In the Zone - March Quarter 2019
Why the 'GAD' is the new GFC
There’s a new acronym being bandied around property and finance circles - GAD - or the ‘Great Australian Deleveraging’. What is it?
Australia is experiencing record levels of debt accompanied by declining house prices. This means we have entered a ‘deleveraging’ phase in our economy, which is the process of reducing debt by selling assets. This also means we’re putting other spending on the backburner.
What has caused this phase of deleveraging?
There are lots of ideas behind why….declining house prices, an upcoming election, flat retail sales, US/China trade tensions…the list goes on…
However, the real reason, is because household borrowing is at levels we have never seen.
In September 2018, Michele Bullock, Assistant Governor of the Reserve Bank of Australia, observed that household debt in Australia has been rising relative to income for the past 30 years; and from around 70% to around 190%; this can be attributed to falling interest rates.
She says ”…the increase in household debt over the past few decades has been largely due to a rise in mortgage debt. And an important reason for the high level of mortgage debt in Australia is that rental stock is mostly owned by households….this is different to many other countries where a significant proportion of the rental stock is owned by corporations or co-operatives.”
The abundance of ‘property moguls’ with investment properties increases price volatility. We’re seeing doom and gloom in our headlines every day – looming crashes, falls of up to 40% in some suburbs. It’s terrifying.
Billionaire investor Warren Buffett noted “It’s not debt per se that overwhelms the individual, corporation or country. Rather it is a continuous increase in debt in relation to income that causes trouble.”
Where to from here?
Australia’s household debt must be reduced but there are a few possible pathways our economy may take to get there.
Rising salaries may speed up the paying back of debt, but consumer spending may still slow;
Salaries may stagnate, however savings will be eroded, ultimately reducing spending;
Rising mortgage rates will put pressure on household budgets, creating negative equity, rising debt and possibly the worst economic outcome.
Throughout modern history, financial crises have been followed by an average of six or seven years of deleveraging. And, it’s possible deleveraging can occur in the absence of a crisis, which is a sustained period of ‘belt tightening’.
The major concern is that now that house prices are beginning to soften, and people are less likely to spend, which may ultimately lead to a more rapid slowdown in the economy. We’re seeing signs that this is already occurring. Nationally, Mercedes Benz car sales fell 43% year on year in November 2018. We are likely to enter a period of greater volatility in asset prices and economic conditions. For many, this will mean slow and steady repayments, or in the more extreme, forced asset sales.
Fasten your seatbelts, because whichever path the economy takes is likely to mean sustained retail and housing slumps before we see any glimmers of recovery.
Bon Voyage Brad - see you soon!
Brad and his wife Sharyn are taking a well-deserved break from late April until late May. The office will operate normally, although email would be preferable for your queries. Naturally, Brad will be logging in each day. If you have any queries, drop us a line!
Top 5 Tips for Better Financial Housekeeping
1. Review your Outgoings
Make sure your providers still fit your needs.
This includes your power, phone, and internet bills and check the billing breakdown. Can you get a better rate on your home loan, credit card? Comparison sites like GoSwitch, Whistleout and Finder can help you compare.
2. Consider Where You’re at Right Now
Ever calculated your net worth? This may be daunting, but a good platform for you to work out where you are, and where you want to go! It’s easy enough: subtract what you owe (liabilities e.g. loans. mortgage, credit cards) from what you own (your assets e.g. savings, home, super). Now, write your financial goal for the year. Is it to improve your net worth? Is it to pay off a specific debt? Is it to save for a large purchase? Is it to boost your super account balance? Now commit by marking Next, write your financial goal for the year. It might be to improve your net worth by a specific amount by this time next year, or to funnel money towards a specific debt so you can take a guilt-free holiday in 2019. Commit to it by marking a progress review in your calendar every three months.
3. Have a 'Spending Fast'
No, this isn’t ‘fast spending’! If you really want to make some inroads in saving clean up your act, challenge yourself to a spending fast. For one month you’ll purchase only essentials, putting all other income towards supplementing your savings or making a dent in your debt. Not only is it a fun challenge, it will teach you more about your spending habits (and why you may not be hitting those savings goals) than any spreadsheet can. Be strict! Just choose a shorter month 😉
4. Take a Financial Health Day
Think of this like you would an annual leave day, sick leave or mental health day. Set aside an entire day dedicated to your financial housekeeping. If you can, choose a weekday when you can more easily make phone calls and work uninterrupted.
5. Fast Forward to the Future
In this ‘live in the now’ mentality, it’s easy to ‘park’ mortgages, insurance and super. Plus, they might not be the most fun way to spend our money. If we can take the time to imagine our future self, however, investing some time and energy towards these things now could make a massive difference.Wondering whether to put more towards super or the mortgage? Yes, they’re both important, however, salary-sacrificed super above your employer super guarantee is taxed at only 15%, and the returns could be greater than the interest on your mortgage.
Of course, you have to find the balance that works for you. Think about what would happen if you were injured or seriously ill, or in an accident. How would it affect your income? Unfortunately, accidents and serious illnesses are far more likely than we like to admit. So take the time to assess your insurance needs; whether it’s income protection, trauma or disablement.
If you take some time now to think about these things, you’ll be rewarding yourself for getting closer to your financial goals. If your efforts reveal that you need more in-depth advice, a professional can help you develop a plan to get your finance back on track.
Federal Budget 2019
This year’s Federal Budget announcement will take place one month earlier than normal, on Tuesday 2nd April. We’ll keep you posted about any relevant updates soon after.
Westpac Customers Abandoned:
The Bank to cease offering Financial Advice
Westpac is selling off and winding down its financial planning business, with its wealth division BT Financial Group being subsumed into its consumer and business bank.The changes come as Westpac continues to compensate customers for its history of errors including charging fees but not providing relevant advice. This also mirrors a shift in consumer sentiment towards independent advice.
The wind up is expected to be completed by 30 September. In the case of Westpac, it will mean many of their customers will no longer have an Adviser, so if you know of any Westpac advice orphans, please feel free to refer them to yours truly, your local ‘Platinum Rated’ Adviser who does not answer to any bank!
We help busy professionals and business owners like you every day. Book in a free Financial Health Check at www.investmentzone.com.au/bookonline or call us on 1300 124 683.
The information in this communication has been prepared on a general advice basis only. The advice has been prepared without taking account of your specific objectives, financial situation or needs. Accordingly, you should, before acting on the advice, consider the appropriateness of the advice having regard to your objectives, financial situation, and needs. In cases where the advice relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure Statement (or other relevant information statements) and consider such document before you make any decision about whether or not to acquire the product. For these reasons, it is imperative that you seek advice from your financial adviser before making any investment decisions. Investment Zone Pty Ltd (ABN 18 104 622 611) provides financial services as a Corporate Authorised Representative no. 296974 of Financial Force Pty Ltd ABN 42 091 425 464, AFSL no. 238337