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Title: September Newsletter 2018
Created: 2018-10-02

Good morning all

I can now officially be called grumpy Granddad with my daughter-in-law having a very healthy and happy baby boy, with all ten fingers and toes. You tend to forget how small they are when they first arrive in the world, how cute they really are and also how much of a magnet to everybody. The first time I went to visit and hold him and being the proud granddad, I picked him up, held him and went for a walk in the back yard and was talking away for about 40 minutes before I passed him back to his Mum. Well, what can I say, my arms just about fell off. I either forgot that I have lost condition or that holding your arms in a certain way for an extended period would cause your muscles to work that hard. My arms ached for about an hour after that and it reminded me that I need to start lifting weights again. The worst thing was, as I was with everyone when I handed him back, I had to keep the pride in tack and pretend there was no pain when really the bicep was in agony and my face should have been a bit more distorted J Thank you for all your well wishes. I must say I was surprised by all the comments about my boy and that I have to be a bit more lenient on him.

Anyway, enough of that and on to the markets. There has been a lot of commentary recently on housing prices and the problems facing the market in the coming year regarding lower values and what this will mean to everyone. As we know, housing prices were pushed up due to low interest rates and the consistent growth over many decades in Australia. The old adage of buy property as there is nothing safer than bricks and mortar has been around for decades. I remember my Dad and his generation were the main believers in this theory. What has happened is that the baby boomers grew up, settled down and the first thing they did was started buying property to raise their families in. This lasted from the 50’s all the way through to the mid 80’s. Then immigration came along and more housing was required. Housing, being deemed a safe investment, attracted many people into buying property. Negative gearing helped not only lower their tax but gave them a very tax effective way of making a capital gain and increasing their wealth.  Adding all these events into the mix the property market boomed and hence the wealthier entrepreneurs became involved in the early eighties and multiple subdivisions commenced all over Australia, especially when interest rates fell to their lowest after the GFC.

What has happened now is, because of the excess housing, cheap interest rates and the large increases in property prices we have now passed fair valuation and have gone into overbought territory. When the average house price in WA hit $500,000 the chances of the next generation buying the ‘old quarter acre block’ totally disappeared due to affordability and so here we are, at a peak in property with nowhere to go. As I said the mix of cheap loans and banks allowing everyone to borrow we are now in a situation where many people have got themselves into trouble with being able to afford a regular mortgage. A loan of $450,000 has a repayment of approximately $3,500 per month with principal and interest, so you can understand that it does not take much to get into mortgage trouble especially if a wage earner is made redundant and things are tight. We all know there has been no wage growth for the last seven (7) years but the general cost of living, including everything in the budget basket, never stops going up. So now we are in a situation where everything has come to a peak, supply has outstripped demand and with affordability being such a big issue property prices will fall further in certain locations. Luckily, as country WA always takes a hit first, due to the mining activity, the cycles affecting prices are on a more regular basis so we have taken a good hit pricewise already, so prices are reasonably fair. The cities and other regional parts of Australia are not so lucky and there will be more falls to come as this part of the economic cycle goes through its supply and demand peaks and troughs over the coming few years, so you will hear more about this. The Banking Royal Commission has seen banks change their lending criteria not only making it much harder to get a loan but interest only loans are just about ceasing to exist, especially on investment loans. This is not going to help property turnover like in previous years. Stay tuned and watch the property space. The thing to remember about WA is our prices don’t tend to fall too far but things will trade sideways for many years, as they have done before, which cushions the hits but gives no growth for many years. I am sure you will all remember the 90’s, 2000’s, 2010’s where property commenced at the beginning of the decade at a certain price, stayed that way for eight (8) years and then doubled in the final two (2) years. This cycle has ended.

I must add one final comment before I go on to the other markets and that is that having a rental property is a good investment strategy over the long term. As you can still negative gear the property as a tax deduction this helps with the overall house payment strategy and with the tenant paying rent this is helping pay the mortgage and ultimately paying off the house, which increases your wealth. Growth will return to the property market, just over a longer term, so you will need to be patient which can sometimes be hard to do.

The last time I reported on the US economy things are going very well with the market reaching new highs and employment rates at the lowest for years. Having spent most evenings in front of my computer watching Bloomberg TV and listening to the best economist talk about the markets I am happy to say that at this point everything is going well, with most indicators showing good growth and steady economies with no major problems anywhere in sight at this point. The emerging markets have taken a bit of a hit with the rising US dollar but even that has slowed down and appears to have peaked in front of the interest rate rise by the Federal Government next week. After this rise they are predicting this will slow down somewhat keeping things on hold for a while. The China vs USA trade war, so to speak, is at this point very small and for all the talk China needs  the US economy to export to, whereas the USA exports very little these days so at some point they will come to a deal. Some of the more extreme economists are saying this trade restriction will hurt the world economy and cause a slowdown which will start a recession but the consensus is that it will be milder than that and will only cause a very minimal slowdown. The US are just seeking a better deal when it comes to investing in China and asking them to open their barriers more so the US can participate more in their economy, which is fair and reasonable.

Having said the above your portfolios have slowed down a bit due to the Australian market having a pull back over the last couple of months, which is just a breather, so to speak. After the strong run the markets have had a pullback before they begin moving forward again. With the US doing well we have seen a small gain in your portfolios over this period in question, but only just, with the Australian market having this slow period. Emerging markets have had their issues over this time too, but as with most markets they sometimes don’t work in sync hence the variation in returns. Having looked at all the competitors over the same period everyone is having the same issues unless they have been fully vested in the USA and that would be not many. We are expecting a pick up going forward towards Christmas which will help boost your portfolios in the coming months. We are confident that with the investment selection we have that a good solid gain will come through in the numbers for the coming year. With the international funds doing well and the Australian market moving forward again, the return expected will be strong with the only concern being Asian emerging markets and China. Just a quick note on China, one of the main economic weapons they use to stimulate their economy is infrastructure and this is a big plus for Australia, exporting iron ore and precious metals. China has stated that if their economy starts to lag they will bring forward the Silk Road which means bridges, roads, ports and all things metal. This is why our WA economy survives the bad periods.

I hope this email has not appeared too negative but I wanted to point out some of the troublesome areas that we have at the moment in real estate. I have had people through my doors with equity issues regarding bank loans and others having problems with meeting repayment commitments. Unfortunately some people have seen their equities erode and in some cases are “underwater”, which is a term meaning they owe more than the property is worth. These are trying times, but we are all in the same boat having made all that equity to have it taken away. It will come back, it is just a case of holding on until that time, especially when it’s an investment.

Until next time, happy investing and I promise to have better news next newsletter.

Regards

Allan

 

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