SSS – Jan/Jun 2022

G’day All,

What a year 2022 has been so far!

Although the RBA hiked quite steeply in June, the two cash-rate increases to 0.85% so far is still very low. The cash-rate is an important number as it acts as the reference for the entire economy and determines the price and velocity of money. As a result, interest rates have gone up across the board, however most are still below 4.5% which is the target yield on our residential property investments.

The RBA say they had to hike because of inflation, which is true. RBA target band is 2-3% and we just hit 5% (it’s around 9% in the US). However the type of inflation we’re experiencing is different.

Ordinarily, inflation occurs because of increases in demand by consumers such as you and I and usually due to wage increases, low interest rates and low unemployment. Current inflation though is being caused by supply-side constraints – not wage rises or significant increases in consumer demand.

When the pandemic hit and economies shutdown, flow-on effects meant productivity ceased, staff laid off and relocating, supply chains broken and businesses folding on a global scale. Despite massive amounts of money printing and government assistance, economies and industries cannot be shutdown then restarted in short time as it’s too complex a beast. The sharp increases in building costs and numbers of building companies folding is just one example.    

The Ukraine war also isn’t helping as both Ukraine and Russia are some of the world’s largest exporters of grain, fertiliser and energy hence high food and oil prices. Increasing the cash rate now places a heavier burden on society and risks a recession. Fortunately we’re looking close to peak inflation as the world slowly gets back to normal and supply and productivity gets re-established. We’re seeing this in Chinese factories reopening after this year’s lockdowns and the global oil price slowly coming down. As such, I’d expect the RBA cash rate to top out at around 1.5%-2.0%.

Interestingly, history shows that inflationary periods are good for property and hard assets in general. Firstly it raises rents and capital values, and secondly, erodes the value of debt in real terms and is one of the reasons countries have inflation-targeting policies. Some argue that rising interest rates means a fall in property prices, but unless the cash rate is higher than inflation (currently 0.85% v’s 5.0%), then expect values to increase as people shift to hard assets. History is instructive on this. The 18.6 year property cycle going back over 400 years in the UK and 200 years in the US also calls for a rapid increase in land price between now and 2026-27. Although not easy, it is wise to go against mainstream media reporting if you can.

Going Forward

Key investment trends remains commodities, agriculture and defence. As such, WA, SA and NT remain our target markets with pockets in NSW, QLD and VIC based on local industry, infrastructure, population growth and international migration. The latest G7 meeting has also pledged a US$600 billion global infrastructure initiative to combat China’s Belt-Road and debt-trap initiatives. This bodes well for Australia given our rich mineral and resource status and proximity to Asia.

EOFY

As we approach EOFY, please get in touch if you’d like assistance with any ADF and/or property tax returns. You can also find the latest ATO Rental Property and ADF Member guides here.

Congratulations also to our new clients who have recently come on board. Timing right now is perfect as we enter the second-half of the 18.6 year cycle.

Strategy

The Defencewealth strategy of TWO-50-TEN™ is based on acquiring a $2 million portfolio at 80-90% LVR over a 6-8 year timeframe. Once acquired we work to reduce the LVR to 50% over the next 4-7 years using a combination of capital growth, offset accounts and principal repayments. Once at 50% LVR, you will have some serious financial options but it will take time (min 10-15 years) to achieve. The new property packages we recommend are considered investment-grade based on experience and results and are selected for their balance in anticipated cash flow, capital growth and risk.