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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate May 2020: The Three Critical Themes Unfolding In The Economy Right Now — And How They Impact Property Prices!

Today Governor Lowe and the Reserve board met, and they kept the cash rate on hold at 0.25%, so nothing to see there.

What I wanted to highlight in regards to some of the activity from the RBA, we did get an update in the middle of May, in terms of how their stimulus package and monetary package they introduced in March is going to work. So, a couple of the highlights for me there, in terms of domestically and globally.

We do appear to be in better shape, in terms of how liquid the markets are.

The bond markets and the financial markets seem to be holding up okay compared to, obviously, they were the reason for the last significant contraction in the global economy, being the GFC. So, doing a good job in terms of how we’ve organised the financial markets and how liquid that they are.

The other big takeaway for me also was around one plausible scenario that Governor Lowe put out there, and that is with the easing of restrictions and getting back to a more normal state – what we’re going to basically see there is potentially GDP going back into positive territory inside that third quarter, which is the September quarter, after what will be a shocker in terms of the June quarter. So we’re preparing ourselves for some pretty ordinary data through that area.

I’ll give you the GDP number. So a contraction of 6% in 2020, and then also looking at between 6% and 7%, which is supported by the International Monetary Fund as well, in regards to their views, which I’ll share with you in a minute.

The other thing I also wanted to highlight was the unemployment. So, yes, we all think that unemployment will peak around the 10% range.

Could have been worse obviously without the JobKeeper package, but that also said… his indications in that update was seeing unemployment coming back around that 6% level. That’s an important number for us to understand as property owners, in terms of what does that mean for our properties. So I’ll talk about that also in this economic update.

The final message here is, all attention now turns to the statement of monetary policy which we’ll see coming out at the end of this week, and what we will be looking for in there is some guidance around some of the forecasts. Now, also being mindful that it is a bit of a moving target at the moment.

It’s great to see we’ve flattened the curve — Australians have done a great job in doing that, but ultimately, we’ll start to see some of where their economic modelling looks, and what sort of forecasts we’ll see.

So everyone’s waiting for that.

Now, if I was to summarise what this economic update is going to showcase, there’s probably three things that are important. Well, not important, but are showing up.

Firstly, the politics is back. So what I’m sort of saying there is, now, after we’ve gone through this uniformity in regards to looking after Australians first, now that Australia looks like it’s reduced the curve, flattened the curve, as they say, we’re now starting to see politics come out. So that’s going to be a bit of a flavour that you’ll see coming through my presentation today.

In terms of the other two critical things, I’m going to share with you the predictions around distressed selling in property. I think that’s overdone, and I’m going to prosecute my argument in regards to why I think that is misguided and we won’t see the distressed selling that we’re seeing people commenting about on social media and the like. We’ll go to the facts and we’ll go to the data on that one.

Lastly, property won’t be immune, so there are some areas in the property market which I feel are going to be at the highest risk. So I’ll share with you that later, in terms of what property type is going to be at the biggest risk in this pandemic.

Right, so as I normally do, let’s start with a global view.

The first thing I’m looking at is the US politics. Now over the past months, and in the lead up to the end of the year, I talked about the US/ China tariff war. Well, I also talked about how President Trump’s, pardon the pun, “trump card”, was the economic situation that was in the US – historically low unemployment and a booming economy. That was his card to obviously be re-elected in November. Well, obviously we know that that’s not necessarily going to be the case. We’ll probably see the US in recession during that time.

So he’s had to divert his strategy, in terms of an argument that he can win and that will galvanise his voters and his base, and that argument is China – in blaming China for the COVID-19 outbreak. So we’re now starting to see that rhetoric materialise as part of his positioning and lobbying for his voter base come November. So, for me, that is obviously politicking and what that does do, unfortunately, is it destabilises the equity markets.

It also destabilises the global economy in terms of the US talking about increased tariffs and what that means for global growth. So, one to watch there.

