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Year End Superannuation Contributions

Wed, 19 Jun 2024 07:15:48 GMT

Superannuation Contribution Fundamentals.

It’s June again. The end of another financial year. At this time of the year, we get bombarded with all things tax deductible. Buy this, do this, claim this on tax.

You might also hear recommendations to make extra contributions into your superannuation. But what do they actually mean by this? What contributions are they talking about, and how are they beneficial to you?

Let's go back to basics and break down the different types of superannuation contributions and then explore why some might be a beneficial at the end of the financial year.

Types of Super Contributions

There are basically two types of superannuation contributions and the difference between them depends on a three-letter word we all know and love…hate - tax. The difference depends on whether the money going into super is un-taxed or has already been taxed.

The superannuation industry calls them Concessional or Non-Concessional Contributions

Concessional Contributions = Pre-Tax Contributions

Concessional contributions are payments made into your super account before tax is taken out.
Because tax hasn’t been taken out, it gets taxed when it goes into super.
The tax rate going in is 15%, which is lower than marginal tax rates.

Non-Concessional Contributions = After Tax Contributions

Non-concessional contributions are payments made into your super account from your after-tax income.
Since you've already paid tax on this money, these contributions aren’t taxed again when they go into your super.

Each type of contribution has a limit on the amount that can be put in each year. But you can play catch up.

Let’s take a look at the different types of Concessional Contributions because this is the area where you can get some last-minute tax deductions.

Concessional Contributions

Employer Superannuation Guarantee (SG) Contributions:
These are the regular contributions your employer makes to your super fund on your behalf by law.

Salary Sacrifice Contributions:
Salary sacrifice is when you tell your employer to put an extra amount into super for you each month and they do it out of pre-tax dollars. Nice. Instant tax saving.

Personal Deductible Contributions:
These are voluntary contributions you make from your after tax income which you then claim as a tax deduction in your annual tax return.
This effectively makes them pre-tax contributions for tax purposes.

Personal Deductible Contributions are the last-minute contributions you can make that can decrease your taxable income. They are tax effective because the contribution tax you pay when the cash enters super is less than your marginal tax rate.

You might use them in the following instances.

You’ve built up some savings outside of super. An after-tax contribution is tax deductible to you so you will get a tax refund when you do your tax return. Make sure you notify your super fund if you are going to claim a tax deduction though.
You are self-employed and haven’t paid tax yet. Instead of paying tax at the company rate, or your marginal tax rate if you are a sole trader, you can make a contribution into super and pay 15% contributions tax instead.
You have a capital gain that you would like to offset.

Catch-Up Contributions

One of the better rule changes that was introduced several years ago was the catch-up contribution rule. The premise is fairly simple. Each year we have a limit of what we can contribute into super as a Concessional Contribution. If we haven’t used the previous year’s limits – we can make a larger catch-up contribution to use them in the current year (remember that your employer contributions are included in the limit).

Suppose a self-employed consultant named Jane has had an exceptionally profitable year, earning $200,000. Her taxable income would place her in the highest tax bracket. By contributing $25,000 to her super, she can:

Reduce her taxable income to $175,000. Which means instead of paying $60,667 in tax she pays $49,817.
Benefit from a lower tax rate on the contributed amount (15% within the super fund versus her marginal tax rate). Her contribution will incur $3,750 in contributions tax.
Create an overall Tax saving of $7,100.
Have her $21,250 contribution invested in superannuation where she benefits from compound interest at lower ongoing tax rates.

If you would like to discuss any of the ideas raised within this blog I can be reached at andrew@endgameadvice.com.au

This blog’s aim is to provide general information only. It should not be relied upon as personal financial advice. Endgame Advice strongly recommends investors consult a financial adviser prior to making any investment decision. While all care was taken at the time of writing I make no representations as to the accuracy, completeness, suitability, or validity, of any information contained within.

New Year. Fresh Start. Resolutions You Can Keep.

Fri, 26 Jan 2024 05:14:32 GMT

Four financial resolutions that won’t cost you a cent but could save you a pretty penny.

Know thy interest rates…. seek better ones if possible.
Know thy spending….do you need to buy three coffees a day?
Know thy superannuation…. how is your super invested and what are your options?
Know thy insurance…. compare how much you have, to how much you need.

Resolution Time.

By this time of the year we've made our New Year’s Resolutions. I’ll do more of this…and I’ll do less of that… and so on. Some stick, most don’t. What sounds great on the third day in January is often well forgotten by the second day in March.

Financial resolutions fall in this basket.

It might have something to do with the nature of resolutions themselves. If they're too hard or going to take too much effort they’re easily forgotten…until the following January when they pop up again. But what if the resolutions didn’t sound like a laundry list, weren’t that hard to do, and didn’t cost you a cent but could save or make you a pretty penny. Would it be worth the hour or so of your time?

