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House Prices Again – Is it a bubble or not

admin — Thu, 25 Mar 2010 07:28:27 +0000

I overheard two people talking about their land valuations today – we got them in the post yesterday.

One said to the other that he was surprised to see his land had gone down in value over the year. The other agreed, saying that he had read in the papers forecasts of houses being worth millions of dollars in 20 years, or some such stuff.

I do actually recall the forecasting that was mentioned – its a bit misleading, but many people do believe whats written in the newspaper.

Consider the following (it is past of a newsletter I send to my clients every month and was written about a month ago).

The House Price Saga.

This seems to be the number topic again, so I will chip in for my 2 cents worth – again.

This year we are again in a time when first home owners will not again be able to afford a new home – last year they could, but not this year.

An article appeared in the Sunday Mail on February 21 in the Smart Money Section regarding home prices.

I have done a table below that summarizes some of the salient points of the article:

Year	Average House Price	Average Income	House Price / Income	% of Household Income for Mortgage repayment
1960	7,000	2,073	3.38	15%
1980	44,800	12,580	3.56	23%
2000	110,600	38,558	2.86	34.4%
2010	481,310	57,691	8.34	29%

What does this mean – well in 1960, the average house was 3.38 times the average income, now it is 8.34 times.

Or if you like to look at it this way, house prices have increased since 1960 at 8.83% per annum and wages have increased at 6.88% per annum since 1960 – this is not a cause for alarm, however since 2000, house prices have increased by 15.84% – more than twice the 50 year average, while wages have increased by 4.11% – less than half the 50 year average.

Interestingly interest rates were at their lowest over that time in 1960 – at 5%. We are at the second lowest level now at 6.64% (although not for much longer) and repayments are at 29% of income – the only time they were higher was during the recession we had to have when house prices were at 3.56 times annual earnings.

Does this matter to you – well given that nearly all Australians have their wealth concentrated in their houses, yes it does matter.

Affordability is not an issue so long as rates stay low – rates stay low when the economy is not performing.

What are our headlines saying at the moment? That we have dodged the recession bullet, interest rates will rise and prosperity is on the way.

Also the other question is can house prices keep increasing at the rates they have in the past 10 years, or will they revert to normal – or dare I say it, less than the long run return.

Its possible that returns will be lower in the longer term as we do have a rapidly ageing population – in short more old people than young people – young people buy more houses than older people. With less young people (unless we have rapid increases in migration) demand for housing will probably subside, as a result prices will decrease also.

What will support the growth in housing returns – shortage of supply – although I can’t see that happening. A rapid increase in wages – not if the Reserve Bank have their way. Or finally an asset bubble where prices are artificially increased through measures such as the first home owners grant.

I am not sure, perhaps you have a view, I am willing to listen to any thoughts you may have.

But what I will say is that coupled with the inadequate level of savings that many Australians have (and that is all savings) and the increasing taxes or decreasing level of services our governments will be able to provide as a result of the money spent on preventing our recession that forgot to turn up, there are going to be a lot of Australians that hit retirement – the longest holiday of your life with very little money – hope they all have a contingency plan.

Please Note:

This publication has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you need to consider (with or without the assistance of an adviser) whether this information is appropriate to your needs, objectives and circumstances. This information is provided for persons in Australia only and is not provided for the use of any person who is in any other country.

The Australian Share market, one year on

admin — Thu, 11 Mar 2010 08:03:30 +0000

This week sees a year since the share market lows of the Global Financial Crisis were reached.

Given that it is far easier to predict the past than the future, it is interesting to note that this time last year, the Australian Financial Review ran a headline in their weekend edition (I think it was the last weekend in February) that basically stated that the love affair Australians had with stocks was finally over.

At the time, we did not know it, but I guess we can now say that that was as close as you would get to having a bell being rung to signal the bottom of the share market.

Fast forward one year and after the savaging we saw in 2008 and early 2009, many investors are now sitting on returns for the last 12 months that are some of the highest we have ever seen.

I just hope that not too many people took the advice of the nay Sayers and bandwagon jumpers to sell out at the bottom only watch the markets take off again. I hope that the sensible investors stuck to their long term plans and didn’t realize major losses – realized losses can be hard to make up.