It’s only just starting to come out, but given that he’s got very little to talk about in terms of how they’ve managed the actual coronavirus over in the US he needs to play to his strengths. So blaming others plays to his strengths.

In terms of some of the economic news out of the US, we did see some pretty ordinary numbers, bordering on horrible numbers, in terms of unemployment. So, 3.83 million US people filed for unemployment during the week commencing the 24th of April. Now that was down from 4.42% the previous week, but that’s more than 22 million people have now signed up for unemployment claims in the US, so that’s not great.

Consumer spending has plunged 7.5% in March, on the spread of the coronavirus limiting shoppers’ movements. Makes sense. Then in terms of the ISM manufacturing survey, it fell to an 11 year low of 41.5 in April, suggesting a significant disruption to the manufacturing supply sector and the supply chain over that month. Yet, despite these large falls, less than… a lot of people expected that number to go down to around 36.9, so that was the forecast. So 41.5 was actually better than expected. So that’s obviously the biggest economy in the world we wanted to have a look at.

Let’s turn our attentions now to China, who is a little ahead of the game in terms of the COVID-19 outbreak.

The positive news coming out of China is that the recovery in the Chinese economy has continued in April.

So we have seen the data of the PMI manufacturing index is 50.8. Now that is a fall from 52.0 in April, but we’ve got to remember, any reading above 50 is expansionary. So manufacturing is still expanding. The other one which was also quite positive was the services PMI index rose to 53.2, and that’s also in expansionary stage there, where it was 52.3.

In terms of China’s growth is expected to be muted. So it won’t be as strong as what it has been, around those 6% ranges for GDP, because of this, because, effectively, COVID-19’s spread has meant that the export markets for China are going to be impacted as social distancing measures continue to impact productivity and spending around the world.

I took with interest the latest update out of the International Monetary Fund, in terms of their global growth forecasts. You can check out the IMF Real GDP Growth update here. So I wanted to share those with you, in terms of real GDP growth in 2020, what’s expected, lots of negative numbers. But I also then wanted to share with you the rebound of what they’re expecting in 2021, to try and give some context.

So the world economy is looking at a negative 3% growth figure for the remainder of 2020 – in real GDP – but then bouncing back in 2021, delivering a 5.8% growth story.

US is going to be negative 5.9% to US positive 4.7% in 2020. Germany, negative 7% with a positive rebound of 5.2%. France, negative 7.2% with a rebound of 4.5%. Italy, negative 9.1%, so a significant retraction in their economic activity, to then move positive 4.8%. The United Kingdom, negative 6.5% to a positive four number in 2021. Japan, negative 5.2% to a positive point three. Canada, negative 6.2% to a positive 4.2%.

China, positive 1.2%, so not even negative in 2020. So they seemed to have… still are remaining positive in terms of economic growth, to a positive 9.2 number.As the global rebound occurs, China plays a big role in that, in their exports. So that’s a significant pickup in growth in 2021. India also positive in regards to their 2020 real GDP outlook, at a positive 1.9% to a 7.4%. So very, very strong growth in both India and China anticipated.

Round that out to Australia. So they’re talking about negative 6.7%. You heard me say before that the RBA thinks that that’s negative 6%, and you heard they’re saying 6.1% positive rebound, and the RBA’s talking between 6% and 7% growth in the Australian economy next year.

So that sort of rounds out the international outlook. I think that International Monetary Fund forecast is reasonable in regards to the information they’ve ascertained. We’ve also got to be mindful that it is, as I said, a pretty moving beast at the moment, so those numbers are bound to potentially be adjusted as we work out how quickly we get mobility and also treatments and possible vaccines to give us our freedoms that we’ve enjoyed in the past.

Turning back to Australia, and I pick up the politics story here again…

So, the politicians’ got a lot of good capital, a lot of good capital in terms of being united. They’ve done an excellent job on the back of the best medical advice that has been provided for us. So they’ve built up some political capital but they seem to be losing it very quickly. As this pandemic phase one is easing, what we’re basically seeing is the politics coming out.

