ISSUE 2 I JANUARY 2009
HORIZON THE
INFLATION FALLS TO 3 YEAR LOW
NEWSLETTER
FURTHER INTEREST RATE CUTS AHEAD - WITH INVESTMENT PROPERTY SET TO BENEFIT FIRST HOME BUYERS LEAD THE WAY RENTALS SET TO CONTINUE SOARING GET ON THE PROPERTY LADDER FROM JUST $33 PER WEEK - WE SHOW YOU HOW
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THE TIMES THEY ARE A CHANGING
Can Obama save the USA and its economy?
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THE HORIZON NEWSLETTER I ISSUE 2 I JANUARY 2009
HAPPY NEW YEAR Welcome to 2009 and the opportunities that lie ahead. We all travelled through what was one of the toughest years in living memory. This is something of a triumph in itself, and a story to relate to children and grandchildren in years to come, ie “We lived through one of the toughest periods that the modern world has ever known.” We found a chart that sums up the year just behind us when compared to the stock market performance in years gone by. This chart will serve as a benchmark reference for many years to come, and it’s unlikely that we’ll go through another such year in our lifetimes! Pass on the chart to those who might appreciate this perspective on the year just passed by.
ANNUAL AUSTRALIAN SHARE MARKET RETURNS
2001 1973 1966 1957 1941 1920 1917 1910 1893 1884 1873 1854 1841 1837 1831 1828 1825
2000 1990 1981 1977 1969 1962 1953 1946 1940 1939 1934 1932 1929 1914 1913 1903 1890 1887 1883 1882 1876 1861 1860 1853 1851 1845 1835 1833 1827
2007 2005 1994 1993 1992 1987 1984 1978 1970 1960 1956 1948 1947 1923 1916 1912 1911 1906 1902 1899 1896 1895 1894 1891 1889 1887 1881 1877 1875 1874 1872 1871 1870 1869 1868 1867 1866 1865 1859 1856 1844 1842 1840 1836 1826
2006 2004 1988 1986 1979 1972 1971 1968 1965 1964 1959 1952 1949 1944 1926 1921 1919 1918 1905 1904 1898 1897 1892 1886 1878 1864 1858 1855 1850 1849 1848 1847 1838 1834 1832 1829
2003 1999 1998 1996 1983 1982 1976 1967 1963 1961 1951 1943 1942 1925 1924 1922 1915 1909 1901 1900 1880 1852 1846
1997 1995 1991 1989 1985 1980 1975 1955 1950 1945 1938 1936 1927 1908 1830
1958 1935 1928 1863 1843
1954 1933 1885 1879 1862
-20 to 10
-10 to 0
0 to 10
10 to 20
20 to 30
30 to 40
40 to 50
50 to 60
S&P Index 1825 to 2007 Positive years: 129 (70%) Negative years: 54 (39%)
2008 Year to date 1931
1937
2002 1974 1930 1907 1857 1839
-50 to 40
-40 to 30
-30 to 20
Annual percentage returns. Source: Zurich
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THE HORIZON NEWSLETTER ISSUE 2 JANUARY 2009
Barack Obama a symbol of hope and optimism In a presidential inauguration of historical significance and importance to America and the world, seldom has so much expectation and responsibility weighed on the shoulders of one man.
HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH It is a story whose run-up could have been scripted by Hollywood, with Barack and Michelle Obama playing themselves, but as the historic events on a cold winter’s day ended, so too started what will be the most challenging task ever to face a US President. What is clear is that the world has run out of the ability to function as it did before, and with the global financial system in tatters, and with recession creeping across the globe, and with 3 major unresolved conflicts running in troubled areas, there has never been a greater need and a better time for change The task of rebuilding America and re-shaping its role as leader on the world stage sounds like a tough job description, but it is clear that Obama is ready for the job and will take it on head-on, and create the change that is so sorely needed. Negative sentiment and a lack of confidence in the current system played a big part in the unravelling of structures built on foundations of sand, and which has become a whirlwind of destruction as decades of dodgy practices get unwound at breakneck speed. In many respects the world as we knew it is changed forever, and with the dawn of change, and with determination and transparency replacing the secret
manoeuvrings of so much that was rotten both in government and business, we can expect new-found optimism, hope and confidence as the seeds of change start to blossom into the first signs of new growth. What is certain is that the reckless accumulation of debt and leverage as a short-cut to personal and business reward is a phenomenon that is gone, hopefully, forever. As individuals we could all be well advised to reflect on what there is of the old world order that we still cling to, and find ways to let it go and move on, as well as identifying the key requirements and characteristic of success in what will follow. In our view, and listening to Obama’s words, there will be a greater focus on service and concern for others, rather than the individualism and greed that has caused so much harm. And there is a need to reinforce values of respect for others, tolerance, thrift, and honest hard work as the job of re-building America and the world takes place. While Obama is but one man, he is the beacon that shines for the world to see. We look forward to the change and challenge that lies ahead. We are all in this together. Positive forward action and the re-building of confidence and momentum is the only way out.