Of course we are still not out of the woods and just as in the depression years, there is always the chance that markets may turn down again, and I have no idea what the possibility is of that happening, but even so as it is beyond my control, I wont stress too much about something I cannot control, what will you do?

Please Note:

Fees versus Commission

admin — Mon, 08 Mar 2010 01:37:15 +0000

This is an update to a blog posted nearly 2 years ago and the issue is still being discussed, but in relation to finding a Financial Planner what does and should matter to you, the client?

The topic of fees versus commission was written about by every financial columnist over the past 2 – 3 years, but more so during the height of the Global Financial Crisis. The call being for fees to be the method of payment – by the client, and commissions – payable by the product provider being stopped.

In a nutshell financial advisers receive payment from their employer, the client, through either commissions or by charging a fee for the service provided. The fee may be fixed or based on an hourly rate, or a combination of both which is used by many financial advisers. In reality the client pays the commission – the product provider will recoup this amount from the fees they charge over time anyway.

So what should you look for in terms of fees when seeking out a financial adviser? There are plenty of independent websites and organisations that can give you tips and advice, so look around and do your homework. But what’s important here is that consumers should be given a choice. Not all consumers want to pay fees for services up front and are happy to pay adviser fees in the form of commissions.

Providing clients are kept informed of commissions and fees, such a strategy may suit a client. The down side is that advisers may be influenced to recommend investments with higher commissions and the client may not always be told of alternative investments that may be equally as good with lower fees. An adviser may also continue to receive trail commissions even if a client chooses to no longer use their services but retain their investment. However recent changes to a number of product providers means that the client may be able to turn off trailing commissions where there is no service being provided - this is a great thing for consumers.

When engaging an adviser who charges a fee for service, make sure you discuss and agree on the costs to be charged. Charging directly for a service is a good incentive for a planner to give good advice and service but costs come straight out of your pocket and are often charged in advance.

While there will always be a debate of the pros and cons of commission versus fees, scrapping commission completely from the industry removes the right for consumers to choose.

The true issue is transparency.

Please Note:

Is your weight fattening your premiums?

admin — Tue, 23 Sep 2008 00:10:52 +0000

Did you know a third of our population is on a diet and another third of our population is trying to maintain their weight at any one time! [i]

Australians are spending bucketloads of money in an effort to lose weight. We all know the benefits of slimming and keeping active. But losing weight won’t just trim your waistline, it could trim your insurance premiums too.

Around seven million Australians are now overweight or obese? While there are more overweight men than women (67 per cent compared to 52 per cent), obesity is more common among women (22 per cent) than men (18 per cent)[ii]. In Australia, it is estimated 20 per cent of children are also overweight or obese.

Rather than assuming scientific advances will continue to add to our life expectancy, Professor Ilona Kickbusch, an independent health consultant who previously worked with the World Health Organisation (WHO), has said that today’s generation of children may be the first to be sicker and die younger than their parents.

We all know that obesity increases the risk of many chronic and potentially lethal diseases such as heart disease, high blood pressure, stroke, kidney disease, diabetes, liver problems such as fatty liver, sleep apnoea, gout and joint and back problems.

But did you know that it may also be fattening your insurance premium? Not only is obesity becoming a problem for society, it is increasingly becoming an issue for life insurers. In the USA for example, studies have shown that there has been a substantial rise in disability claims for those under 60 with obesity related disorders[iii]

As a result insurers are charging higher premiums for those people with a high body mass index (BMI). A person’s BMI is calculated by dividing their weight in kilograms by their height in metres squared. The higher a person’s BMI, the higher their premium.

Rates of obesity are rising rapidly both in Australia and worldwide which is having a major impact on health and health care costs. It is considered to be a preventable disease and can be managed through counselling, support and lifestyle changes.

So congratulations if you have managed to significantly reduce your weight. However, unless you can keep that weight off and tell your insurer – you will still pay your higher premiums.

Get in touch with your adviser and get him/her to let your insurer know so that you can start saving money now – after all advisers get paid ongoing commission to look after you, and if you aren’t talking regularly, they are getting paid for doing nothing.

This also applies by the way if you have given up any hazardous pursuits or smoking.