Let’s run through four simple financial resolutions anybody should be able to master.

But let’s make it simpler. Instead of trying to do everything in a week (which by the way would be a great way to start the year), why don’t we aim for one resolution per quarter? With a timeline like that we have no excuses. Even the laziest of us should be able to manage one of these resolutions every three months.

This time let’s make some resolutions and stick to them.

1. Compare any of your interest rates to other rates available.

Interest rates were in the news a lot last year. This year doesn’t look like it is going to be any different. Make 2024 the year you get on top of your interest rates.

Home Loan - Rates have been changing so much lately you’re forgiven for not knowing your current interest rate. Why don’t you take the time to log in to your bank account, and know exactly what rate you are paying. Once done, compare this to other rates are out there. Speak to a mortgage broker, they can tell you what the best deals. Go back to your lender and see if they can give you a better deal. If not, some lenders were offering cash incentives if you refinanced last year, see if they apply to yourself.

Credit Cards – Most of us have a credit card. Most of us wouldn’t know what rate we’re paying off the top of our head. Find out what rate you are paying, then google credit card comparison. If you are on the typical card charging 21% you might be surprised that low-rate cards exist with a rate closer to 12%. Do a balance transfer and cut up the old card. Don’t forget to swap any recurring direct debits.

Term Deposits – If you have cash kicking around in a term deposit that you haven’t done anything with in a while, then take the time to seek out some alternatives. Is staying loyal costing you money?

2. Take a snapshot of your spending

For some of us, confronting our spending habits is going to be an issue. We might be scared of what we might find - but I think it needs to be done every now and then and is probably one of the best things we can do.

Most of us don’t use cash anymore. Meaning all our spending is done through one of our cards. Which also means our spending has never been easier to track. Just for the hell of it, go through your card statements over the last three or six months to get an idea of your spending habits.

Having a handle on where you are spending your cash will give you an indication of where you can make some changes. Regardless of what you find - if you know what you're spending your money on, you can come up with ways to reduce the costs.

For an easy win: Check your utility bill and see if you are on the best plan available to you. By law energy companies in Victoria must tell you on your bill if you could save money on a cheaper plan. To make it easier there are websites that help you compare different energy provider plans. Easy savings could be there for the taking.

( Personal Note. I learned this the hard way. For years I neglected a utility bill because it was on a direct debit. When I finally took the time to have a look, I was shocked by how expensive my plan was compared to what was available. I felt like a complete idiot. I switched over immediately)

Examining your spending and then making changes could open up hundreds of dollars per month. This extra cash could be put towards something you like, maybe a holiday. Or better still towards any debt you might have or a savings plan into an Exchange Traded Funds.

Either way you won’t know if you can cut your costs if you don’t take the time to review your spending.

It’s easy to do and will only take an hour or so tops. If you don’t, you only have yourself to blame.

3. Actually look at your superannuation statement.

When most of us receive our superannuation statements, we have a quick look at them and then put them in the drawer or throw them away. I’ve lost track of how many people I’ve met who had no idea how their superannuation was invested.

This is surprising because it is often a tidy amount. The whole “I cant touch it until I retire idea” means we pay it scant regard. I can assure you, if you had the same amount in sitting in your bank account you would take a lot more interest in it.

Take the time at some stage this year to:

Read your statement and find out how you are invested. Are you conservatively invested or more aggressively invested?

Ascertain whether this is the place you want to be invested. If you are young and can take fluctuations, a growth fund may be more your style. If the market movements cause you anguish, you may want to adopt a more cautious approach.

Understand the fees you are paying. Most funds are reasonably priced but there are differences. Compare your options.

4. Insurances. Know how much insurance you have and compare it to how much you need.

Insurance is the only product we buy that we never want to use. Insurance doesn’t give us a tangible benefit. The only thing it gives us is peace of mind. Peace of mind that if things go pear shaped we might get out of it without too much damage. That’s it.

We start our adult life with little need for insurance, but the older we get and the more commitments we take on, the more insurance we need. If you have a family, you need life insurance. If you have debts or a lifestyle to support, you need income protection. Australians are lucky in that these insurances are available within superannuation.

The thing I like to ask clients when discussing insurance is “what situation do you want to leave behind?”.

If talking life insurance, the question to ask yourself is “if I died now, what situation do I want to leave for my family”.

Do I want them to struggle or do I want them to be ok? How are they going to be ok? If you have a mortgage, the obvious answer is enough life insurance to pay off the debt. If the kids are really young you might want extra insurance so you partner doesn’t have to go to work full time straight away. If your dream is to send the kids to private school, you need more to cover off on the school fees. And so on.