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THE HORIZON NEWSLETTER I ISSUE 2 I JANUARY 2009
A CHANGE FOR THE BETTER
At the heart of the near-collapse of the world financial system was the wide-held view that rapid asset growth using limitless easy credit was the smartest game in town. Companies who didn’t follow this approach were criticised for having ‘lazy balance sheets’, ie not enough debt. In many cases managers borrowed large sums of money to invest in the shares of their own and other firms, only to be hammered by margin calls when the value of the shares dropped relative to the outstanding loans. On the private front individuals in the US were buying (and being sold) houses that they could not afford. Others were tapping into the equity in their homes to fund risky investments. When the US ‘sub-prime’ housing loans eventually tumbled out of the cupboard, the patchwork of financial instruments across banks and countries that had kept it all afloat finally fell apart. Then credit dried up. And the businesses needing serious amounts of re-financing as a result of their massive borrowings couldn’t find it, and so began the write down of value and sale of assets in an environment where the banks stopped lending, and the rest we know. (Remember how close the Allco-led consortium was to buying Qantas for $11.1billion – and how eager the Qantas Chairman and MD were to do the deal?) The big positive out of this is the re-discovery of respect for real assets and the good oldfashioned value of cash, and the fact that you can’t ‘engineer’ sustainable long term gains simply through abusing the system. In our view, there is a fundamental rediscovery of the value of solid assets, including property and cash, and the need to leverage investments in a controlled way. Investors are sure to be a lot more careful when they read the fine-print of documents to ensure that they are clear regarding who actually owns and controls the assets. Properly used, credit cards are useful, but they have increasingly been targeted at getting private individuals to spend, and then over-spend relative to their incomes, and the paying down of debts on these cards is a process that is underway right now. There is also a greater caution regarding spending, greater respect for personal budgets, and careful reflection about Wants vs Needs, with new criteria emerging regarding what is essential expenditure as against “I want it because I want it”. Welcome to the reality check that accompanies the arrival of 2009.
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THE HORIZON NEWSLETTER I ISSUE 2 I JANUARY 2009
Australia’s AAA rating affirms sound finances and resilient economy Amidst worsening global economic conditions and a tough outlook for 2009, Standard & Poor’s has recently confirmed Australia’s AAA credit rating, reflecting its view that our government finances are “sound” and our economy “resilient”. While global economic conditions are widely tipped to worsen in 2009, Australia remains well-placed to ride the storm. Standard & Poor’s also commented that while the slowing economy would increase banks’ problem loans, Australian banks should remain profitable, adequately capitalised and with good asset quality by international standards.