So you want to see the politics being less of a play but unfortunately, no, it’s not going to be, right? Again, now that we’ve got over this immediate risk and panic, where we did see that uniformity, we’ve now got a disparity in regards to what the politics of the state and national parties are doing, and obviously the political parties associated with that.

So, as predicted, if you look at Labor’s playbook nationally, in any of these types of crisis, it’s always about securing jobs for Australians. So, they’re going after the immigration story to try and instruct the government, or put pressure on the government to reduce immigration, which, understandably so, it does two good things in terms of their potential for re-election. One, it says that they care about the Australian worker, which is fair enough, but they also know that that also means that it will have a detrimental impact on economic growth in Australia. So they don’t want to see the Libs and national party in power have that strong economic grounding for when the federal election comes around again in 2022. So expect to see more of this playing out, unions getting behind that push, in terms of Australian jobs.

But the important point here is that Australia has been built on the back of immigration… so, if we do restrict that immigration, we just be mindful of the significant economic impact that that’s going to have on jobs in this country; especially in construction and also those flow-on jobs that a growing population deliver in terms of services and goods jobs.

So, a migrant couple arrive in Australia, they’ve usually got cash in the bank. So from those point of view, a minimal requirement is to come here with a significant amount of cash to back them so they’re not a burden on our health system and also our welfare system. Then obviously they need shelter, and then ultimately they want a secure job, and then obviously start to be buying materials and goods as they go on, as they set themselves up in this country. So I’d like to think that through good economic management, we wouldn’t see that reduction in immigration. I’ll put an argument there in terms of why we don’t have to do that.

At the moment, a lot of people think that our borders are shut and that flights aren’t coming in. No. All you need to do is go to Melbourne Airport and you can see we have flights coming in from China, we have flights coming in from Asia, and we also have flights coming in from Europe. Now, there’s not a lot of flights — we’re talking about three or four of those international arrival flights a day — but you’re talking about over 1,000 seats are coming into this country.

So if we can do screening, rapid testing and the like, and if they’re not bringing COVID-19 in, then what’s the danger in terms of bringing them in and getting them settled in as planned, given that they were accepted as migrants into this country, as were most of the people in which this country was built on. So from that point of view, that’s an important one at the national level. So we’ll start to see that politics playing out.

In terms of at the state level, we’re already starting to see there’s an opportunity here.

So what you understand about business and politics is that there is a saying around there, to always take advantage of a crisis. That means that when things are going pretty well, such as 29 years of positive economic growth, you can’t necessarily do large reform as part of that because people don’t like change. But when you have a crisis like this, you can potentially look at different types of reforms, and we’re starting to see that in regards to how Victoria and New South Wales are setting up their politics around stamp duty, and potentially land tax for that matter.

They’re exploring the idea of not relying on stamp duty and also land tax because it is absolutely an unproductive tax.

It’s a shocking tax. It does nothing but they rely on it heavily for the revenues to feed their spending fetishes that they have, in terms of looking after us, apparently. So, from that point of view, we don’t know what the details will be around the impact to property, so the devil is always in the detail.

So we look forward to seeing what is proposed and how that proposal will then potentially impact properties. So we’ll come back to you more on that once we see it happening. But effectively, what it will mean is that there will be an annual bill that every household owner, including investors and owner-occupiers, will be paying to government, and there will be a potential transition period like what we’ve seen in the ACT. So they want to sure up their revenue base, so they’re potentially using this crisis to take advantage of a potential macro reform.

Whilst I’m staying on macro reform, if I get on my little soapbox here, I will tell you that I also would love to see some reform in regards to GST and the political willpower to actually look at GST. It is a very good tax because it’s a consumption tax, so long as obviously there’s adequate safeguard measures there to protect our most vulnerable. And vulnerable doesn’t necessarily mean middle-class welfare. What we’re talking about there is protecting those who are struggling in that. So I’d like to see that come up in regards to an opportunity.