Work out what these amounts are and compare it to how much insurance you have in place already.

Don’t stop at Life Insurance, do the same process with Total and Permanent Disability Insurance and Income Protection.

New Year. Fresh Start.

What I really love about the new year is the fresh start. It is the perfect time to reflect on where you have been, take note of where you are and chart the course for where you want to be.

If you would like to discuss any of the ideas raised within this blog I can be reached at andrew@endgameadvice.com.au

This blog’s aim is to provide general information only. It should not be relied upon as personal financial advice. While all care was taken at the time of writing I make no representations as to the accuracy, completeness, suitability, or validity, of any information contained within. Endgame Advice strongly recommends investors consult a financial adviser prior to making any investment decision.

What Drives Interest Rate Movements

andrew@endgameadvice.com (Andrew Bonnici) — Wed, 13 Apr 2022 01:57:25 GMT

You might be surprised by what drives interest rate movements.

Why do banks decide to increase or decrease interest rates and who influences their decision? The following discusses some of the factors that drive interest rate movements.

What drives interest rate movements?

The Reserve Bank of Australia (RBA) and the major trading banks may play the most visible role in setting interest rates, but in many cases, they are being reactive rather than proactive.

A wide range of external factors feed into their decision-making process, including in no small part, our collective behaviour as investors and savers, borrowers, and consumers. Then there’s the rate of inflation and wages growth, foreign currency exchange, the economic health of our trading partners, and the interest rates paid by local banks to borrow money from overseas.

Suddenly it’s not so easy to figure out where interest rates are headed, even in the short term.

A fine balance

To look at just one part of the puzzle: the RBA dropped the cash rate to 0.10% in November 2020 [1] , the lowest rate on record, and a rate which has remained unchanged for the following 16 months. This has made it cheaper for businesses to borrow and invest in job-creating activities. However, mortgage rates also followed the cash rate down, allowing homebuyers and investors to borrow more, which subsequently also drove up house prices.

So how can the RBA keep a lid on housing costs without choking business activity and consumer spending?

One way is to get by with a little help from its friends, in this case, the banking regulator, the Australian Prudential Regulation Authority (APRA). APRA can impose a range of restrictions on the banks. These include capping new interest-only lending and limiting the growth in lending to investors. Lenders can also be ordered to keep a tight rein on ‘risky’ loans, for example, where loans exceed 80% of the value of the property.

While APRA’s main motive is to make the banks more resilient to any shocks such as another global financial crisis and the economic slowdown caused by the COVID-19 pandemic, a side effect is that the banks will have to reduce the amount they lend for housing. And according to the rule of supply and demand, if less money is available then the cost of that money – the interest rate – will go up.

Benchmarking

Interest rates in Australia are also affected by the Bank Bill Swap Rate (BBSW). This is calculated by the ASX at the same time every day and is based on the rates being bid and offered by approved trading institutions on short-term interest-bearing securities. General interest rates are set by financial institutions in reference to the BBSW.

Navigating uncertain waters

Appreciating the complexity of interest rates doesn’t always help in deciding how to respond to them. Even the experts often get it wrong when trying to predict where interest rates are going. This doesn’t help answer borrowers’ eternal question: “do I lock in a fixed rate, or opt for a variable rate?”

Locking in current rates protects against future mortgage rate rises. In the current low interest rate environment, it’s very tempting to fix the rates on at least part of a mortgage, and for as long as possible (usually up to five years).

Waiting for the rise

Harley Dale, chief economist at CreditorWatch, cited several key developments that influenced the RBA’s March 2022 decision to hold rates. “The Ukrainian crisis provides substantial geopolitical uncertainty. Consumer confidence has already been trending down for nearly 12 months and supply chain issues associated with the crisis is likely to lead to a higher demand in groceries, sparked interest rates and steeper mortgage repayments.” The federal election, now almost certain to be held in May, is also expected to weigh on the RBA governor’s mind. “The short of it is that the RBA is still in sit and wait mode,” Mr Dale said [2] .

Bendigo Bank’s David Robertson believes August 2022 is the month to watch. “The RBA is very close to starting their tightening cycle and exiting pandemic monetary policy settings but will probably wait for two more sets of inflation data (in April and July) before hiking rates in August,” said Mr Robertson.

Has it been a while since you reviewed your mortgage? Are you are currently on the best loan package available? Are you looking to refinance or use some of the equity for investment purposes? Contact Endgame Advice for an initial conversation on your options and if need be a recommendation to a professional mortgage broker.

The information contained in this article is general information only. It is not intended to be a recommendation, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.