Headline inflation falls to three-year low This time last year the political football was inflation, with ‘the inflation genie being let out of the bottle’ according to Treasurer Wayne Swan, with Malcolm Turnbull accusing the government of talking up inflation and talking the economy down. The last of the 12 successive interest rate increases was in March 2008, with the ‘war against inflation’ being cited as the reason for the increase. How things have changed. Barely 8 months later, concerns about inflation have long disappeared, and if anything, deflation is emerging as a potential risk. According to the TD Securities-Melbourne Institute, the headline inflation rate has fallen to 2.2 per cent, its lowest level in over three years*. This will enable the government to continue to reduce interest rates without inflation rearing its head as a risk. Aside from enabling further interest rate cuts, which in turn feed lower mortgage and borrowing costs, everyone will be feeling the benefit of lower petrol prices resulting from the dramatic price drop in the cost of oil (approx US$37.00 as we write). Reduced inflation data also supports moderation of wage increase expectations, and this is a theme being pressed by Prime Minister Kevin Rudd at the moment. *The Australian Financial Review, 20 January 2009, p5, reported by Adrian Rollis
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THE HORIZON NEWSLETTER I ISSUE 2 I JANUARY 2009
Further interest rate cuts ahead – with investment property set to benefit We can look forward to an interest rate cut of at least 0.50% (and probably more) when the Reserve Bank of Australia meets on February 3, which will bring the official bank rate to at least 3.75%. This will bring further relief to homeowners and landlords as well as for businesses large and small. The expectation is that the competition between banks and the sensitivity of interest rates should ensure that the reductions get passed on to customers. It is worth remembering that the phrase ‘housing stress’ has not been written about much in recent months given the speed and extent of interest rate reductions. Note: the major banks raised their interest rates by 0.55% more than the RBA over the past year due to the impact of the credit squeeze on funding costs. With the ongoing uncertainty and extreme risk in international banking, the government is unlikely to be too heavy-handed in trying to persuade the banks to pass the premium back to consumers. From an investment point-of-view, returns from bonds and cash deposits will be dropping as the bank rate falls. This means that savvy investors will be looking for alternatives. The share market awaits those with the appetite, while investment property remains a solid option given the continuing fall in the supply of homes despite growing demand. With the lower holding costs enabled by the low interest rate environment, and the likelihood of rentals holding firm due to demand factors, it is our view that investment property is poised to emerge as an attractive opportunity given the combination of factors working to support it.
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THE HORIZON NEWSLETTER I ISSUE 2 I JANUARY 2009
First-home buyers lead the way In our December 2008 issue of Horizon we noted the significant opportunity that was available in the federal and state government’s measures to boost the subsidy to first-home buyers in order to stimulate construction and to address housing affordability. It seems that first home buyers have been quick off the mark, with loans to this group increasing by 18 per cent in November, and pushing their share of new loans to 23 per cent, the highest since January 2002.* “With strong population growth driving rents higher, low interest rates and the doubled home-buyer grant should see pent-up demand from first-time buyers unleashed over the first half of 2009”, an economist at Commonwealth bank, James MacIntyre, said (in the article quoted above). First-home buyers provide a valuable ‘floor support’ to entry level housing, and also serve to keep the construction of new homes a viable option thanks to the $14,000 grant plus an additional $7,000 available for new homes.
The scheme also provides a valuable social solution that counters the long-term live-athome young adult referred to as ‘Kippers’ (‘Kids in parents’ pockets eroding retirement savings’).
*Sydney Morning Herald, January 15 2009, page 1, reported by Jessica Irvine
Weak Aussie battler a strength It doesn’t seem that long ago that the Australian dollar seemed headed for 1:1 parity with the US dollar. With our high interest rates at the time, strong economic fundamentals, and the resources boom, we were certainly punching above our weight. With a value now of about US$0.65, however, it’s not all bad news. The weaker Aussie dollar means; • More competitive (and also increased local value of) exports • A cushion against losses on overseas investments • Increased attractiveness of domestic vs international travel • Increased competiveness of locally-produced goods (hence supporting jobs) • Decreased attractiveness of imported luxury goods So is the glass half-full, or half-empty? You be the judge. But there are certainly two sides to the reduction in value of the $A coin.
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THE HORIZON NEWSLETTER I ISSUE 2 I JANUARY 2009
RENTALS CONTINUE TO SOAR The quarterly rental figures released by Australian Property Monitors show that weekly median house rents increased by between 5 per cent and 25 per cent across the country’s capital cities*. Darwin ($500pw) now leads Sydney ($450pw), with year-on-year increases of 25 per cent and 16.9 per cent respectively.
