Greetings to you all on a hot Sydney Day!
Australian Interest Rates
After the most aggressive rising of interest rates since the 1990s the RBA followed other global reserve banks in reducing interest rates last Tuesday by 25 basis points. This had been widely anticipated by the bond market which had already significantly reduced fixed term rates on shorter dated mortgages. The Big Four banks reduced their rates immediately on both mortgages and savings products and there was a noticeable spike in property auction activity over the weekend.
The RBA rate has been at 4.35% since November 2023 (15 months) which is historically a very long time to hold rates at a peak level. Accordingly, equity markets which generally do better as interest rates fall had already priced in these reductions and had a very poor week particularly in the banking sector once the rates were confirmed.
Bank earnings across the Big Four were flat for the Interim reporting season with interest rates falling improving bad debt provisioning but making margins harder from a profitability point of view. Importantly dividends the banks have been retained which in aggregate make up 50% of the entire Australian stock market.
RBA Cash Rate (Source: CoreLogic)
Australian Economy
Looking through the data it does appear that Australia will achieve a soft landing from an economic point of view, but clearly productivity remains the main negative in the economy and again it isnet migration that has kept our overall economy from going backwards. On a per capita basis we have now had seven consecutive quarters of negative growth, and the obvious benefits of technology and AI are yet to reflect in productivity improvements in aggregate particularly in the Public Sector.
This situation has been increasingly highlighted by the RBA as a key reason for why they have kept interest rates at an elevated level for so long. The prognosis now is for interest rates to continue to fall over the next two years with the RBA budgeting on a neutral rate of around 2.75%. This would equate to variable rate mortgages being around 4.75% and term deposits around 3.5%.
If productivity and the use of technology improve rapidly then interest rates could move lower and quicker. The corollary of this is of course that savings rates are declining at the same level which will impact on clients requiring an income streaming in retirement to fund their expenses.
Australian GDP Movement (Source: ABS)
Australian Federal Election
Unlike other comparable democracies we have a shorter length of time between Federal Elections with another one due by mid-May at the latest with Saturday April 12th firming as the most likely date. As a consequence of this the country will go into caretaker mode fairly soon and it is a most unlikely that there will be any more meaningful legislation enacted in this term of Parliament.
At this stage it does look like a very closely contested election which probably means that there will be little strategic change in the direction of the country. The overall need for tax reform that increases consumption tax (GST) in line with comparable countries and reduces tax on personal exertion will probably be delayed indefinitely.
The wider issues of an ageing population requiring income streams to live off in retirement and the management of cost-of-living increases will remain a key issue for whichever party wins power.
Australian population by age 2024 and 2034 (Source: The Centre for population)
International Equities
The last few weeks has of course been dominated by Trump becoming president again of the United States with hundreds of executive orders seeking to completely rebalance the state of global trade in the US favour. Whether he can keep up this pace of change and if he has the longer-term support of the US public remains to be seen. In the immediate, he has threatened to introduce tariffs against his major trading partners where they have a trade surplus with the US and commenced a cost cutting exercise to radically reduce their public service.
Colloquially known as DOGE (Department of Government Efficiency) and run by the wealthiest man in the world Elon Musk; the proceeds from the tariffs and savings will then be allocated to personal tax reductions for US citizens. There will also be significant reductions in company tax which would be a positive for the US stock market.
Clearly there is a lot of execution risk here and it is important to make investment decisions based on the long term and look through any hubris that is currently being exhibited over there. At this stage equity markets have been strong, and it does appear to be a growing sense of optimism in the business community. Ultimately the share market is price based on expectations of future earnings and profitability, which again comes back to being incredibly efficient and forward thinking at a leadership level.
Domestic Property
The RBA reduction of interest rates had an immediate impact on auction clearance rates over the weekend while this is probably more sentiment than a significant financial saving it does provide hope for mortgage holders for a better future with lower Interest payments.
In addition, the Federal Treasurer has instructed the regulator APRA to review the 3% buffer for calculating mortgage affordability and in particular HECS debts for former students who are now in the workforce with the prospects of increasing future income based on their university studies. A combination of these initiatives will mean that younger people will have greater borrowing power and should be able to compete more fairly in their natural desire to own their first home.
The NSW State Government has now passed legislation encouraging medium density housing to be built within 400 meters of our train station in Sydney circumnavigating local council approval. This should improve the supply side of properties being built for first time buyers, but also for downsizes in our community looking for an easier way to live their lives.
For those clients interested in exploring this further we have strong and deep relationships with builders in this sector – Tony.virtue@virtueandpartners.com.au
The final piece of the puzzle is to reduce or eliminate Stamp Duty which at a national level will substantially reduce the cost of moving home. A broad-based increase in consumption tax would be a far more effective way of providing the public with a choice of the level of taxes they pay depending on their own circumstances rather than a mandatory substantial fixed fee to the State Government on the purchase of a property.
Australian Capital Rolling Quarterly Change in Values, Dwellings (Source: CoreLogic)
Changes to Aged Care Legislation
Just a reminder that new rules apply to the aged care sector from 1/7/25. This will include 8 levels of health assessment for Government support and much more flexibility in the type of services to be made available particularly in home packages. This will also reduce the very high level of administration fees currently being wasted in this sector.
Clinical needs will continue to be met entirely by the federal government while nonclinical requirements will have a high level of means testing, up to a lifetime cap of $130k. This is an area of financial advice that we have specialist expertise. I encourage you to contact the office should this be impacting on your parents or indeed yourselves.
Our News
As you can imagine the need for independent financial advice has never been greater in Australia to make this demand, we have increased our team in Manly. The intention being to be as efficient as possible while providing you with the expert ongoing personal advice that you need irrespective of your stage of life.
We will prioritise immediate family of existing clients as we seek to provide a very high-quality personalised service to our community.
We never lose sight of the enormous privilege it is to share our lives with you and look forward to another successful and rewarding year together whatever personal circumstances come our way.
With our best wishes.
Tony and Fiona
tony.virtue@virtueandpartners.com.au
fiona.goodland@virtueandpartners.com.au
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