[1] https://www.rba.gov.au/statistics/cash-rate/

[2] https://www.investordaily.com.au/regulation/50875-rba-makes-interest-rate-call

The Fallacy of Rising Property Values

Wed, 16 Mar 2022 00:27:01 GMT

The Fallacy of Rising Property Values

Property Values Boom

Wow, 2021 was a hell of a year for property prices in Australia. According to Core Logic the national median property price rose 22%. In Melbourne approximately 30% of suburbs now have a median price over $1m. Homeowners are feeling pretty good about property values. Unlike those yet to enter the market.

First home buyers are rueing the market and the record low interest rates that are fuelling price growth. Thankfully for them, there are indications that the rate of growth is slowing.

Clearly many homeowners are sitting on substantial equity gains within their property. With interest rates at all-time lows now may be as good a time as any to tap into that equity.

Property is an Emotional Thing

Property ownership means different things to different people, but few deny there is an emotional side to it. We all get a little excited when our property increases in value. We want to know what the house down the road sold for…...even if we have no plans of selling ours anytime soon.

The reasons we feel better are varied. We might feel safer, we might feel that the wolf is further from the door, we might even feel vindicated for taking on the responsibility of a mortgage. But the main reason is we just feel wealthier.

But does the value of the home we live in really matter?

I’m not so sure.

In fact, I would argue that the value of the family home doesn’t matter too much at all on a day-to-day basis.

Most of us are going to need somewhere to live and most of us still prefer to own rather than rent. Owning a residential property offers us a sense of security that renting can’t. So, if you like the house and neighbourhood you live in whether its worth $800k or $1.1m doesn’t really matter. It’s not like you can sell a bedroom if you are short of cash one month.

Strictly speaking our home isn’t an asset.

People often suggest their home is their largest asset. Again, not so sure.

I would argue that our home isn’t an asset at all……it’s the equity we hold within it that’s the asset.

The only way to make that asset matter is to use it to create further wealth. After all you can have a pile of a cash sitting under your bed but if your not doing anything with it, it’s just gathering dust.

How do we use this equity?

Equity matters because we can use it in several ways to better our financial position both now and in the future. Some of the ways we can use it include the following.

Downsizing The Property

An obvious way to use the built-up equity within the home is to downsize it in the future.

The Downsizer Superannuation Contribution rules make this a great long term strategy goal. Think about it. You sell the family home tax free ; you buy something smaller and put the remainder into superannuation…… again tax free …….the assets you buy with the contribution are concessionally taxed ( i.e., minimally taxed ) while in super…… until you start a superannuation pension when suddenly no tax is paid on the earnings at all and the pension you draw is tax free . Everybody 50 years and older should have their head completely around the strategy of downsizing.

Property investment

The most common way Australians have been using their equity is by tapping into it to fund a deposit on an investment property. Not exactly a secret to anybody at this stage. As prices seem to be levelling this might start to wane. Possibly.

Share Investment

In the current interest rate climate, using home equity to purchase a portfolio of blue-chip shares is almost a no brainer. Australian shares are currently kicking out an income stream of roughly 4%. According to Canstar you can still get 3-year fixed rates for under 4 % while some variable rates are closer to 2%. It’s almost a free hit. The obvious strategy is to redraw off the home, plonk some into the market, let it sit and use the dividend stream to help pay back the loan. Better still would be to reinvest the dividends and pay the interest cost back ourselves.

Superannuation Contribution

Depending on personal circumstances an argument could be made for using some equity to make a concessional or even non-concessional contribution into super. For some individuals putting a contribution into superannuation and generating 7% per annum while paying down the loan they redrew at 3% could make sense.

Inheritance

Parents love having equity in the family home as it is their way of looking after their children. They can leave the property to kids with the knowledge that they will be able to reap the benefits of the embedded equity. They may also see it as justification for spending the inheritance.

Reverse Mortgage or Aged Care Needs

If leaving an inheritance isn’t an issue or the superannuation has run out an individual can use their home as a basis for a reverse mortgage to help fund their retirement income. Why bother leaving equity in the home if you can use it for your enjoyment in your lifetime.

Additionally having equity within the family home will be beneficial and provide options if Aged Care Accommodation becomes an issue later in life.

Debt Repayment

Redrawing off the mortgage to pay off more expensive debt should be obvious to everybody.

Use it or…...Waste it?

We might feel richer because our home has increased in value, but property values alone can be a touch misleading. Property values increased across Australia. Sure, some cities and areas moved more than others but largely everybody’s property increased in value.

Generally, the pecking order of suburbs doesn’t change much. The flow on effect of this is our relative wealth might not have improved as much as we think. But, the extra equity we now hold, provides us with an opportunity to increase our personal net wealth.

For those that have the desire to increase their net wealth, using the equity within their property is a valid strategy - and thanks to the historically low interest rates available right now it’s also an affordable strategy.

