Finance Market Update - 12 April 19
Talking points in this update
1. Sellers think it’s worth it
We are in a buyers’ market and with more properties listed for sale than in recent memory, they have their pick, and as sellers grit their teeth hoping for an offer like it was 2017 we have to ask, is their price realistic?
2. Cash splash of a budget
In typical fashion of a government about to head into a federal election they have come promised tax cuts, cash in your pocket and spending to build up the roads and things you need. Time will tell to see if they have bought more votes to stay in power. I argue it is too little too late below….
Not willing to sell for less than you would buy
In psychology there is a term called the “Endowment Effect” which refers to when the amount people are willing to pay for an object is less than they are willing to accept.
We are seeing this across the property market. Owners are not willing to accept a lower price but would not necessarily pay the price they are asking for the same property.
People inherently value the asset they own more than the market is willing to pay.
A “market” by the way is made up of people buying and selling, when people refer to “the market” they are referring to people. So, when you hear about “the market” just remember it is not an abstract thing. You are dealing with people, with all their biases, individual mental models of the world, beliefs and objectives. All of which influence how much they will buy for or sell for.
This is perhaps one factor contributing to the downward spiral in property prices. That people have higher pricing expectations than “the market” is willing to pay.
An asset is only as valuable as what someone will pay for it.
Further to that, the price decline is likely exacerbated by the fact that there are so many properties available for sale at the same time, something around 28% more than this time in 2018, so buyers are spoilt for choice.
That means that there are more properties being sold right now than anytime before over the past 5-year property boom. The ironic thing with falling property prices and everyone trying to sell at once is that is just further pushes prices down.
In Sydney we see property spend an average of 69 days on the market before it is sold, pulled from auction or off market completely, which agents have been seeing about 20% more of, as sellers pull their property off the market because they aren’t getting the right offer.
Sellers will either continue to value their asset at a price the market is not willing to pay or lower the price to meet the market. Either way, prices have not found the bottom yet.
The most political budget of them all
There are a few key things in the 2019-20 budget released last week by the government that might be interesting for you, or at least what they will be marketing the most thinking it is what interests you.
The most spruiked point of the budget will be the tax relief for middle to low income earners.
Low income earners could get just over $2k. For middle income earners, those earning $48k to $90k will get $1,080 and those over that but less than $126k will get something between $0 and $1,080.
Funnily enough in my last update as an example I argued that the exact amount of $1,080 would not make most people feel rich, or at least rich enough to go out and spend big.
This point carries across to tax cuts, in that even if you get this as a rebate in your tax return it you probably won’t go buy a new car or tv, but rather put that money into savings or paying down existing debts.
An extra grand in your pocket will certainly be welcome but it is not going to make people feel rich, but politicians think it might just be enough to get your vote.
For businesses, the main thing in this budget was the extension of the amount and time frame of the existing instant asset write scheme.
The limit has increased from $25,000 to $30,000 for all assets purchased by small businesses with turnover less than $50 million. This can be used every time an asset is purchased and can be great for cash flow.
This is a good thing as businesses can get money back into their business quicker and have a new piece of equipment or tool that should improve their revenue or productivity.
Shockingly the number of small businesses that have already used this scheme is only around a quarter of a million business. There are approximately 2 million small businesses that could have used this scheme, so only 1 in 8 businesses are getting this advantage. I always talk to my business clients about maximising cash flow and using the right debt for the right asset or objective, so if your business hasn’t used the instant asset write off scheme we should take a look at your finances.
Further they have committed to fast tracking the company tax reform which would reduce the company tax rate to 25% (down from the current 27.5%). This is more important for larger businesses than small, in terms of dollar savings, but regardless it still means more money staying the business, and that is a good thing.