Now, turning to our economic activity for the month.

I’ve got a lot to talk about from a property point of view, so you won’t see all of the data coming through, and as I said, the data’s all lag data anyway and some of it’s meaningless considering what we see here. Let’s look at inflation as a good example of that. Annual rate of inflation edged higher in the March quarter. So we saw headline inflation and also the standard inflation also move higher, 1.8% to 2.2%, on the back of the bush fires, the drought, the stockpiling of the COVID-19 provisions. As that lockdown loomed, everyone started to stockpile. It’s out the window now, right? Because what we’re going to basically see is a significant detraction in inflation on the back of fuel costs, with the oil price globally tanking, child care fees being free, and we will see some rental declines also showing up in the June quarter numbers. So expect our inflation number to fall further.

In terms of unemployment, yes, the March data was meaningless because it obviously didn’t include anything. The April data’s not out yet as I go to this presentation timing. So I refer to the Australian Bureau of Statistics and they’ve released a COVID-19 series on payroll, wages and employment, which is a fortnightly series that they’re running out where they’re sampling 25,000 to 50,000 households and businesses to get a sense of unemployment.

Some of the key takeaways from this is that unemployment fell by 6% in the two weeks to April 4th. That also includes a 5.5% drop over recent weeks.

This is by far the largest fall in a short amount of time on record, we know all of that.

We know the JobKeeper payments will encourage some businesses to keep their employees online. Where do we see the falls? Well, where we’ve been telling you you’ll see the falls: Food, accommodation services down 25.6% and 31%. We’re talking about wages also declining, arts and recreation are down 15.7% and 18.7% declined, respectively. So horror stories. Retail, we saw a 2.7% fall in employment, and also a decline in wages being paid, of 7.6%, on the back of shorter working hours. The worst performing states: Tasmania off 7.3%; Darwin and the Northern Territory off 17.6%. Obviously very small population bases, but significant numbers.

By age, the decline in unemployment was felt mostly by the elderly and also the youngest Australians. So let’s dive deeper into that number because this also bodes well for my argument around property prices. So 9.9% drop in employment for those aged under 20, and those aged over 70 also saw a 9.7% decline. So it’s hitting both the younger workforce and also the older workforce. In a separate labor force survey, showed of around 13 million workers that we’ve currently got employed, a 6% decline in unemployment will result in approximately 780,000 job losses. Not necessarily the million plus job losses that were touted earlier in the crisis through the media as headline aspects.

The latest data that did come to hand yesterday was the ANZ Australian job ads fell a whopping 53.1% month on month in April, to be down 62.2% year on year.

In trend terms, job ads declined 11.2% month on month, and 33.9% year on year. Non-essential services shut down through April, you’ve got to expect that these numbers were going to be horrible. So tumbling 53% is definitely shocking. To put that into context, almost five times the previous record month, a monthly fall of 11.3%, which was recorded in January 2009 during the global financial crisis.

Okay. So we’ve got to keep an eye on unemployment, and obviously it’s going to be a trigger and it’s the argument for some in terms of “why property prices will fall significantly through distressed selling”, so we’ll come back to that.

Retail sales recorded their largest ever monthly percentage increase, largest ever in March. Retail sales increased by 8.2% compared to only 0.05% in February, on the back of obviously stockpiling, or panic-buying as we call it. This monthly increase was the highest in the series, and the series has been started back in 1982, beating the previous record of 8.1% increase in June of 2020 when householders bought purchases ahead of the GST. We do some strange things us Aussies, don’t we? Human behaviour is funny.

Food retailing rose 23.5%. Medical and cleaning products rose 50%. Well, it’s good to see we’re keeping hygienic in these uncertain times. As anticipated, the significant decline in spending in obviously cafés, restaurant, takeaway food and clothing, and retail department stores also took the brunt of that.

I want to turn our attentions now to the Australian banking sector because I’ve got a couple of comments to make here in terms of the results of three of the big four banks.