If you would like to discuss any of the ideas raised within this blog I can be reached at andrew@endgameadvice.com.au

Australian Property. Fantastic Opportunity or a Slow-Moving Train Wreck?

Tue, 04 May 2021 06:38:10 GMT

30 April 2021

Australian Property. Fantastic Opportunity or a Slow-Moving Train Wreck?

Let’s start with a joke

What do you get if you cross an already property obsessed nation with a slashing of interest rates, a bunch of property purchasing incentives, a global pandemic and a media driven fear of missing out?

Punchline. Read On.

Crazy times for property prices.

As a financial adviser I like to keep up with property prices. This means I read a lot of articles on the subject. For a long time now I’ve thought that property prices in Australia were at crazy levels. But every article I have read lately suggests property prices are going to keep going up and up for the next few years.

This has made me second guess my views on property and ask myself.

Does the property market represent a fantastic opportunity, or is it a slow-moving train wreck?
Is now a great opportunity to buy a property, or are we in the mother of all property bubbles?
Who should be buying property in the current environment?

Forecasts Gone Wrong

By the start of 2020, and after almost two decades of solid property price increases, many suspected Australian property prices were already at highly elevated levels.

When Covid struck most analysts were forecasting a serious downturn in property price. Some tipped falls of up to 30%. Combined with banks making it harder to borrow money this was a safe call.

At the time I remember thinking “you know, it wouldn’t hurt for property prices to level off a bit’.

Boy were the forecasters wrong.

Property Fundamentals out the Window

Historically it was things like a healthy economy, low unemployment rate, wages growth, migration and population growth that fuelled property prices.

Not now.

Covid has stopped migration in its tracks, real wage growth is almost non existent, unemployment is still fairly high and though we have seen some improvements there are still fears about the economy going forward.

So if this is the case what is driving property prices up?

I don’t think it takes a genius to work out that low interest rates and the general public’s eagerness to take on bigger and bigger mortgages has been the main driver of property prices. According to the Australian Bureau of Statistics the average loan size in December 2019 was $500,000, twenty years before it was $200,000.

Happy for an economist to tell me different and that I have it all wrong. But I don’t think so.

I know, let’s Slash Interest Rates to Historical Lows

At the start of 2020, the Cash Rate was already at a ridiculously low 0.75%. By the end of the year it was 0.1%. Say that again slowly – zero – point – one – percent . Our parents could only dream of interest rates that low.

You can get variable interest rates that start with a 2 now. I’ve seen a 3-year fixed rate advertised at 1.75%.

And this isn’t going to change anytime soon.

In February 2021 the Reserve Bank Governor Philip Lowe went on record saying he expects the cash rate to remain unchanged until inflation is running at between 2 and 3%.

“For this to occur wages growth will have to be materially higher”…”this will require significant gains in unemployment and a return to a tight labour market. The board does not expect these conditions to be met until 2024 at the earliest.” FEB 2 2021

Add Covid Stimulation

For many Australians Covid probably seems like a distant bad dream, but this time last year the nation was in a Covid inspired panic. We had idiots fighting over toilet paper in supermarkets and governments introducing package after package to keep everybody employed and the economy ticking over.

In a short time, we saw the introduction of Jobkeeper to keep business from letting go of employees, Jobseeker was made easier to receive for the newly unemployed, banks allowed a mortgage holiday for those affected by Covid and people were allowed to tap into their Superannuation if need be.

And of course, some property initiatives were also introduced.

The HomeBuilder Grant provided up to $25,000 to people who were building a house or buying off the plan.
Home Loan Deposit Scheme was extended for first home buyers who had a limited deposit.
Later in the year Victoria slashed Stamp Duty by 50% for those buying a newly built home to a value of $1m, while also offering a 25% discount if you were purchasing a pre-existing home up to the same value.

So what happened over the last year?

First off, not much.

Thanks to people either still being able to pay their mortgage or the ‘bank mortgage holidays’ we didn’t see a mass sell off or the expected property price plunge. Prices dropped a little in Melbourne where the lockdowns were most severe but generally property prices were stable.

Of course Covid made it harder to buy property, especially in Melbourne. Auctions went online and open for inspections became a thing of the past. Things got even worse during the second wave lockdown between August and October.

By then conversations had started to change. It was no longer the end of the world conversations but how soon were we going to have a vaccine.

In Melbourne things changed quickly after the second lockdown ended.. First home buyers could sense an opportunity and pounced. Between all the different grants on offer, plus some developer incentives, they were entering the market with up to a $50-$60k in savings.

First home buyers weren’t the only ones hitting the market. Owner occupiers wanting to upgrade their properties also hit the market hard.

Covid Anomalies

The Covid lockdowns spurred a couple of surprises that have also affected the property market.