RISING RENTS
Dec 08
QoQ
YoY
($)
(%)
(%)
Sydney
450
4.7
16.9
Melbourne
350
0
6.1
Brisbane
350
0
6.1
Adelaide
300
3.4
7.1
Canberra
420
5.0
5.0
Perth
360
2.9
12.5
Darwin
500
4.2
25.0
Hobart
290
0
6.4
Median weekly house rents* While the trends are positive for landlords, they are serving to stretch the budgets of renters, many of whom could be paying a similar amount on a home of their own if they were able to save the deposit and qualify for a loan. With monthly mortgage costs dropping, and with rentals increasing because of strong demand for under-supplied accommodation, the investment property argument remains a strong one, particularly when long-term capital appreciation gets added into the mix. *The Australian Financial Review, 22 January 2009, p49, reported by Michelle Singer
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THE HORIZON NEWSLETTER I ISSUE 2 I JANUARY 2009
Investment property increasingly affordable – how about $33 per week? 00
sts) $399,0
urchase co t (inc. all p
Property cos
$25,000 $ 4,750
Outgoings Interest es ens Property exp
$29,750
Total mings Less Inco Rental Tax credits Total Shortfall
$1,750 (or
$ 20,000 $ 8,000 $28,000 k)
$33 per wee
ty e affordabili highlights th ne ur t. bo el en M project in rate environm of a current ced interest An example today’s redu in ty er op t pr of investmen
The investment property proposition in Australia is a compelling one, and it has become increasingly more so as mortgage rates have fallen, rents have surged, and building and development costs have become more competitive due to reduced economic activity. Current proposals being developed for McCarthy Group clients show that a brand new home in a strong rental location (with 25 years of depreciation allowance) can be brought on-stream as a viable project with the landlord covering a shortfall of as little as $33 per week. With average personal wealth having fallen back by 10% in the past twelve months, strategies are needed to recover lost ground. The combination of factors supporting investment property in Australia make for a strong case for it to be included in a future plan given its relative affordability, security, and the sound long-term fundamentals under-pinning property in this country. If you have friends or family who believe that investment property is out of reach of working Australians, then pass on this example of just how affordable it has become in the current environment. And fixing the mortgage at current low interest rates helps to lock in the advantage for years to come.
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THE HORIZON NEWSLETTER I ISSUE 2 I JANUARY 2009
On the record Share meltdown wipes $90b off superannuation
THE average superannuation fund has shed almost 20 per cent in the past 12 months, a year in which the industry has waved goodbye to about $90 billion in value... But some funds have weathered the share market meltdown relatively well, the latest report by the market watcher SuperRatings says. The median balanced super fund lost 19.7 per cent in the year to the end of last month. A fund marked for more aggressive investment - or one where the customer has opted for a “growth” investment strategy - lost about 25 per cent in the year. In that period the share market has halved in value. Given that super funds tend to invest about 50 per cent in shares, maintaining yearly losses below 20 per cent is not a bad achievement, the SuperRatings report says. Also yesterday, the industry’s regulator made public a snapshot that details a $90 billion drop in the value of assets held by Australian funds in the past year. That is equivalent to the value of the country’s two biggest banks, Westpac and Commonwealth, combined, and would come close to buying the world’s largest miner, BHP Billiton. The managing director of SuperRatings, Jeff Bresnahan, said there was a reasonable divergence in the performance of different types of funds. Industry funds - or the not-for- profit end of the sector - have tended to produce better results in the past few years than retail or commercial funds because they invested more in infrastructure assets - bridges, wind farms, toll roads and the like - not listed on the share market. “Unlisted assets are not going to be as volatile as listed assets,” Mr Bresnahan said. Despite the performance divergence, and a substantial variation in the fees charged, he said most customers failed to evaluate their choice of fund. “Unfortunately, Australians are still proving to be incredibly apathetic. They are looking more for blame at the moment than doing research and looking for better returns, “ Mr Bresnahan said. Average yearly growth in the past three years has dropped to 0.2 per cent, while the rolling fiveyear average has dropped to 6.1 per cent a year. “This means that in what has been one of the worst economic meltdowns, Australians in ‘balanced’ investment options have still seen their super go forward in real terms,” the SuperRatings report says. Total assets being managed by the superannuation industry dropped from $1.24 trillion in September last year to $1.15 trillion this year - a $90 billion slump, the APRA report shows. Industry funds held up relatively well in the September quarter, their assets dropping by 1.2 per cent. Retail funds lost 3.1 per cent, and public sector funds fell 3.3 per cent. SOURCE: Sydney Morning Herald, 23 December 2008, reported by Jacob Saulwick
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THE HORIZON NEWSLETTER I ISSUE 2 I JANUARY 2009
Affordable housing to lead property recovery Wednesday, 14 January 2009 Homes priced at the lower end of the property market are going to offer the best opportunities for capital growth and drive the sector forward in 2009, according to experts. Government incentives are drawing first home buyers into the market, which will drive growth in the next 12 months said RP Data National Research Director Tim Lawless. “This will be something of a turnaround for the property market because, over the last four years, it has been the affluent properties that have generally provided the best capital growth,” Lawless said. “Market activity is already showing signs of increasing at the lower end of the pricing scale.” The worst period for Australian property values in recent times occurred in the second quarter of 2008, when prices fell by 1.9%, said Chris Joye, Managing Director of Rismark International. However, he stated that the October and November sales data “suggests that house prices in the final quarter for 2008 will be broadly stable”.