 So we’re talking about NAB, ANZ and Westpac who have reported in the last week and a half. I wanted to highlight one of the most important things in regards to that, and that was the billions of dollars that they’ve provisioned for doubtful debts. Now, in my view, that provisioning was overs, meaning there was a significant buffer in terms of what they’d provisioned for doubtful debts, and I give two valid reasons for that.

These are uncertain times — forecasting is a little difficult, and so you want to always be cautious when you’re a public company because my point number two is the greedy lawyers who will be looking for any type of class action potential if the banks don’t do the right thing by their shareholders, and they would be arguing that they would have misled the shareholders had they not provisioned such an excessive amount in their doubtful debt.

So, in my view, as I think the economy will return to some normality in the second half of this year. I do expect that most people will be able to meet their lending commitments, and I’ll be sharing some more data on that in a minute, and so potentially some of those doubtful debts, or provisioning, will find their way back into the P&L for a better profit result in the coming months.

But, again, just my opinion. Who am I? I’m a nobody, so take that with a grain of salt if you want to. The other thing I also wanted to focus in on was lending in terms of… this thing that I’m about to share with you did rear its ugly head during the GFC as well, and that is this whole idea around redraw being limited. So we did see last week — I won’t name the bank — but there’s potentially several institutions now who are limiting the amount of redraw… so redraw is the money that you have in advance on your loan… limiting the amount that you can take out at any one time, and they put a cap of $20,000 at that time. Now, the reason why they do that is obviously they want to manage liquidity, which makes perfect sense to me, and in some cases you may say it’s a prudent measure for the bank to do that.

This is why I’ve been arguing — and this is why Bryce and I continually talk about it and why our team at Empower Wealth continue to set up your mortgage loans in the same way — where we always have an offset against your principal home or your primary account being an offset account. They can’t do that to you. Even though they have the rights in the mortgage documents to say they can do that for redraw, they simply can’t do that for your offset account. So your money is your money. Now I’m not sure why you need $20,000 or more in offset anyway unless you’re taking advantage of putting another deposit down for another investment property, which makes sense to me, but, again, who am I, in terms of looking at that particular facility. You don’t need to necessarily have that much cash reserve over the short-term, but there is a flight towards cash because people are misinformed. They read too much social media and they start to panic.

So from that point of view, I would be saying to you, always, the number one rule of investing and money management is being in control.

So an offset account means it’s your money. It’s a transactional account, it’s protected. So that money’s not at risk if it’s sitting an offset account, up to $250,000 per individual, under the government guarantee of the ADIs. So that is something that’s really important to understand. So always, always don’t go for cheap loan products with redraw, always go for the offset accounts. You’re in more control, and there are benefits to that as well as obviously other benefits around offsets and investment properties and the like.

Okay. So let’s look at credit growth in March.

We did see a surge of 1% in private sector growth over the month of March. That was good. Up sharply from the 0.4 of 1% in February. Annual growth was looking pretty good at 3.6%. Business credit rose 2.9%, the fastest monthly increase since 1987. Understanding why, that’s businesses basically just getting their money that’s been made available through the RBA and the banks as part of that stimulus program. So they’re just putting that in reserves as a cashflow buffer for their businesses, to get them through this short period of time. So that was a big number.

Housing credit also grew modestly at 0.3%. That was led by owner-occupiers who grew by 0.5%. If you are an owner-occupier or someone thinking about getting into the market as a first time home buyer, this next three to six months looks pretty exciting for you. There’s going to be very, very little competition for you. So if you’re in gainful employment and you’ve got a good buffer, then something to consider for yourself.

In terms of other personal credit, we are talking about personal loans and credit cards here, good to see declines, in March fell by 1.4% over the month. So couple of reasons that could be. Obviously people being a bit more cautious, but the other thing is, you can’t get out and spend, so those people aren’t spending on those credit cards at the moment.