Savings

With our movements restricted people simply weren’t doing much. Contrary to reports of everybody buying up big online Australians saved a lot of money over the year. According to an article released in December “the pandemic-induced recession saw Australians squirrel away $110 billion in savings”.

What are they going to do with it?

Fear of another share market collapse and term deposit interest rates at all-time lows (you’re lucky to get 1% at the moment) meant good old bricks and mortar still seemed like a safe bet. Auction clearance rates may be an indication that some of this surplus is already making its way into the property market.

Working from home

Lockdowns meant many of us were forced to work from home. But because many of us were able to embrace technology and still work efficiently from home workplace arrangements may have changed for good.

Lifestyle changes

People started thinking they could improve their lifestyle by moving further out. Instead of battling traffic everyday people were thinking maybe I could work from home a couple of days a week and only commute on the others. This led to a massive interest in rural and beach-side properties. In Victoria, properties on the morning peninsula were selling within days of being listed. Similar to other states.

By year end 2020

Come December 2020 all states in Australia had seen median price increases except Melbourne. Nationally property rose by 3% with the smaller states and territories being the stand outs. For a change, the regional areas did not miss out on price gains.

2021 Record Highs

This year has seen more of the same. Each month has seen increases across the board. Auction clearance rates are high and almost every Saturday has been dubbed a “Super Saturday”.

March saw Sydney reach its highest ever median price while Melbourne is just 1.3% off its record high having risen by $100,000 in the space of a year due to an influx of buyers vying for limited stock.

What can we expect going forward?

If last year, and especially the last three months are anything to go by, property prices are heading north for a while yet.

I know the media loves a good beat up.

I know that anything about increasing property values catches the interest of property owners…probably because it makes them feel like millionaires…. but here are a few headlines that caught my interest.

Australians ready to buy property in 2021 after record savings. DEC 8 2020.

Aussie house prices rise 3% in 2020 with only one city (Melbourne) suffering price falls. JAN 4, 2021

Melbourne property prices soar to record levels in December quarter. JAN 28, 2021

House prices to rise by 16 per cent over 2021 and 2022: CBA forecast. FEB 16, 2021

Loosening the mortgage belt: household interest payments at 35-year low. FEB 22, 2021

Melbourne’s median auction price up $100,000 in a year. FEB 26, 2021

Housing market tipped to power on despite end of JobKeeper: economists. MAR 22, 2021

Melbourne house prices tipped for biggest surge in a decade. MAR 24, 2021

(articles mainly thanks to my subscription of The Age newspaper)

So what’s going to stop this Perfect Storm?

Right now, it seems like we’ve got the perfect storm for property investment.

Interest rates are low and not moving for a few years at least. This means people can service bigger and bigger mortgages. Minimal term deposit rates make investors look for yield and investment opportunities elsewhere. Attractive government incentives and every analyst and their dog predicting a property boom and it’s easy to see why Australians have rushed into the market again.

Logic tells us that this can’t go on forever but what is going to slow this phenomenon down in the short term?

Pent up demand dissipates.

The pent up demand Covid created will come to an end. All of those that were thinking about buying property last year have probably done so already or are in the process of buying. Of course this might mean investors replace owner occupiers and first home buyers as the main drivers.

People come to their senses.

People might finally come to their senses and stop paying ridiculous money for property they wouldn’t have considered 5 years ago….. but I don’t think so. Aussies love property so much and the Fear of Missing out is so strong at this stage that you cant see that happening anytime soon.

Another pandemic.

With 80000 people going to the football again I think Covid may already be under control in Australia. At least for the time being.

Economy Tanks.

Maybe the economy could take a sudden and disastrous turn for the worst, but it seems to be moving in the right direction. The early call is that the next budget due to be released in May is going to try to pump the economy up, not slow it down.

Regulatory changes.

For me, the most obvious thing that would slow or even stop the property market in its tracks would be major regulatory changes. Similar to those introduced last month in New Zealand. (Source Savings.com.au MAR 20)

Changes there included.

Reducing the tax deductibility of property investment loans to zero by 2025.

Increasing capital gains tax payable for properties held for less than 10 years.

Making it harder to borrow money by increasing the deposits required to secure a mortgage to 20% for owners occupiers and 40% for investors.

Putting $3.8 billion towards building new houses.

Increasing income thresholds on first home owner grants and loans.

If Australia adopted these measures, we would quickly see complexions change. But as we know, a strong robust property market generates a lot of spending and is good for the GDP.

I can’t see massive regulatory changes like this happening in the short to medium term and it would take a very courageous political party to introduce those changes.

The next migration wave coming?

