shares hitting a ten-year high, but the worry list has returned again with US, global shares and Australian shares now down around 7% from their recent high. This note looks at the issues for investors and puts the falls into context.

What’s driving the latest plunge?

The recent plunge reflects a range of factors.

• Investors have started to worry again that the very strong US economy will push the Fed into tightening a lot more and that this will cause a further sharp rise in bond yields which will threaten growth and share market valuations.

• The trade conflict between the US and China is continuing to intensify and spilling over into other areas.

• Technology shares, which have been key drivers of the US share markets rally (and outperformance) have been vulnerable – being somewhat overvalued and facing increased regulation in the US (which is something that President Trump has been threatening).

• Rising oil prices due to strong global demand and threats to supply have added to concerns about inflation and growth.

• Problems in the emerging world partly due to rising US interest rates poses a threat to global growth as reflected in a recent downgrade to the IMF’s global growth forecasts.

• Nervousness remains in the US around President Trump and the Mueller inquiry and the upcoming US mid-term Congressional elections.

• Tensions in the Eurozone regarding the Italian budget are weighing on European shares.

• October is also known for share market volatility and this October is the 31st anniversary of the 1987 crash which often seems to create a bit of apprehension.

Because shares have fallen rapidly they are technically oversold and so could have a short-term bounce. But given that many of these issues could get worse before they get better the risk is that the pullback has further to go.

Considerations for investors

Sharp market falls with headlines screaming that billions of dollars have been wiped off the share market (funny that you never see the same headlines on the way up!) are stressful for investors as no one likes to see the value of their investments decline. However, several things are worth bearing in mind:
First, periodic corrections in share markets of the order of 5-15% are healthy and normal. For example, during the tech/dot. com boom from 1995 to early 2000, the US share market had seven pull backs greater than 5% ranging from 6% up to 19% with an average decline of 10%. During the same period, the Australian share market had eight pullbacks ranging from 5% to 16% with an average fall of 8%. All against a backdrop of strong returns every year. During the 2003 to 2007 bull market, the Australian share market had five 5% plus corrections ranging from 7% to 12%, again with strong positive returns every year. More recently, the Australian share market had a 10% pullback in 2012, an 11% fall in 2013 (the taper tantrum), an 8% fall in 2014, a 20% fall between April 2015 and February 2016 and a 7% fall earlier this year all in the context of a gradual rising trend. And it has been similar for global shares, but against a strongly rising trend. See the next chart. While they can be painful, share market corrections are healthy because they help limit a build-up in complacency and excessive risk taking.

Source: Bloomberg, AMP Capital

Related to this, shares climb a wall of worry over many years with numerous events dragging them down periodically, but with the long-term trend ultimately up & providing higher returns than other more stable assets. Bouts of volatility are the price we pay for the higher longer-term returns from shares.

Source: ASX, AMP Capital

Second, the main driver of whether we see a correction (a fall 5% to 15%) or even a mild bear market (with say a 20% decline that turns around relatively quickly like we saw in 2015-2016) as opposed to a major bear market (like that seen in the global financial crisis (GFC)) is whether we see a recession or not – notably in the US. The next table shows US share market falls greater than 10% since the 1970s. I know it’s a bit heavy – but I like this table! The first column shows the period of the fall, the second shows the decline in months, the third shows the percentage decline from top to bottom, the fourth shows whether the decline was associated with a recession or not, the fifth shows the gains in the share market one year after the low and the final column shows the decline in the calendar year associated with the share market fall. Falls associated with recessions are highlighted in red. Averages are shown for the whole period and for falls associated with recession at the bottom of the table.

Several points stand out. First, share market falls associated with recession tend to be longer and deeper. Second, falls associated with recessions are more likely to be associated with negative total returns (ie capital growth plus dividends) in the associated calendar year as a whole. Finally, as would be expected the share market rebound in the year after the low is much greater following falls associated with recession.

So whether a recession is imminent or not in the US is critically important in terms of whether we will see a major bear market or not. In fact, the same applies to Australian shares. Our assessment remains that US/global recession is not imminent:

• Still high levels of business and consumer confidence globally are only just starting to help drive stronger consumer spending and business investment.

• While US monetary conditions have tightened they are far from tight and they are still very easy globally and in Australia (with monetary tightening still a fair way off in Europe, Japan and Australia). We are a long way from the sort of monetary tightening that leads into recession.

• Fiscal stimulus will boost US growth into next year, partly offsetting Fed rate hikes.

• We have not seen the excesses – in terms of debt growth, overinvestment, capacity constraints and inflation – that normally precede recessions in the US, globally or Australia.

Reflecting this, global earnings growth is likely to remain reasonable providing underlying support for shares. So, for all these reasons its likely that the current pull back is more likely to be a correction rather than a major bear market.

Third, selling shares or switching to a more conservative investment strategy or superannuation option after a major fall just locks in a loss. With all the talk of billions being wiped off the share market, it may be tempting to sell. But this just turns a paper loss into a real loss with no hope of recovering.

Fourth, when shares and growth assets fall they are cheaper and offer higher long-term return prospects. So, the key is to look for opportunities the pullback provides. It’s impossible to time the bottom but one way to do it is to average in over time.