Final bit of data around manufacturing. So …  declined sharply in April following a surprising strong result in March. The AIG performance of manufacturing index fell to 35.8% from 53.7% previously. So it was a strong reading of expansion in March. Again, we had some serious momentum, folks, coming into February, March, before COVID-19 took a hold of us, and we’re now starting to see that come through as well.

In terms of dwelling approvals, so this data was released yesterday, so it’s hot off the press, in terms of unit dwellings, again, it’s March data, unit dwelling approvals rose by 1.3%. Private household… houses, I should say, rose by only 0.2% in March. Private sector dwellings, excluding houses, so this is factories and warehouses and storage and office buildings and so forth, had also a healthy rise of 2.8% in March. Now, again, we can only say that that was on the back of momentum building in the economy which has since been stripped away from us for the short term by COVID-19.

Okay. Now we get into housing. So this is where I want to get serious.

We did see a surprise result for some — house prices in April actually grew.

So of the housing index of the eight capital cities, we did see growth in April of 0.2% of 1%, taking the annual rise to 9.7% in value increases. Now, no such thing as an Australian property market but that’s how that particular index in measured.

What we did also note through the great data that we received from CoreLogic is in regards to sales activity, was down a whopping 63% lower than April of the year before. So it’s obviously clearly evidenced that there is less buyer demand, for sure, but there’s also less seller or vendor demand in terms of selling their property. I repeat to anyone who isn’t in a position or isn’t forced to sell: It’s not a good time to be listing your property for sale.

So I would be holding onto that particular asset, subject to my point of the most properties at risk, which you may then want to understand in your sub-market, in terms of how this might impact you.

Now I want to turn my attention to the second point here around distressed selling and also what’s going to happen to property prices, which is my subject matter knowledge.

So I want to focus in and prosecute my case in regards to why I feel that property prices won’t be as susceptible as some people think.

So let’s start firstly with unemployment because everyone’s saying everyone’s going to lose their job. So we’ll start with that. So the first example that we were referring to before is, most people who have lost their job have lost their job in an age group that’s not necessarily an age group that is a property owner, or they own their property outright. So if they’re in their fifties and sixties and so forth, and beyond, they already own their property outright in most cases, so it won’t be as dangerous to them. Also, anyone really under 25, most of those people also don’t necessarily own a property. So we’re not necessarily going to see a big fall there.

But I also want to then focus in on, well, the RBA Governor is also talking about potentially unemployment staying around that 6% to 7% range. So when I look at that 6% to 7% range, I say, “Okay, so if it’s going to stay there for long, what experience do we have around capital growth during that time?” So I go to the numbers and I have a look here and I see to myself, well, we did have 6% to 7% unemployment, not for a very long period of time, it was actually falling quite significantly after the… sorry, just prior to the 1990 recession. So we didn’t have it in there for long, but what we did see is capital growth. So you can get capital growth during a period of time where you’ve got 6% to 7% unemployment.

Another great example where we hovered around 6% to 7% unemployment was during the early 2000s, which was the dotcom boom. It didn’t really affect us down here in Oz but it certainly hit the share market a little bit. But we also saw double digit growth in property prices when unemployment was around that level.

Then the next time we did see it, because we haven’t had unemployment above 6% for a long time, so we just peeled into between 6% and 7% back in 2015, where we also saw property prices growing at around that 10% range. So the question for me was, well, what is the level where unemployment needs to get to where property prices start to fall? It’s pretty clear that when we get to 10% plus unemployment, that that absolutely has an impact in regards to confidence and what flows on into capital growth and property prices, but the question we have there is, are we going to stay at 10% for a long period of time?

My argument to that point is, I’m backing the RBA Governor in, and I believe also that we’re going to see the most plausible outcome is unemployment being around that 6% to 7%. If it is affecting the youth unemployment or elderly unemployment, it’s not going to have a real impact on those people who do buy houses which are those people really aged between 30 and 50, are the people that are most active in the property market. So that’s my first point in regards to that.

You are also hearing arguments around, “Are people defaulting on their mortgages?”

