Mid-year snapshot
You would be forgiven for thinking that in the middle of 2020 when the virus crisis was still going, still is going, that a year on the world would look considerably worse, but in fact for the most part, and least in these narrow categories the economy and world looks better than before.
But looks can be deceiving.
We all know that there are considerable challenges ahead for the Australian economy and global conditions but remaining optimistic is imperative to capitalising on opportunities and hopefully the areas we talk about in this update help to give positive perspective.
This is the third mid-year review we have done and you can find the one from 2020 here and from 2019 here.
Household Wealth
This time last year the average Australian family’s household wealth surpassed $1M for the first time.
According to the Australian Bureau of Statistics, it remains steady, and as at the end of 2020 sat at $1.02M, slightly above a year ago.
I think this is understated.
The reason I say that is because property prices, specifically for houses, are still ridiculously hot and the ASX had its best year since the 1980’s delivering twenty something percent over the past 2020/21 financial year.
With both houses and stocks rising most households are richer than ever.
Not all households, but most, and particularly ones where the income earners have white collar jobs that allow them to work remotely, which has saved them time and money commuting and seen their superannuation balances increase.
You could make a case that inequity and inequality is at the most divergent points in a generation right now.
A prime example of this is Jeff Bezos. Founder and ex-CEO of Amazon, who just retired from the company he built over the past 27 years, with USD $197 Billion in wealth making him the richest man on earth.
He is 739,489 times richer than the average American household.
If that is not an example of inequality I do not know what is.
Inequality is going to become a feverish topic over the next few years as the average household wealth and income flatlines and interest rates rise.
Cash Rate
This time last year the cash rate was sitting at 0.25%.
Now it is 0.10%.
The banking regulator APRA has started to prime the banks on negative interest rates and telling them to ensure their computer systems can handle it.
While it is unlikely rates will go negative it is not out of the realm of possibility.
Most economists are predicting the RBA to start to lift rates in 2023 and this is also possible.
It is important to remember that the cash rate, and subsequent mortgage and business loan rates, being so low is because of a global emergency. Rates are at historical and emergency level lows and will increase in the future.
Beware the RBA raising rates noting inflation as the reason, in the past this has meant inflation was already burning underneath supposed CPI indicators and lead to dramatic pull back in liquidity supply from banks and lenders which is often a trigger for recessions.
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.
This is very interesting to see, as we currently have the lowest home loan rates Australians have ever seen, which is reflected in the sharp drop in both variable and especially sub two percent fixed rates.
**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 2.63% - 3.05%, now 2.29% – 2.54%, a difference of 0.3%.
Fixed was 2.14% - 2.40%, now 1.79% - 1.99%, not as big a drop as the 1% differential the year before, but still seeing rates sub two percent.
Investment Property Loans
Principal & Interest
Variable was 3.07% - 3.35%, now 2.55% to 2.69%, a difference of 0.5%.
Fixed was 3.09% - 3.30%, now 2.09% to 2.34%, a huge drop of ~1% which is surely getting investors back into the market.
Interest Only
Variable was 3.30% - 3.45%, now 2.59% to 2.89%, a staggering difference of over a percent.
Fixed was 3.40% - 3.54%, now 2.09% to 2.29%, another massive decrease of over a percent.
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 is in the snapshot is because depending on what happens with the value of the banks in totality is a good proxy for the property market and wider economy.
The incredible performance of bank stocks over the past year are a direct result of quantitative easing from the RBA which has enabled the banks to lower lending rates, most notably home loan rates, which has boost loan volumes which increases their profit and (perceived) value.
Over the past twelve months the big four banks and Macquarie combined market cap has increased over by $110 billion dollars. This is in the same twelve month period when there was a global pandemic. In some ways this is a lagging indicator or the capital flows from the RBA.
2019 Figures:
CBA $144.12
Westpac $96.30
NAB $77.67
ANZ $76.82
Macquarie $43.37
2020 Figures:
CBA $126.94
Westpac $60.53
NAB $56.06
ANZ $50.03
Macquarie $45.16
2021 Figures:
CBA $174.55
Westpac $92.93
NAB $86.57
ANZ $79.20
Macquarie $57.16
*Figures in billions and taken from the ASX website, 2019 figures from 18th July 2019, 2020 figures from 7th August 2020, 2021 figures from 14th July 2021
Clearance rates
Prior to the virus crisis and the lockdowns in Sydney and all across Australia, the average clearance rate for residential property sales was about 60% or 70% depending at its highest peak.
During the lockdowns this dropped dramatically and barely anything was sold, people were too worried about buying at the time given the uncertainty.
Unfortunately for those now looking to buy property, about a year ago was the best time to buy because clearance rates and property prices, particularly for houses, were well below where they are being sold at the moment.
Avid readers will recall that I predicted record high property prices for 2021 back in June 2020, when that was not a common view. I have elaborated on why prices have kept burning higher in more recent updates like this one here.
In Sydney just before this latest lockdown clearance rates were 80% or 90% in most cases with reserve pricing and suburb records being smashed.
Right now in lockdown things have tapered off, but I’d dare say when this lockdown is lifted and people can hit the streets with to buy property again all that pent up demand will see a surge in clearance rates and keep prices buoyant.
Aussie Dollar
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.
In mid-2020 the AUD/USD pair exchange rate was almost flat compared to the year before that at about 72 cents.
The AUD peaked in February 2021 to around 79 cents which is interesting given the “trade war” with our largest customer, China, who has incessantly tried to administer economic pain and coercion on Australia since the virus crisis started, perhaps even before. Tariffs and bans have not shrunk the AUD.
At the moment the Aussie is sitting at around 75 cents to the Green Back and forecasts indicate it will remain strong.
Prime Minister
In this section last year I wrote “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” and I stick by that view.
This is not an endorsement of either side of politics, their policies, or Morrison as a PM, but rather a practical assessment of public opinion based on the most damaging and scary times Australia has faced this century.
It is important to understand politics and parties and their policies relating to regulation of industries, in this case of banking and financial services. Specifically, the amendment and thoughtful removal of the ‘responsible lending laws’ and the onus moving to a ‘responsible borrower’ style, which makes a whole lot more sense.