The Finance Design Co.

14/09/2022

What life stage are you at?

Home Owner? Wealth Builder? Retirement Planner?

Its never too early to start building your Wealth, and the earlier the better to take advantage of compounding growth!.

So don't get caught thinking you need to pay everything off first before thinking about the next stage...... as invariably by then its too late!. 😲

A robust investment plan at the wealth building stage can make things much easier later.

12/09/2022

How did we get to this point?

It was only last year that most anticipated a slow and steady path out of the pandemic, only to find that consumer spending appetite was much higher than anticipated.

A result of long lockdowns and ‘work from home’ provisions providing plenty of built-up savings for a large percentage of the population.

However, the timing for a boom in consumer spending couldn’t have been worse, with businesses suffering from supply and labour shortages, the war & East Coast floods causing food, energy & construction prices to skyrocket & close contact isolation rules destroying any normal workforce.

The perfect recipe for soaring inflation.

Why is combating inflation so urgent?

Increasing prices, which is inflation, reduces how much you can buy with the same money, and causes ‘cost of living’ pressures for the most vulnerable.

With unemployment so low, consumers are asking for pay rises & changing to higher paid jobs, while businesses need to increase their prices to cover the increasing cost of supplies and wages, and Unions are pushing ahead for real wage increases (where wage increases are more than inflation).

All of which will continue to add to inflation, which then feeds on itself and creates ‘runaway inflation’, where price increases are built into future pricing and wage decisions, feeding back into higher inflation.

Runaway inflation is much harder to control.

How can Interest Rate increases combat high inflation?

The fastest (and unfortunately bluntest) tool for combating high inflation is Monetary Policy, being the RBA’s use of the Cash Rate to restrict funds in the economy, as the Cash Rate is the base rate of all consumer and business interest rates.

Higher interest rates result in higher loan repayments for both consumers and businesses, which reduces available cash for spending which in turn reduces demand and takes the pressure off supply and consequently the pressure off increasing prices and wages.

As ‘runaway inflation’ is much more difficult & painful to control the RBA will want to get on top of our high inflation levels before pricing and wage increase of 4% and higher are built into business pricing decisions.

Which means they need to move quickly to do so.

How high will Interest Rates go?

The Cash Rate was at the Pandemic ultra-low setting of 0.10% until May, and a neutral Cash Rate has historically been around 2.5%, this is where the Cash Rate is neither stimulating nor restricting the economy.

To restrict the economy enough to get on top of high inflation the RBA will need to move the Cash Rate above a neutral setting, without increasing by too much and putting the economy in reverse.

Predictions range from 2.60% - 3.50% and higher, with most leading economists anticipating further 0.25% increases this year, at which point the RBA may pause to see the effects of the increase to date.

This may mean a Cash Rate of 2.85% by years end.

What will happen to Interest Rates when inflation is under control?

The RBA wants to see core inflation within its medium-term target band of 2 % - 3% and will maintain the high Cash Rate until there is clear evidence of reaching these figures.

Once achieved, the RBA will want its Cash Rate setting to ensure the ongoing stability of the dollar, full employment, and economic prosperity.

Under normal economic conditions this would be achieved with the Cash Rate at a more neutral setting where it is neither stimulating nor restricting the economy.

Although historically a neutral Cash Rate has been around 2.50%, with the increase of indebted households through the pandemic most leading economists believe that the neutral Cash Rate is more likely in between 1.80% - 2.50%.

If this is correct, the RBA’s swift and sharp increases may have more of a restrictive effect than anticipated, at which point the RBA may need to again stimulate by reducing the Cash Rate to prevent the economy from retracting too far.

More and more leading economists now believe the RBA will need to start reducing the Cash Rate back to a more neutral setting around the middle to late next year however at a much slower and steady rate.

What does this mean for you?

With banks taking up to 2-3 weeks to implement interest rate increase and most mortgage repayments set on monthly repayment cycles, most mortgage holders have only experienced the first 2 -3 rate increases. This means the majority of pain is still to come.

Furthermore, while lenders are passing on the full increase to all customers, at the same time they are discounting their new customer rates to win new business.

This discounting is competitive and rampant around three weeks after an RBA increase which means around week 4 is the best time to ask your existing lender to match your rate to their new customer rates.

If they won’t?... Then its time to talk to your broker about finding a lender with the lowest rates who will.

08/06/2022

Good question!