So mortgage stress is going to be the next indicator when it comes to those prices fall. So let’s go to the data. Now, what we heard from Matt Comyn is around 74,000 people had applied, and I heard him quote that number on the Money News show on 2GB, 3AW. Matt Comyn is the CEO of the CBA Bank. He came out and said 74,000 of their 1.8 million mortgage holders have applied for a repayment holiday. So what percentage of his 1.8 million mortgage holders? That represents just over 4%. So we’ve got 4% of his total mortgage book who have applied for that repayment holiday. So not a material number, one wouldn’t have thought, in terms of what that looks like.

But also be mindful that the property market, in terms of total dwellings, we have over 10.4 million total dwellings, estimated around $7.1 trillion. So the global LVR of debt at the moment, so the debt on that $7.1 trillion, is $1.83 trillion. So that’s a global LVR of 25.7. Bryce and I have talked about this before. So if we also then use the census data to compilate out the 10.4 million dwellings, 37% of them, which is what they’re saying have a mortgage, equates to around 3.84 million households with a current mortgage. Of those 3.8 million households with a current mortgage, if we use the 4% of that 3.8%, then around about 153,000 households have applied for a mortgage pause.

Now, even if it was more than that, that represents about 1.48% of the total mortgage market. Again, not a material number, and considering that they’re spread out everywhere, that it won’t be all in one suburb or all in one street, how do you then determine that that’s going to provide the listings and the distressed selling that’s going to move values in a particular location? You need a mass of stock like that so we can refer to… What type of markets can we refer to for that type of research? Mining towns are a classic. Townships with one economic output, where there’s a significant detraction in economic activity. What happens to property prices there? Everyone becomes the distressed seller and you do see those significant price movements.

But you don’t see that in bigger cities where you’ve got multiple industry and you’ve got multiple dispersion of that particular stock. So if we are only talking about 1.48% of the total stock available, effectively, that is nothing in regards to putting any pressure on distressed selling.

In addition to that, we also saw in the NAB half year results some fascinating information around their repayment buffers. So I really want to focus in on that because we’re also hearing news out there, and it might be fake news as far as what the banks are telling us, because it’s a big four bank here and these guys have around 15% market share, this is what they’re saying. So they’re saying, in terms of repayment buffers… so, for context, it represents payments in advance by accounts, includes offset, but it also excludes accounts in arrears or advantage book and lines of credit. So what they’re basically saying there is this is the bank’s lending but it doesn’t include any overdrafts or buffers. This is cash. This is savings that households have in their bank account.

So greater than two years of savings, 32% of NAB’s mortgage customers have greater than two year buffer. One to two years, 7%. Three months to 12 months, 14%. One to three months, 13%. Less than one month, 15%. And on time, 15%, and behind, 3%. So, again, if you package all of that up, everyone is in advance, and then if you look at the overall numbers that are requesting a repayment pause, they are immaterial in regards to the broader mortgage market which, as I mentioned earlier, is around 3.84 million mortgages, and we’re only talking about a couple of hundred thousand of people who are actually taking a repayment pause. So I can’t see that as being a material number that people need to worry about. That’s another point that I wanted to highlight there.

That said, property prices aren’t going to be immune in some particular marketplaces.

One of the things that is definitely going to be of increased risk is rental demand. We’re talking about Airbnb properties or short-stay accommodation being potentially repurposed into the longer term letting market, potentially international students, also younger renters potentially moving home or partnering up into flatmate style arrangements to reduce their exposure and try and save some more money. We do see a risk in regards to that type of rental accommodation.

So that leads me nicely into, what is the risk in that particular accommodation? For me, that is what I’ve always said it is: medium and high density apartment accommodation in the CBD areas and potentially city fringes or university locations where there are clusters of this type of accommodation. So this is exactly the type of investment stock that we have always said makes for rubbish returns, and we’re so pleased that our Empower Wealth clients, you, our Empower clients, haven’t been exposed to that particular risk because we’ve always bought accommodation where the land content in strong, small apartment blocks, boutique things, and also far more houses than units. So from that point of view, it’s pleasing to know that our clients aren’t caught up in that particular stock.

