In the Zone - December 2021
Another year over! 2021 saw the many of the major challenges of 2020 continue, with COVID19 dominating headlines and the way of life for many Australians.
From a business perspective, we have seen an increase in the need for Financial Planning, as uncertainty has been top of mind in the psyche of our clients. Investment Zone continues to grow and we are delighted we can continue to help Baysiders, Redlanders and Queenslanders in planning for their financial futures.
We wish you all a very safe and happy Christmas, and a prosperous 2022!
Brisbane property continues to boom
If we weren’t already floored by the unexpected property price growth in 2020 – especially in the midst of a global pandemic – 2021 has come along and bowled us over, especially in the bayside suburbs!
In fact, for the week commencing 6th December, there were 4970 homes taken to auction, across all capital cities combined, which made for the busiest week for auctions since CoreLogic records commenced in 2008!
Over the last decade, from 2010 to 2020, Brisbane’s property market was pretty underwhelming, with the median house price only rising 3% annually and apartment values not really moving at all. However, the start of this new decade is seeing the Brisvegas property market really heating up. This can be attributed to southern migration, low interest rates, extra cash reserves in mortgage offset accounts due to reduced travel and hospitality spending, improved buyer confidence, a continued increase in intergenerational wealth transfers through inheritances, and for some, more savings
In Brisbane, house prices have risen almost 24% over the past year (including the Gold Coast region), again, according to CoreLogic data.
So what will happen to house prices in 2022 and beyond?
Research house SQM Research, in its latest report Christopher’s Housing Boom and Bust Report 2022, forecasts that house prices in Australia will drop in the second half of 2022 most likely because of further intervention by the Australian Prudential Regulation Authority (APRA) banking regulator, which could happen soon.
“Our expectation is that the serviceability buffer rate will go from three per cent, maybe up to 3.5 per cent,” said Louis Christopher, managing director of SQM Research. “And/or APRA will announce some specific actions specifically targeted towards investors, because at the moment it’s the investor market which is largely driving prices up.” The serviceability rate is a way for lending institutions to stress test a client’s ability to withstand fluctuations in interest rates.
Whilst Sydney and Melbourne will see a cooling, Brisbane, however, is forecast to dominate dwelling value growth in 2022, being tipped to increase by eight to 14 per cent.
What about interest rates?
Interest rates are also predicted to remain unchanged until at least until the end of 2022, which is in line with the recent decision by the Reserve Bank of Australia (RBA) to keep the cash rate at 0.1 per cent, and a recent statement that the RBA’s board “will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range”. So, we need to keep an eye on the inflation rate.
What to do?
Property will have a place in many portfolios, but it’s all about getting the right balance for you. Always talk to a professional adviser instead of listening to would-be “expert” opinions.
Managing an Inheritance
Booming housing wealth, unspent superannuation and lower fertility are increasing the size of Australians’ inheritances, according to the Productivity Commission.
In Australia, wealth transfers are large and growing — over $120 billion was passed on in 2018, more than double that in 2002. Inheritances, which account for around 90 per cent of all transfers, have increased steadily in line with the growing wealth of older Australians. Over the past two decades, the total value of wealth transferred intergenerationally was about $1.5 trillion.
In 2018-19 the value of the average inheritance was $125 000 compared to $8000 for gifts.
What happens if you are a beneficiary?
Most of us would rather not think about the death of a loved one, although, like paying tax, it is inevitable. But what happens when you are a beneficiary in a deceased estate?
Someone will be appointed to gather the assets of the deceased person pay their debts and distribute the balance amongst their beneficiaries. If they had a Will, the executor appointed in the Will does the job according to the deceased’s wishes. If they died intestate (without a Will), an administrator is appointed according to the formula set out in the relevant state’s Succession Act.
As there are no death duties in Australia, death itself does not incur any extra tax. However, if you inherit an asset and then sell it you may be liable for Capital Gains Tax (CGT). One of your aims as a beneficiary will be to minimise or avoid this tax.
The family home
Normally the family home is exempt from CGT. The same applies if you inherit a family home provided you sell it within two years. Outside of this period, you could be assessed on the increase in value since the date of death, depending on when the property was purchased by the deceased and your occupancy rights.