Please Note:

[i] http://www.babyboomerslifechange.com.au/health-wellbeing/food.php

[ii] www.betterhealth.vic.gov.au

[iii] www.swissre.com/pws/media

Teenagers managing money

admin — Mon, 08 Sep 2008 02:00:01 +0000

Remember the days when you knocked on the neighbours’ doors after school offering to wash the car or do the babysitting for a few bucks in the pocket. Those days are long gone with many teenagers today juggling formal part time work alongside their education. A recent survey noted that nearly half of those aged up to 19 and studying full time were also in paid work.

It’s good to see many of the younger generation are out there working and learning about responsibility. Some of today’s teenagers however are earning a sizeable income with Australian Bureau of Statistics showing year 12 students are today receiving an average of $245 a week. That’s a far cry from a few bucks earned from Dad for washing the car back in my day.

I’m not sure why the Y generation isn’t called the I generation given the amount of i-gadgets and i-gizmos in the market place, but regardless of whether you think they are the “Y” or “I” generation, a Commonwealth Bank survey[1] found many of these young Australians have no plans to save or budget, yet most of them still plan to buy a car or go on an overseas holiday.

What’s frightening is that nearly three quarters of those surveyed had some form of debt, with around half not concerned about their debts stating they do not let the amount of debt they are in affect their daily lives. While the easy availability of credit is causing some problems, it seems that mobile phones consistently seems to top the list for causing debt. It makes you wonder how important those gadgets are …. but I digress.

The good news is that young people are keen to learn about managing their money. The report Financial literacy: Australians understanding money by the Financial Literacy Foundation noted that the majority of teenagers want to learn about budgeting, saving and managing debt and see leaving school as a significant milestone in which they can start gaining control over their finances.

So if you have a significant young person in your life, or you happen to belong to the Y generation, it’s never too early to start down the path of managing money. Start surfing, web surfing that is, because there lots of great websites full of ideas and practical tips that set young people on the right path to managing their money. The Financial Planning Association for example has created Dollarsmart, a web based and CD financial toolkit for teenagers to help improve their financial skills and give them confidence when dealing with financial matters throughout their life.

It might also be of use to start looking for a financial planner who can help you on the road to accumulating enough assets so that you get to decide when work becomes optional. A good place to start is with the planner your parents use, check the websites and make a few calls, it could be an excellent investment for you to make.

Please Note:

[1] Y Money Matters survey

Drug advances save lives but who pays when you can’t?

admin — Thu, 07 Aug 2008 16:08:57 +0000

I was honoured to recently attend Griffith University’s graduation ceremony, which I found to be an impressive example of good planning and organisation. Also impressive was the speech of the national president of the Pharmacy Guild of Australia, Kos Sclavo, who was awarded an honorary Doctor of the University in recognition of his contribution to the pharmacy profession.

His speech was powerful. Not only because of his reference to the death of his 10 year-old son from leukaemia, but because of his recognition of a rapidly changing pharmaceutical world. Doctor Sclavo noted that many of the drugs available today on the Pharmaceutical Benefits Scheme weren’t around when he graduated from university 20 years ago – when he thought he knew everything!

The great outcome for our society is that these pharmaceutical advances are saving lives – but at a cost. Miracle drugs can cure cancer but the treatment can cost patients thousands of dollars for each course. Few people have access to such funds and a patient’s financial difficulties may be further exacerbated by an inability to work while undergoing treatment.

We can’t always prevent misfortune from occurring, but we can take steps to protect the financial well being of our families when hit with the devastating effects of illness or injuries. Investing in trauma insurance will help your family having to avoid admirable but desperate measures such as the recent example of a young son fundraising $70,000 to buy his cancer stricken mum life saving medication.

Last year the insurance industry paid out an average of $8.39 million dollars every day to families experiencing some kind of crisis such as illness or injury. With a third of all Australians expected to suffer a serious illness or injury in their lifetime it makes sense to invest a few dollars each week to protect your family’s quality of life.

Trauma insurance gives us money when we need it most by paying out a lump sum As a result of an accident, on diagnosis of an insurable disease or because of a certain event such as a being placed on a waiting list for an organ transplant. Think of how many people you know who have had heart attacks and cancer and ask yourself the question, when I have my first heart attack do I lose the house or the mortgage?