The RBA have sped up the rate of increase dramatically since the beginning of the year and have said that we should expect more rate increases to come.

This is in their efforts to move the cash rate to a more neutral setting which has historically been around 2.5%, and essentially where the cash rate is neither supportive nor restrictive for the economy, however in today’s world this could be around 1.8% instead.

Lenders then add their margin which gives you your current mortgage rate.

The RBA indicated last month that it was ‘back to business as usual’ with increases of 0.25% as it moved up to a neutral setting.

But now its increased by 0.50% in one hit and some leading commentators anticipate that the RBA may increase by another 0.50% in July, with more increases thereafter.

So why the sudden rush?

The recent increase in gas and electricity prices in Eastern States have put further pressure on inflation which has obliterated any reduction to inflation that the RBA anticipated their 0.25% in May might have achieved.

With so many external pressures, the RBA now feels like it is behind the inflation curve and needs to catch up to get in front and tame rising inflation before it gets out of control.

Their rhetoric has therefore changed to ‘hard and fast’ to get ahead of the curve and to ‘shock’ households into spending less which will ultimately reduce demand pressure and help reduce inflation.

So how high will rates go?

The RBA still want to get back to a neutral setting which will most likely be around 1.8% - 2.5% however instead of their usual ‘slowly, slowly wait and see’ approach, they now want to get there much faster, and possibly by the end of this year.

Find the RBA May Statement on Monetary Policy here: https://www.rba.gov.au/media-releases/2022/mr-22-14.html

06/06/2022

CoreLogic's change in property values is a great way to see both the immediate and long term trends across the country.

The May figures show that Sydney and Melbourne markets have lost more steam while Canberra recorded its first monthly decline, mainly due to a combination of higher interest rates, rising inventory levels and lower sentiment dampened conditions.

With a June interest rate increase expected for tomorrow most leading economists are expecting these trends to continue.

06/05/2022

Good question!
Historically a normalised (neutral) cash rate has been around 2.5% which has been where the cash rate is neither supportive nor restrictive.
Lenders then add their margin which gives you your current mortgage rate.

The RBA wants to have the ability to move the cash rate up if the economy is overheating with inflation out of control, or down if the economy needs some extra stimulus to stop it from going backwards (recession) as was needed at the beginning of the pandemic.

This means the RBA wants to move the cash rate to a more neutral (normal) setting, so it has the ability to tackle either situation in the future.

In doing so, the RBA has left the cash rate at its low level of 0.10% for longer this time, to try and stimulate the economy enough that wages start increase and households can better afford the rate increases and increasing prices (inflation) as the economy starts to grow again.

However, there is much debate about what today’s normal (neutral) cash rate might be as households have taken on more debt during the pandemic and while rates have been so low.
This means that each interest rate increase has a greater impact on households, and a normal setting is more likely lower.
Some leading economists believe a normal (neutral) cash rate now is more like 1.80%, and anything more will restrict the economy and put too much pressure on households.

How fast does the RBA plan to increase the Cash Rate?
A difficult question for the RBA as their moves are very dependent on how the global economy performs and the impact domestically of our rising interest rates.
The RBA have had to carry out some forecasts though and these forecasts are based on reaching a normal setting by the end of 2023.
To reach a normal setting (neutral) in this timeframe will mean 4 to 6 rate increases of 0.25% by the end of 2022, and an additional 2 to 4 rate increases in 2023.

Will we get there?
As mentioned, the RBA ‘wants’ to increase the cash rate back to a neutral setting, but our domestic economy and the global economy are not as strong as the current high inflation figure would suggest.

This is as Inflation today around the world, is predominantly from supply constraints from the war in Ukraine and the lockdown in China, and from excessive stimulus during the pandemic among other things, whereas usually high inflation is caused from overheated demand.

So, although the RBA would like to increase rates to a more neutral setting by the end of 2023, there are some big variables at play that could easily derail their plans, and the RBA has said they will be watching closely and be very flexible with their plans to accommodate the changing world.

What to watch out for?
The RBA have specifically said they will be keeping a close eye on:

o the supply constraints to imports that are impacting on delivery times and increasing prices Ie: the lockdown in China and backlog of shipping in Chinese ports and globally;
o the War in Ukraine and the impact on global demand for oil and gas that is increasing the cost of just about everything either directly or via increases in transport costs, and global demand for wheat and wheat-based products that is increasing the cost of food;
o how households respond to interest rate increases given the level of indebtedness and given that a large portion of mortgagees will not have previously experienced increasing interest rates;
o what will happen to wages growth with the unemployment rate at an all-time low of 4%, something we have never experienced before;
o and how other global economies respond to excessively high inflation, if their economies grow, stall, or retract with increasing interest rates, and if global wages start to increase with inflation.