Recent comments from a few property experts suggest that with Australia viewed world-wide as the beacon of health and safety in how we managed the Covid 19 pandemic, Australia may become the place to move to and call home in the future if Covid 25 is possible. Such a migration wave could result is even greater momentum is the property market BUT that is just too scary to consider now.

Conclusion

So now we come back to the questions I posed at the start of this piece. Are we in a bubble? Do the current conditions represent a fantastic opportunity or a train wreck waiting to happen?

Who the hell knows!

I thought property was expensive a while ago, as much as 4 years ago. I may have been wrong. What I do know is if I had bought another investment property, my net worth would be up considerably. Sometimes the trend is your friend.

What we do know is that interest rates are not moving in the medium term. The RBA have painted themselves into a corner. If they raise interest rates to quickly there will be blood in the streets.

As the old adage goes “the best time to buy a property is when you can afford one”.

If I was a first home buyer I would be moving hell and high water to get into the market and capitalise on all the grants on offer and the lowest interest rates we are ever going to see. That doesn’t mean I would gear up to the hilt but I would definitely try to enter the market. The first one doesn’t have to be the forever home.

If I was an owner occupier looking to upsize I might be less concerned with a property downturn. I’ll be in the house of my dreams and it doesn’t really matter what it is worth if you are going to live in it for the long term. Saying that I wouldn’t forget the fact that I have to pay down the mortgage at some stage and fully realise that if interest rates do jump things could get really painful. I read long ago that “debt is a wonderful servant but a terrible master”.

If I was in a position to buy an investment property, I would go into it with my eyes wide open. It would really depend on your individual position. Do I have minimal debt on my own property? Is my job secure? Do I have my personal insurances in place? Can I afford it if interest rates went up sharply? Again, super low interest rates help there. If investing I would factor in a slow down and some terrible press sometime in the future. If I was happy with all of that, giddy up!

I think that the next few years do represent a buying opportunity but I realise that this boom can’t go on forever. Nor do I want it to.

One thing is for sure, if it is a bubble, we are all in the same boat…..or in this case on the same slow-moving train.

Endgame Advice can prepare an investment property cash flow analysis tailored to your individual circumstances. For any other queries I am contactable on andrew@endgameadvice.com

Andrew Bonnici (BCom, DipFS, Adv DipFS)

Authorised Representative No. 222909

Lifespan Financial Planning Pty Ltd (AFSL 229892)

www.endgameadvice.com.au

The purpose of this article is to provide general information only and the contents of this article do not purport to provide personal financial advice. Endgame Advice and Lifespan strongly recommends that investors consult a financial adviser prior to making any investment decision. I have in no way considered or am I aware of your personal circumstances.

The 5 BEST OPENING MOVES

Tue, 30 Mar 2021 06:38:10 GMT

Five simple ways to kick-start a wealth strategy before meeting an adviser:

How to analyse your net wealth and get your number
The spreadsheet I use for tracking my own wealth

DOWNLOAD

What is ‘Socially Responsible Investing’

Thu, 18 Feb 2021 06:38:10 GMT

Many investors want to know that their investments are making a positive impact on our world and its inhabitants.

Socially responsible investment or ethical investing fits this bill with investors asking the hard questions about how profits are being made. Companies that make their millions through environmentally destructive behaviour or are socially irresponsible may find it harder to raise money when going public.

What is “ethical”?

Of course, “ethical” is a subjective term. For example, an ethical fund manager could define tobacco and gambling as unethical yet consider alcohol to be okay. Another ethical fund could be reluctant to invest in banks because they lend to companies that damage the environment. We are seeing this affect lenders that fund coal mining for example.

Obviously the important issue is what you, the investor, considers ethical. If you are contemplating an ethical investment then not only will you need to understand the financials of the potential investment but also ensure that the underlying businesses and their activities meet your standards.

Whilst it is difficult to lay down an exact formula for ethical investments, there are some basic values which many people share:

Avoid causing illness, disease, or death;
Avoid destroying or damaging the environment;
Avoid treating people with disrespect.

In Australia, many well-recognised investment names are on the list of ethical fund providers. Although some ethical funds have achieved good results, as with any share-based investment, the focus is on long-term investing and sound management capabilities of the fund manager.

What about the risk?

Be aware that when the range of stocks available to fund managers is reduced because of ethical considerations, extra risk and volatility could occur.

If you are interested in learning more about ethical investing, contact us.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional.

We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.

The Benefits of Investment Diversification

Fri, 12 Feb 2021 07:47:32 GMT

When it comes to financial management, no single investment will continually outperform all other investments all of the time. To minimise potential losses and to smooth your investment returns over the longer term, you should spread your portfolio across various investments. But that can be easier said than done so there are different ways to diversify.