Please Note:

Business Succession Planning – Protect your business

admin — Thu, 27 Mar 2008 04:35:03 +0000

We have seen global economies move from boom to bust in the wink of an eye – or over the past 12 months at least. This has led many business commentators to make statements about defensive investments and how to preserve your capital in times of market volatility.

But what about your business – as a business owner you are probably evaluating your product lines, looking for new markets and generally looking at strategies to grow your business in troubling economic times.

But these sorts of times also can take a human toll on you the business owner. Higher levels of stress can lead to illness and business owners that have not taken the necessary steps to protect themselves and their businesses can quickly find themselves a victim of the global economic slowdown.

Consider the following*:

1. 1 in 3 men and 1 in 4 women will suffer from cancer before age 75

2. An Australian dies every 10 minutes from cardiovascular disease

3. A 40 year old male has 1 in 2 chances of having coronary heart disease in their life

4. Working Australians have a 1 in 3 chance of becoming disabled for more than 3 months before turning 65

5. In 2004 over 1,500 people were killed in motor vehicle accidents in Australia

6. Injury is the leading cause of death among people who are under 45 years of age

7. Nearly 1 in 10 men will develop prostate cancer during their lifetime

Each year around 10,000 Australian men are diagnosed with prostate cancer and 2500 die of it.

One of the strategies that may suit you and your business is a Business Succession Plan. The aim of a business succession plan is to ensure that the business survives even after the death or critical illness of one of its principals.

So what happens if a business owner suffers a tragic event and there is no plan in place?

· Third parties could end up with an unacceptable degree of control in the business;

· A deceased owner’s estate could demand a payout forcing the business to be wound up;

· It could be necessary to negotiate additional borrowings or face asset depletion;

· The stability of the business could be questioned by suppliers and customers;

· Lending institutions could seek repayment or re-negotiation of loan facilities.

Consider this scenario:

The widow looks at her late husband’s business partner as the coffin is lowered into the grave and says to herself:

“If he wants the business, I’ll make him pay double,”

The Business Partner looks at the widow and thinks to himself:

“I’ll offer her a tenth of the value, she wouldn’t know what it is worth and without me, the business is worthless anyway”.

The benefits to you, your family, your business, your business partners and their families are:

For the surviving owners:

· Eliminates estate claims to management rights of the business;

· Prevents introduction of new owners with incompatible philosophies and agendas;

· Protects against control of the business being frozen through probate difficulties or legal restrictions if an owner loses legal capacity;

· Provides assurance of the opportunity to buy shares from the owner should they suffer a tragic event;

· Predetermines funding for the purchase, as well as the price of the business;

· Assures continuity of the business with minimal disruption; and

· Provides security for suppliers, staff and creditors.

For the estate of the deceased:

· Provides assured purchaser(s) for the business;

· Guarantees fair price as well as guaranteed funds to complete the purchase; and

· Reduces the delay between suffering the tragic event and receiving insurance proceeds.

If you are currently evaluating your investments and making your defensive plays – have a long hard think about the strategies you have in place to protect your most valuable asset – your ability to generate an income and what your family would do if you, the money making machine broke down completely.

*We are not making the stats up – here are our references:

1. Cancer in Australia 2001’, Cancer Series no. 28, Australian Institute of Health and Welfare, www.aihw.gov.au

2. ‘The Shifting Burden of Cardiovascular disease in Australia’, Access Economics and Heart Foundation 2005, www.heartfoundation.com.au.

3. ‘Heart, Stroke and Vascular disease’, 2001 Australian Institute of Health and Welfare www.aihw.gov.au

4. Calculations based on data from the Institute of Actuaries of Australia (2000) Interim report of the disability committee.IA Aust: Sydney

5. Year Book Australia 2006, www.abs.gov.au

6. ‘Injury Prevention Control’, 2005, Australian Institute of Health and Welfare,

www.aihw.gov.au

7 & 8. Prostate Cancer Foundation of Australia 2004, www.prostate.org.au/disease

“Information provided in this supplement is not intended to be personal financial advice and is for general information only. Readers should only act on the information after having received professional advice appropriate to their personal circumstances.”