G’day All,
With annual inflation coming in at 5.4% in September, inflation is still high and well outside the RBA’s target band of 2-3%. The main contributors were fuel and electricity – staples which the average consumer has no real control over other than to stop consuming it, which is pretty hard when your livelihood depends on it.
On a positive note, it’s significantly lower compared to the same time last year, and as it takes around 12-18 months for rate changes to fully make their way through the economy, it’s hopeful the RBA adopts a wait-and-see approach, especially as wages haven’t materially increased. With unemployment at a historic low of 3.6%, it’s also unlikely there’ll be any rate cuts until that figure starts increasing again. In very broad terms, the RBA bluntly raises rates to curb inflation, and reduces rates to curb unemployment.
With average mortgage rates now around 6.5%-7.5% (compared to <2.5% in 2021), there’s a lot of pain being felt, but interestingly house prices are still rising. A main reason is population growth – Australia’s net overseas migration is expected to hit 400,000 in 2023 and 315,000 in 2024. Pre-pandemic intakes were around 235,000 per year!
As we’re now firmly in the second-half of the larger 18-20-year real-estate cycle, the increase in property/land prices will continue through to 2026-28. Commodities, Agriculture and Defence will be key industries, and as we suggested in June last year, WA (Perth), SA (Adelaide) and NT (Darwin) will be key markets to watch and invest in due to their higher affordability. Perth is already firing with market conditions similar to those experienced in 2005-06, and still has a long way to run.
Although the recent China slowdown has gotten some people worried, we can expect the CCP to start stimulating again via major infrastructure projects requiring Australian resources. The global push to carbon net-zero also requires vast amounts of rare-earths such as lithium and cobalt which WA and the NT already have established mines and exploration projects underway. In fact, Australia is already the world’s largest lithium producer.
On top of this, India has overtaken China as the world’s most populous country and coupled with a much younger median age of 29, it is now urbanising at a rate similar to China a decade ago. This all requires significant resources to fuel and feed India’s growth ambitions which will echo China’s economic growth story over the last 10-15 years.
On the domestic front, there’s still a lot of insolvencies occurring within the building and construction industry. Main cause has been fixed-price contracts entered into prior to the pandemic lockdowns and management of building supplies and operating cash flow. With shortages in skilled labour and high inflation in building materials (30%+), it’s sadly brought a lot of builders to their knees and consumers with unfinished homes.
This is contributing to higher prices and rents overall, boding well for established property owners and those with dwellings nearing completion. Whilst the risk of a builder going under can never be fully eliminated, it can be mitigated through an understanding of their cash flow position, number of active projects, confirmation of insurances and stability of building supplies.
Despite all the bad news about inflation, interest rates and insolvencies, there’s a lot of similarities with the boom period experienced in the mid-2000’s. With national focus on defence and space, higher commodity prices and exports, vacancy rates at record lows and higher house/land prices despite increasing interest rates, now is the time to be getting invested!
Please get in touch if you’d like an experienced team to look at what might be possible or to simply review your current lending.
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.
Defencewealth Australia 