Fifth, while shares may have fallen, dividends from the market haven’t. So the income flow you are receiving from a well-diversified portfolio of shares remains attractive, particularly against bank deposits.

Source: RBA, Bloomberg, AMP Capital

Sixth, shares and other related assets often bottom at the point of maximum bearishness, ie just when you and everyone else feel most negative towards them. So the trick is to buck the crowd. “Be fearful when others are greedy. Be greedy when others are fearful,” as Warren Buffett has said.

Finally, turn down the noise. At times like this, negative news reaches fever pitch. Talk of billions wiped off share markets and warnings of disaster help sell copy and generate clicks and views. But such headlines are often just a distortion. We are never told of the billions that market rebounds and the rising long-term trend in share prices adds to the share market. Moreover, they provide no perspective and only add to the sense of panic. All of this makes it harder to stick to an appropriate long-term strategy let alone see the opportunities that are thrown up. So best to turn down the noise and chill out – yeah, I agree it’s sometimes easier said than done, but still!

Source: AMP Capital 12th October 2018

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.

Residential property has long been a major store of wealth for average Australians.

The home remains the primary assets for the majority of people and the property market – particularly in major cities – has generally been kind for those who were in the market over the past decade or so.

But with the ageing of the population, the percentage of wealth locked up in residential property ($500 billion in home equity is held by people over 65) is both a blessing and a challenge.

According to the last Intergenerational Report in 2015, the number of people in Australia aged between 65 and 84 is forecast to double by 2054 to around 7 million, while the number of people over 85 is expected to more than quadruple.

There is no disputing that owning your own home is a foundational step on the pathway to providing for a comfortable retirement. But the problem is perfectly captured for older Australians with the expression “asset rich but income poor”.

The challenge for many in the post-war, baby boomer generation, is that while the house value may have risen well beyond their expectations, you can’t use it to pay for the groceries, house repairs or a car that needs replacing.

Downsizing has its advocates but comes with lifestyle challenges such as forming new friends and community contacts. So it is no surprise that there is considerable interest in developing a viable suite of products to release the equity locked up in the family home.

While the need is obvious, the solution less so, and products like reverse mortgages do not enjoy good reputations. A recent review by ASIC of reverse mortgage products acknowledged that a common view amongst retirees, and even among finance brokers and lenders, tends to be that equity release products take advantage of vulnerable elderly people.

That certainly accords with a personal experience of reverse mortgages courtesy of a family friend who, with her husband, took out a small ($50,000) reverse mortgage against the equity of their mortgage-free home.

It certainly helped provide some short-term cash and lifestyle enjoyment, but after the husband developed cancer and passed away, an early exit condition was triggered resulting in a massive bill that wiped out almost all their household savings, and left the wife wholly dependent on the age pension to live.

The ASIC review of the reverse mortgage market came after government changes in 2012 to strengthen consumer protections, including the provision of a no negative equity guarantee – that is the borrower cannot be required to repay more than the value of the secured property at the end of the loan.

The ASIC report is interesting in that it found reverse mortgages were satisfying the immediate or short-term needs of borrowers, as did the case study above, and often provided for an improved standard of living while letting people “age in place”.

Where ASIC found challenges in the market was with the long-term impacts on the borrower’s asset position and, in particular, the impact of the cost of the reverse mortgage products that only became fully understood when potentially the home needed to be sold to provide a bond for entry into an aged care facility.

That was highlighted by many of the borrowers surveyed for the ASIC report who indicated that they had not seriously considered their possible future needs.

Reverse mortgages are complex and expensive products for both the borrower and the product provider, and the ASIC report does a good job at explaining the short-term benefits and the long-term risks and lifestyle implications that comes with it.

The ASIC study tested the impact on the remaining home equity by the age of 84 (the average age of entering into aged care) if interest rates on the loan rises and if property prices grew more slowly than expected.

What the ASIC modelling showed was that 63 per cent of borrowers may end up with less equity than the average upfront cost of aged care ($380,000) for one person by the time they reach 84.

The long-term risk for borrowers is that, because of the impact of compound interest, they may seriously compromise their future retirement lifestyle and ability to afford future expenses such as aged care accommodation, medical treatment and day to day living expenses.

To illustrate the costs over the long-term ASIC says the interest charges on an average loan ($118,000) came with an interest bill of $100,963 over 10 years and $180,269 over 15 years.

One of the major warnings ASIC has for borrowers is the focus on short-term objectives with “limited or no attention” being paid to their possible future needs. The review of loan files ASIC did as part of the report found “approximately 92 per cent of the loan files we reviewed did not record the possible future needs of the borrower in sufficient detail and contained no evidence that the broker or lender had discussed how a loan may affect the borrower’s ability to afford future needs”.

The bottom line is that there are no silver bullets that can magically solve the income in retirement question but a clear message from the ASIC report is that you need to carefully balance both today’s needs and your likely future requirements.

The ASIC Moneysmart website provides a comprehensive guide to the risks of reverse mortgages.

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.