If you inherit assets such as property, shares and other investments, you may be liable for CGT if you sell them. Just how much depends on when they were bought. You can save money and hassles by finding out purchase price of the assets or their value at the date of death.
Estate tax and your tax
In the year of death, two tax returns are required – one for the deceased person up to the date of death and one for the estate for the rest of the year. Both tax returns qualify for the full tax-free threshold. Less tax may be due if the estate sells an asset and gives you the cash rather than you getting the asset and selling it.
If you are a beneficiary of a substantial estate, it will pay you to take an active interest in how the estate is administered. We can guide you through this minefield safely.
Do you have an up-to-date Will?
Remember dying intestate means state laws decide who gets your money and your beneficiaries may be inconvenienced by delays and disruption.
The looming 'AdBlue' shortage
What is the fuss over Adblue?
No doubt you’ve come across the term in the last few weeks. In a nutshell, AdBlue is the additive you’ve never heard of that keeps food on Aussie tables.
AdBlue is an anti-pollutant fluid that is added to diesel exhaust fluid. Its purpose is to reduce emissions from the diesel fuel that powers trucks and newer diesel passenger vehicles. AdBlue is made with a particle called urea (of which the main raw material is natural gas), which is now in short supply globally. China is a major exporter of urea, and Australia’s main source, and has blocked exports to bolster its domestic industries.
To some, it feels like the Great Toilet Paper Famine of 2020, however, the shortage of Adblue could have serious knock-on effects to ordinary Australians. If we run out, it could cripple a large portion of the Australian truck fleet. And as we are reminded when we’re driving down the M1, trucks make Australia go round. If we run out, the flow on effects we may experience include higher prices of all consumer goods, a slowing of the economy and shortages of food in supermarkets. Australia uses about 130-150 million litres of AdBlue per annum.
Can they modify trucks?
The short answer is yes.
The long answer is also yes, BUT it will have significant emissions consequences, as most of our trucks conform with European emission standards which required the installation of AdBlue driven systems to reduce the emissions. If we turn that system off, then our emissions will increase, and truck warranties may be voided because the engines have been modified. Transport companies are unlikely to do this – it would be a risky move - without due process and government support, which will take time.
What’s the way forward?
The good news is there are a few solutions to get us through the shortage without requiring modification of engines and alleviating warranty concerns.
Firstly, Australia’s largest AdBlue manufacturer, AUSblue, said it was racing to secure overseas urea supplies to keep Australia moving over the summer. The company has charter planes on standby to bring in 250 tonnes or urea from the Middle East and Asia.
Federal Trade Minister Dan Tehan has said that whilst Australia has about 7 weeks supply left, he has assured stakeholders that the Government is in talks with Indonesia, Saudia Arabia, the UAE, Qatar and Japan to secure supplies.
In addition, the National Farmers Federation said that following their mayday call, the Federal Government and suppliers have assured them there is sufficient supplies of AdBlue and that ‘this now must be business as usual…’
Greater certainty around supply must be a welcome relief to our important supply chains. However, it’s another reminder of our reliance on China and the risk that this poses to our critical supply chains.
If I'd invested $10,000 30 years ago...
Staying the course isn’t easy, especially when there’s so much happening globally.
But if we use the benefit of hindsight and look at market performance over time, we can view the current market context through a different lens and appreciate the power of time when investing. In the chart below, we can see that asset values have steadily increased over the last 30 years to varying degrees.
By setting a clear plan, diversifying across a variety of asset classes (simply a category of investments – like shares or property) we can stay in control of our long term investment strategy.
Picking winners is harder than you think, and ‘time in the market’ always beats ‘timing the market’. Allowing emotions to drive our investment decisions – either fear or overconfidence rarely serves us well.
What would have happened if I’d invested $10,000 in each asset class in 1991?
To help keep things in perspective, I’d like to share Vanguard’s 2021 Index Chart, which shows the long-term performance of different asset classes. The chart powerfully illustrates that, while markets fluctuate day to day—and even year to year—asset values have steadily increased over the last 30 years.
The graph shows the performance of various asset classes over the past 30 years against the backdrop of different political leanings and global events. It reinforces the importance of sticking to a strategy and focusing on the long term. It also highlights how quickly things can change for asset classes from year to year.
Want to speak to our Financial Planning team?
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