Furthermore, other predominant industry commentators believe that the global economy is much weaker than central banks believe, and that the global increase in interest rates to fight inflation (that is caused by supply constraints than excessive demand) at the same time pandemic stimulus is withdrawn will reverse the pace of growth that we have experienced coming out of the pandemic.

If this is the case the RBA will need to temper their plans and respond to the economy as it unfolds, which may mean they won’t get the cash rate to normal, and as some would believe, may even need to reduce the cash rate again.

Let’s hope that we don’t end up in a recession at least!.

Find the RBA May Statement on Monetary Policy here: https://www.rba.gov.au/media-releases/2022/mr-22-12.html

Or for more info from predominant industry commentators: https://www.afr.com/markets/equity-markets/rates-are-going-up-then-straight-back-down-macquarie-s-shvets-20220504-p5aidd

03/05/2022

CoreLogic's change in property values is a great way to see both the immediate and long term trends across the country.

Especially with the imminent interest rate increases nearly upon us.

Leading economists and industry commentators believe that property values in Sydney & Melbourne are more susceptible to interest rate increases where cost of living pressures are much higher and affordability much tighter, which is evident in this month and the quarterly figures.

While continuing state migration to Queensland is keeping demand pressure in the Brisbane market for longer, and with cost of living much more affordable than southern cities, increasing values are anticipated to continue through to the second half of the year.

Perth on the other hand seems to be building some momentum finally with borders now open, and increased demand from the energy and resources sectors which are increasing exports as the situation in Europe deteriorates.

22/04/2022

"Thank you for your recent loan application in the name of [clients]

We would like to take this opportunity to also thank you for the completeness of the application.

We were impressed with how well you packaged the application.

The attention to detail, detailed notes and calculations provided enabled us to assess the application quickly and we hope that this resulted in a positive experience for you and your clients.

We acknowledge the time and effort you took to fulfill all the requirements and we wanted reach out to say “well done”.

We truly value and appreciate your ongoing support to ING and look forward to assisting you going forward."

ING Mortgage Operations

Thank you ING Direct, the clients are very happy too which makes me a very happy broker! 👌

20/04/2022

It's confirmed, Queensland is the place to be! :)

We have seen the largest interstate migration in 20 years keeping property sales roaring ahead with the highest number of settlements in the first Quarter of 2022!!.. Lifestyle, flexible working arrangements and a much lower costs of living are trumping living in the big cities!..

New sales settlement data for the March quarter showed buyers headed back to the city, while the Queensland market benefited from interstate migration.

13/04/2022

Have you ever caught yourself wishing you would have bought a property 10 years or so ago for next to nothing in today's market?

Or listened to your parents talk about buying their first home for much the same amount as you earn in a month now?

It is the compounding nature of annual capital gains held over the long term that provides this increase!

So don’t wait to buy, buy and then wait! 😊

07/04/2022

The RBA have kept the Cash Rate on hold at 0.10% as predicted, however at the same time have abandoned its language around ‘patience’ and signalled it could begin raising the Cash Rate as soon as June if upcoming data shows accelerating inflation and wages growth.

What upcoming data you ask?

Inflation data on April 17, Wages data on May 18, National Accounts data on June 1, and Job Vacancies on June 30.

The RBA said there have been a number of factors pushing up inflation including the war in Ukraine, recent QLD and NSW floods and the budget spending spree, while also showing confidence that wage pressures were picking up across the country.

What will this mean for interest rate increases?

A larger number of leading economists now believe the RBA may start increasing as early as June (before the Job Vacancies data release) with 2-3 increases this year, while others still believe that the first raise will be in Aug/Sept.

For more info check out this AFR article:

https://www.afr.com/policy/economy/economists-firm-on-rba-june-interest-rate-hike-20220406-p5ab7b

07/04/2022

This graph was presented at an ANZ Economic briefing on 30th March providing a snapshot of where ANZ's leading economists believe that house prices will be across the major cities.

Although the forecast is for negative change in 2023, most economists believe that prices will rebound in 2024.