Source : Vanguard September 2018 

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2018 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Here’s a critical question for retirees and those nearing retirement: How much are you intending to drawdown and spend each year from your retirement savings?

Historically-low yields, expected muted portfolio returns and growing life expectancies can make this a particularly challenging question.

Many retirees try to balance the competing priorities of maintaining a relatively consistent level of annual spending while increasing or preserving value of their portfolios to finance future income and perhaps other goals such as bequests.

The recently-published Vanguard research paper, From assets to income: A goals-based approach to retirement spending, proposes that retirees consider a dynamic approach to retirement spending and drawdowns.

This is a hybrid of two popular rules-of-thumb – the dollar-plus-inflation rule and the percentage-of-portfolio rule – designed to allow retirees to spend a higher portion of their returns after good market performance while weathering poor markets without significantly cutting spending.

In summary, this dynamic strategy provides for retirees to set flexible ceilings and floors on withdrawals for their annual spending that reflects the performance of the markets and their unique goals.

Popular rules-of-thumb

It’s worth briefly discussing the most popular withdrawal and spending rules and their potential drawbacks:

• The dollar-plus-inflation rule. This involves setting a dollar amount to withdraw and spend in the first year of retirement and then increasing that amount annually by the rate of inflation.

• The percentage-of-portfolio rule. This involves withdrawing and spending a set percentage of a portfolio’s value each year.

Both rules provide options for retirees to withdraw set percentages or set dollar amounts each year, regardless of how markets are performing.

When markets are poorly performing, retirees using the dollar-plus-inflation rule face a higher risk of spending more than they can afford and depleting their savings. And when markets are performed strongly, these retirees may spend less than they can afford.

With the percentage-of-portfolio rule, a retiree’s spending may significantly fluctuate depending on the changing value of a portfolio. This can make budgeting hard, especially for retirees who spend a high proportion of their income on non-discretionary spending such as food and housing.

Floors and ceilings

With the dynamic spending strategy, annual spending is allowed to fluctuate based on market performance. This involves annually calculating a ceiling (a maximum amount) and a floor (a minimum amount) that spending can fluctuate.

For instance, a retiree might set a ceiling of a 5 per cent increase and a floor of a 2.5 per cent decrease in spending from the previous year.

The ceiling is the maximum amount that you are willing to spend while the floor is minimum amount you can tolerate spending.

Of course, many retirees receive a superannuation pension with a mandatory, aged-based minimum withdrawal rate. A dynamic approach will help such retirees calculate how much to reinvest, if any, each year.

Please contact us on |PHONE| if you seek further assistance 

Source : Vanguard September 2018 

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2018 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page

Are you feeling wealthier, less wealthy or somewhere in between? You may be experiencing what is sometimes called “the housing wealth effect”.

Movements in house prices, up and down, can affect how we feel about the state of our wealth and our willingness to spend, suggests a Reserve Bank paper* published several years ago.

Under this theory, if house prices are up, we may tend to feel wealthier and willing to spend more on consumer goods including new cars. And when house prices are weakening, we may tend to feel less wealthy and less willing to spend as freely.

As housing prices have continued to weaken in most Australian states, led by Sydney and Melbourne, you may decide to reduce your consumer spending due to the housing wealth effect. And you may be more inclined to save more in such ways as accelerating your mortgage repayments.

While overall new car sales have eased over the year to August, sales of luxury cars are at their lowest for more than two years, according to an update of the CommSec Luxury Vehicle Index. This index is based on the Australian sales of 17 upmarket models.

Historically-low interest had been, of course, a major driver of the last rapid rise in housing prices. (The Reserve Bank this month held the official cash rate at the record low of 1.5 per cent – a level held for almost two years.)

Yet continuing low rates provide an opportunity for many homebuyers, depending upon their circumstances, to build a mortgage buffer or cushion using mortgage offset accounts and redraw facilities.

By putting aside more than the required mortgage payment, homebuyers create protection to help deal with financial setbacks, such as illness or job loss, and future rate rises.

When interest rates fell over the past decade, many homebuyers chose to keep their monthly repayments at the same dollar amount while many developed a habit of making higher repayments whenever possible.

The Reserve Bank reports that homebuyers early this year held a total in mortgage offset accounts and redraw facilities equal to two and a half years of scheduled repayments.

Particularly given Australia’s record household debt, it makes much sense for homebuyers to try to use the “housing wealth effect” to their advantage by building a bigger mortgage buffer – a task made more achievable by low interest rates.

In a speech this month, the Reserve Bank continued to highlight the rise in household debt – up from 70 per cent of household income in the early 1990s to 190 per cent today. Australia’s total household debt-to-income ratio has been rising in recent years more sharply than in other advanced economies.

The rise in household debt is “largely due” to a rise in mortgage debt, the Reserve Bank notes. Low interest rates have enabled homebuyers to borrow more – a key influence in a country of enthusiastic homeowners.

* Housing wealth effects: Evidence from new vehicle registrations, Reserve Bank Bulletin, September 2015.

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.

Please contact us on |PHONE| if you seek further assistance on this topic.

Source : Vanguard September 2018

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2018 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.