In the middle of last year, I wrote a special update as a snapshot so we could compare the world a year ago to now. In this update we reflect on where we were a year ago, compared to where we are presently and talk about the differences, particularly on property prices and interest rates.
Snapshot of the past and present
What a difference a year and a global pandemic can make.
In an update in July last year I took a bit of a snapshot on a few pieces of the market and world with the idea to run a comparison this year to see what had changed.
A lot has changed.
There were eight main things I focused on in the update last year which you can read here.
We will revisit each of them below, take another snapshot of the world now and make a few predictions on where we might be in another years’ time.
Last year the average household wealth for the average Australian family surpassed $1 million for the first time.
This was quite the significant milestone as it shows our wealth continued to grow and that as a nation we are becoming richer. This was largely on the back of “houses and holes” (i.e. residential property and mining) but also to ever increasing superannuation balances. Well, super might be slowing a bit as people (eligible or not) withdraw up to $20k under the Covid19 policy. Our wealth is based on property prices and the share market.
I made the comment in the snapshot that both property and shares are “vulnerable to downturns” and given we are in the worst recession right now it is reasonable to expect household wealth has dropped as well.
But wealth has not dropped, not much, yet.
The equity markets have been booming this year. This is fuelled by a few things such as government liquidity driving up asset prices and amateur stock buyers using apps to get in on the action which drives up buying activity and prices. There is probably more complex stuff as well, but I am not a stock market commentator.
Property so far has only really fallen about 5% give or take depending on location and type of property and considering most people’s idea of financial self-worth is tied to the home household wealth in terms of a sense of and on paper is doing pretty well. In fact, as I wrote a few months ago I predict property prices will start another boom in 2021 driven by five forces.
This time a year ago the cash rate was at 1% which was a new historical low for Australia and I said in the last snapshot “we will have a new historical low this time in 2020”.
Today, it is at 0.25%. Another historical low.
In the last update I wrote that I think mortgage rates have a bit more depth left and will head lower but not by much, and the cash rate won’t go lower anytime soon. Governor Lowe has stated this very clearly.
Mortgage rate ranges
The below ranges are based on anecdotal scenarios and quoted rates from various banks. These are indicative only and depending on a borrower’s financial circumstances they could get an even lower or higher rate.
The range was from 2019 and current 2020 offers are listed to show the then and now ranges, and the differential.
We have discussed the drop in the cash rate already but here you can directly see its impact on borrowing costs for residential mortgages. I said last year that I thought rates on “soften” i.e. lower and low and behold we have lower rates.
The outstanding difference in rates is for Owner Occupiers paying Principal & Interest repayments on a Fixed rate, in certain cases seeing rates over a percent lower than this time last year.
**80% LVR, $800k loan, 30-year term, fixed terms 1-3 years, used for each example below**
Owner Occupied Home Loans
Principal & Interest
Variable was 3.18% - 3.44%, now 2.63% - 3.05%, a difference of 0.5%.
Fixed was 3.17% - 3.29%, now 2.14% - 2.40%, a huge difference of over 1%.
Variable was 3.94% - 4.24%, now 3.33% - 3.65%, a difference of 0.6%.
Fixed was 3.72% - 3.89%. now 3.34% - 3.55%, a difference of 0.4%.
Investment Property Loans
Principal & Interest
Variable was 3.59% - 3.74%, now 3.07% - 3.35%, a difference of 0.5%.
Fixed was 3.59% - 3.69%, now 3.09% - 3.30%, a difference of 0.5%.
Variable was 3.97% - 4.20%, now 3.30% - 3.45%, a difference of 0.4%.
Fixed was 3.69% - 3.89%, now 3.40% - 3.54%, a difference of 0.2%.
Market capitalisation of big banks
‘Market Capitilisation’ is a rough measure of how “big” or valuable a company is and is calculated by multiplying the share price by the number of total shares.
The reason this was in the snapshot was because depending on what happens with the property market and economy bank shares are a good indicator of what is happening in the finance market and the economy more broadly.
The big 4 banks have lost over $100 billion in value over the past year. This is a staggering number and a clear result of the virus crisis impacting the finance market and banks.
The scary thing is that their decline might not be over, and these figures do not represent the provisions for losses from the almost ~$280 billion in mortgage and business loan deferrals currently in place.
CBA, was $144.12, now $126.94 Billion, down $17 billion
Westpac, was $96.30, now $60.53 Billion, down $35 billion
NAB, was $77.67, now $56.06 Billion, down $21 billion
ANZ, was $76.82, now $50.03 Billion, down $26 billion
Macquarie, was $43.37, now $45.16 Billion, up $1.7 billion
*was figures from 18th July 2019, now figures from 7th August 2020*
Leading up to the lockdowns clearance rates were consistently in the 70% range showing a healthy and booming market. This is reinforced by the official figures from the Australian Bureau of Statistics that stated in Sydney prices were up 10.5% in the year preceding the lockdown and in line with my prediction that property prices would reach or exceed 2017 peak values in 2020.
Indeed, I said that clearance rates in Spring and Summer 2019 will be up on the previous year and correlate with upwardly correcting house prices – which was certainly accurate.
Right now, is a different story. Looking at the clearance rate number in isolation makes the picture a bit rosier than it actually is, because in reality the number of properties for sale is still quite low which means clearance rates are relatively high because there is such strong demand.
In the update a year ago I quoted a figure of 194,000 units/townhouses were in development and right now it is hard to say what that revised figure is. The reason it is hard is because so many developments have slowed, stalled or stopped all together and it is hard to tell which is which.
Look at Victoria right now for example which has level four restrictions in place which effectively stops construction sites being worked on. How do you classify that?
What we do know is that there will be a lot of new houses being built over the next couple of years with money from the Home Builder government grant.
I ended the comments on housing supply last year saying that “many more apartments will either be sold or tried to be rented out, adding even more stock to the market, which will add downward pressure on prices, both rental and value, in the short to medium term” and this still seems true, albeit because of the virus and its second order impacts.
Currency is relative to the finance market because it impacts GDP, inflation and economic activity and therefore the decision of the RBA to lower or raise the cash rate, and that decision as we talked about just before directly impacts home loan interest rates.
This time last year the Aussie dollar was hovering around 70 cents to the USD and was in this range for most of the year. Right now, the exchange rate is pretty similar, even just slightly higher at 72 cents.
But in March 2020 the AUD got as low as 58 cents which was a dramatic collapse in value. However, the AUD has proved resilient and risen back to strong levels with some people expecting it to continue to strengthen against the USD. Last year I said I thought it would be in a stronger position now.
If ScoMo can be perceived to have managed the virus crisis well and wins the next election he could become one of the longest serving Prime Ministers in recent history.
One of the Five Forces fighting for property prices is government policy and spending. After the government has done so much to support the economy so far we should expect them to continue to support it as much as they see as needed.
Part if this is self interest on their part because they know if they let the economy or housing market collapse there is basically no way they would win the next election. But, more importantly they know it is in the best interest of the economy and country to keep supporting it. One example of this was the “cliff” of when JobKeeper and mortgage and business loan repayments was going to end this year was pushed out, just like I said there would be no cliff, and they will push it out more and more as long as needed. From here, ScoMo could remain PM and not be thrown out by his own party and be an extraordinarily strong contestant to be re-elected.