Don’t look now – you are almost certainly poorer than a year ago

Wed, 09 Jan 2019  |  

This article first appeared on the Yahoo Finance web page at this link: https://au.finance.yahoo.com/news/dont-look-now-almost-certainly-poorer-year-ago-211934583.html 

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Don’t look now – you are almost certainly poorer than a year ago

I am sorry to kick off the new year with some gloomy news of your finances.

It is never nice to discuss how much money you have lost, but if you are a home owner in Sydney, Melbourne, Perth or Darwin and if you have a superannuation nest egg, the odds are you are less wealthy today than you were a year or two ago.

Here are some uncomfortable facts.

The Australian stock market, where the bulk of your superannuation assets are likely to be invested, has slumped 11 per cent since August, reducing the value of stocks by around $200 billion.  No doubt your superannuation has suffered part of this loss.

At the same time, home owners in Sydney, Melbourne, Perth and Darwin are seeing the value of their homes getting crunched.

Here are some examples.

A house in Sydney that was $1 million in July 2017 is now worth around $890,000, a loss of $110,000 in 18 months.

In Melbourne, a house that was $800,000 in early 2018 has lost around $50,000 in value, to now be worth around $750,000.

In Perth, the situation is more parlous. Prices have dropped 15 per cent since late 2014, meaning that a property that was $600,000 in 2014-15 has lost close to $100,000 in value to be worth just over $500,000.

Ouch!

While those in the most financial pain are those who bought at the top of the market, the effect of falling house prices is very real for all home owners, including those who own investment properties. Rising house prices underpin extra consumer spending which helps to support the bottom line growth in the economy. This is through a wealth effect which impacts on the economy in a number of different ways.

When householders are wealthier, discretionary savings are lowered, which frees up money to be spent in the broader economy. What is also important is the reduction in the loan to valuation of a property with a mortgage as house prices rise. This not only makes the householder more financial secure, the banks and other lenders are more comfortable with the financial status of the borrowers and they will be able to ramp up lending not only to the existing home owner, but to new potential customers as well.

And when house prices and wealth are declining, as they are now, householders will hunker down with their spending and the banks will be tighter with their credit.

This is the risk to the economy in 2019.

As the loss of wealth filters through to more and more householders, or perhaps when they see the house around the corner not sell for months and when if finally does, the price is a shock, or even when the next superannuation statement comes in showing a sizable fall in the balance, consumers will likely scale back their spending, rebuild savings and be generally cautious in their approach to spending. This will undermine growth in the economy.

Things could get even more problematic if the stock market remains weak and house prices keep falling through the course of 2019. The wealth losses will be more extreme and the consumer reaction to those losses even greater in terms of the slowing in growth in spending.

The economy and your personal finances are kicking off 2019 on a fragile note. At best the next six months will see the economy muddle along with growth slowing, the unemployment rate ticking up and inflation remaining near record lows.
No disaster, but certainly it is not good news.

The risk is the destruction of wealth will continue and this will see consumers cut their spending to a point where the economy stalls and the unemployment rate starts to climb at a truly worrying rate.

 

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This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/its-time-end-strong-economy-propaganda-230414837.html 

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It’s time to end the “strong economy” propaganda

For the last year or so, it has been obvious to anyone with an open mind that the economy is in trouble. Unfortunately, the government and the Reserve Bank not only ignored this growth slump, but they ran a propaganda campaign saying the economy was “strong”, that unemployment would keep falling and wages growth was poised to pick up.

It might have been politics that lead the RBA and Treasury to this view with the recent election swinging on the economic credentials of both major parties. Ahead of the election, the RBA and Treasury were loathe to undermine the government with an honest assessment of the rapidly spreading economic problems.

It is possible that the forecasts were a simple error, which sometimes happens when an external shock hits the economy.

Either way, things are so bad in the economy right now that forecasters are rushing to out-do each other on how low interest rates will go in this cycle. Some are canvassing negative interest rates, printing money or the need for a fiscal policy boost if the economy remains in its economic funk.

Time will tell.

The range of forecasts that where regularly produced by the government (Treasury) and the RBA up until very recently were unambiguously optimistic. The forecasts ignored all hard data on the economy, which suggests it may have been a political strategy to remain upbeat, rather than it being a clumsy forecasting error.

An update on my house price bet with Tony Locantro

Thu, 20 Jun 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/house-prices-are-still-dropping-but-bottom-sight-210000929.html 

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An update on my house price bet with Tony Locantro

It is difficult to think of a bigger issue that gets Australians fired up than house prices.Regular readers will know that back in September 2018, I made a bet on house prices with Tony Locantro, a fired-up Investment Manager with Alto Capital in Perth.

Tony wont mind me saying this, but he is what is called an ‘uber bear’ on house prices – he reckons prices are grossly inflated and are overdue to collapse. On the other hand, I reckon there is a cycle and that after the surge up to 2017, house price falls were inevitable, but that the decline would last only a couple of years and would not be too severe.

The bet was framed around a peak-to-trough fall in prices of 35.0 per cent in either Sydney, Melbourne or the 8 capital cities measure used by the Australian Bureau of Statistics. If prices fell by more than 35 per cent at any stage from the peak until the end of 2021, Tony would win, if the fall was less than 35 per cent, I would win.

Simple.

That background is important because the ABS just released the official dwelling price data for the March quarter 2019.

In the quarter, dwelling prices fell 3.0 per cent in the 8 capital cities and dropped 3.9 per cent in Sydney and 3.8 per cent in Melbourne.