“Other indicators are also pointing towards an improving property market,” Joye added. “Variable rate borrowers should see their interest rates drop to around 5 to 5.6% [in the next few months], which will provide further dramatic improvements to affordability.” First home buyers now represent 22% of all residential property transactions, according to the ABS, and this figure is expected to increase during the first quarter of the year as affordability improves. Investors should target ‘strategically affordable’ properties, Lawless advised. “These are homes with a reasonable price tag that are well serviced by public transport, arterial roads and the necessary amenities such as shopping, schools and health care facilities,” he said.
“Other indicators are also pointing towards an improving property market,” Joye added. “Variable rate borrowers should see their interest rates drop to around 5 to 5.6% [in the next few months], which will provide further dramatic improvements to affordability.” SOURCE: Mortgage Business
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THE HORIZON NEWSLETTER I ISSUE 2 I JANUARY 2009
2009 property hot spots revealed Friday, 02 January 2009 Despite an overall slower property market projected for the coming year, RP Data’s 2009 Property Pulse Report has highlighted the suburbs that will offer value for money and potential for strong capital growth. “The markets that are most likely to record good capital growth over the next 12 months are those that hold that ‘driver’ appeal,” Tim Lawless, RP Data’s national research director, said. Mr Lawless believes a variety of factors will act as market drivers in these areas, such as falling interest rates, increasing affordability, rising rental rates, improving investment yields and a shortage of housing. “First home buyers and investors will be the first to jump on these suburbs,” he said. According to RP Data, property hot spots are those with strategic affordability – those that represent good value for money based largely on “location, necessities and social options”.
Examples of those suburbs highlighted are as follows: Sydney: Toongabbie, West Ryde, Ultimo, Crows Nest, Canada Bay Melbourne: Deer Park, Flemington, Kensington, Prahran, Collingwood Brisbane: Coopers Plains, Fortitude Valley, Camp Hill, Zillmere, Redcliffe Regional: Upper Burnie (TAS), Woolgoolga (NSW), Wonthelia (WA), Halifax (QLD), Mount Barker (SA) SOURCE: Mortgage Business
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THE HORIZON NEWSLETTER I ISSUE 2 I JANUARY 2009
Win an Apple iPod Nano HAVE A GREAT YEAR In closing, I would like to extend the very best wishes from all of us at McCarthy Group as you tackle the challenges and opportunities that 2009 will bring. From our point of view we are very positive about the prospects ahead, as it is in times like these that savvy investors set themselves up for exceptional future returns. Given the credit squeeze we should be grateful for the private and investment homes we already own, for the equity and mortgages already in place, as well as for the opportunity to access them to enable future property investments as personal circumstances allow. If there is anything that you would like to discuss in terms of the road ahead, please don’t hesitate to call us on (02) 9687 3601. We would love to hear from you.
Kind regards and Happy Investing. Stephen McCarthy CEO McCarthy Group.
here’s how. We’d love to hear your views on the investment property market or any other subject that you feel would be of interest and relevance to Horizon readers. Simply email your contribution to info@mccarthygroup.com.au and we’ll send a colourful 16GB iPod Nano valued at $199 to the sender of the best entry. We’ll also publish the story in the next edition of Horizon. If you have friends or relatives who you feel would benefit from an obligation-free review of their future financial circumstances, please feel free to forward them a copy of this e-newsletter, or email us at info@mccarthygroup.com.au or call (02) 9687 3601.
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