But if you are someone who may be listening to this on the podcast, as opposed to my update to our Empower Wealth clients, then it’s important for you know that that is the most at risk stock, in addition to obviously building defects and everything else that’s going on in that particular area. So I would be very much looking at the levels of rental demands showing up, and also looking at your balance sheets in terms of whether you can ride out this challenging time and see the other side of it or whether you feel like you might need to dispose of that particular stock, because that’s the stock that potentially could be most at risk, and that’s why I wanted to share that to you.

In terms of more broadly, yes, we do anticipate that vacancy rates will increase and so that’s why you’re also making sure that you’ve got adequate buffers in play for… you may have a little bit more of an extended period of a vacancy when you’re trying to attract a new tenant into your property during this time, until we get out until probably early into the New Year where things hopefully become a little bit more normal.

So that’s my messages around the property market.

I don’t believe that we will see the distressed selling, which ultimately alludes to the fact that I’m not a big subscriber to the idea that we’re going to see double digit price corrections in the property market.

I’m sure there’ll be people out there who will want to prove me wrong in regards to, “Well, look, it happened here and it happened here.” Remember, the Australian property market is made up of hundreds and hundreds, if not thousands of sub-markets, so it’s important to put that into context, in terms of where you’re talking about because I do see some challenges, as I said, in medium and high density prices as well as their rental yields, and I see rental yields coming off slightly in other markets as well.

So there we are. That’s my property update.

What to look out for in the coming month. I’ve got a couple of things as I close out this presentation. The COVIDSafe app. I’ve got an idea for everyone. If we want to open the bars, restaurants, the coffee shops, we want to travel on planes, or we want to also see open for inspections and public auctions return, then I reckon a prerequisite for that should be that you have to download the COVIDSafe app. Can’t go into the restaurant unless you’ve got the COVIDSafe app. So that’s my little idea, my thought bubble for the month, and it makes sense to me.

So same sort of thing in terms of public auctions, you can’t attend them unless you’ve got the COVIDSafe app, and that way we’ll get to the critical level that we need to do. Because, remember, these are people who are working. So whether you’ve got your own self-absorbed interests, that’s fine, but if you’re putting other people at risk and they’re in their workplace, I think it’s only fair and reasonable that you take their side of the conversation and download that app, not for your benefit, but for their benefit. I do expect that we will see some more news about open homes coming through and maybe, as I said, a prerequisite should be the COVIDSafe app.

In terms of children returning to the classroom, that’s almost a given, hopefully, Mr. Andrews in Victoria. As the parent of two young boys in primary school, let’s just say home schooling, not so great, not necessarily their most optimum learning environment. Just ask my wife, Jane, she’ll tell you directly, if you want to talk to her. So hopefully we’ll see some common sense prevail and our schools will open here in Victoria, as it’s opening everywhere else.

We’re fascinated by the unemployment number that is going to hit, will it get to that 10%, and then we’ll fall from there. In terms of the other, obviously, critical news economically is actually the medical news. So Remdesivir, you’ll see some more results coming in in terms of the trials on Remdesivir, in terms of whether it is a potential treatment which is helpful in minimising the fatality rates, to be able to have some confidence in terms of people’s mobility again. Over the course of the next months, we’ll start to see some of the initial vaccine trial results starting to also materialise.

So, lots happening obviously in the health space, and that is hopefully going to be good news if we get out of this pandemic.

So thank you very much for listening into this very long-winded rant… you probably could call it a rant, couldn’t you Ivise? Long-winded rant in regards to the economic update. But that’s it. If you want to read more about this, I’ve got a blog on what I think in terms of what’s going to happen in regards to the distressed sales. You can check that out here. In the show notes, Ivise will send a link through.

But until next month, knowledge is empowering, but only if you act on it.

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