Diversify across asset classes

Asset classes are the broad categories of investments and include equities, fixed interest, property and cash investments. Equities include both Australian and international shares. Fixed interest includes government, semi-government and corporate bonds. Property includes residential, retail and commercial properties. Cash includes term deposits and at-call cash accounts.

Lower risk asset classes, including fixed interest and cash, protect your capital during adverse market conditions. On the other hand, higher risk assets, such as Australian and international shares, can deliver good returns during the boom times. Holding a mix of asset classes may help to provide more stable returns over the medium to longer term as markets rise and fall.

Diversify within asset classes

This could mean spreading your share portfolio across different industry sectors because certain sectors may outperform others over a given period according to economic conditions.

Two good examples are mining and manufacturing. The Australian resources industry helped keep Australia’s economy a shining light against a gloomy international backdrop following the Global Financial Crisis. Manufacturing, on the other hand, struggles with high labour costs making Australia less competitive against low income countries such as China. Nobody knows what the future holds – both of these industries are facing volatile conditions a few short years later – so a balance across industries is crucial.

It can be simple

Even with a relatively modest amount to invest and very little time, you can achieve a balanced portfolio with the right mix of investments.

Managed funds offer easy access to a wide range of investments. By investing in a managed fund, professional fund managers select individual investments for you. In addition, most managed funds offer several different options to cater for varied levels of investment risk.

Other options include purchasing shares in Listed Investment Companies (LICs) and Exchange Traded Funds (ETFs) on the stock exchange. Depending on its charter, a LIC holds shares in a wide range of companies, while ETFs invest across all stocks making up a particular index, such as the S&P/ASX 200. Buying shares in an ETF or LIC gives you exposure to all the stocks held by the fund. Talk to us about the best ways to manage your investment risk.

Note: past performance is not an indicator of future results.

How Using Core-satellite Investing With ETFs Can Give You Outperformance Potential

Wed, 10 Feb 2021 07:42:39 GMT

The core-satellite investing strategy

One of the most important elements of your investment strategy is how you construct your portfolio.

One popular approach is the ‘core/satellite’ strategy. ETFs are an efficient tool to help investors employ the method across their portfolios.

Summary

Core-satellite investing involves an allocation to diversified investments, whether broad domestic or global exposures, which are essentially bought and held for the long term – this is known as the ‘core’ component

Along with this ‘core’, more tactical positions are added to the portfolio as the more ‘actively managed’ portion – these positions form the ‘satellite’ component and can be, for example, specific regional or sector exposures

What are the benefits of using ETFs as a core?

Some of the many benefits of this investment approach include decreased cost and portfolio turnover, particularly if you use low-cost passive index funds (eg ETFs) as the core.

Apart from lower management costs, since the core portion of the portfolio is left alone, turnover costs are additionally reduced significantly.

Part of the reason ETFs have seen such enormous growth in popularity over recent years is that active fund managers have generally found it difficult to beat the broader market over the longer term.

Even those that do one year, find it difficult to repeat the feat the next. Having the discipline to hold a low-cost, diversified “core” exposure reduces the fee load otherwise felt when using active managers or regularly adjusting an entire portfolio, and has historically demonstrated outperformance potential vs. equivalent active managers.

For the core part of your portfolio, a diversified asset allocation is conventional wisdom. Holding multiple asset classes can help reduce the risk of poor performance in any single asset class jeopardising your entire portfolio, and can also help counter market uncertainties.

Of course, it’s useful to review your portfolio regularly and rebalance to ensure you stay in line with your original investment objectives.

Where do exchange traded products fit into the satellite component?

From the above, it should be clear that a low-cost ETF providing exposure to the broad market can be an excellent option for the investment ‘core’. However, it does not need to end there.

Exchange traded products (ETPs) are increasingly being used for the ‘satellite’ or tactical parts of investment portfolios as well.

Traditionally, the satellite portion has been allocated to low-correlated active managers. However, with the range of exposures expanding on the ASX, both passive and active ETPs are increasingly being used as a “satellite” tool.

For example, using ETPs to employ tactical overweight exposure to certain sectors or regions removes the pressure to pick individual stock winners, but can still provide the opportunity for outperformance.

The satellite portion of your portfolio is where you can really put a personal touch and where you may attempt to generate portfolio alpha. As mentioned earlier, ETPs allow you to take a tactical view for typically low fees, without putting all your eggs into one basket.

New Year Financial Checklist

Thu, 07 Jan 2021 07:44:38 GMT

As we move towards the end of yet another year and ponder how fast the last 12 months have come and gone, many of us find ourselves thinking about the coming year and our aspirations for the future. Let’s face it, we’ve worked hard throughout the year and now is the time to reflect on what we have achieved; where we want to go; and what we need to get there. These times of reflection are critical to our lives whether we run our own business, are employed or retired.

A financial checklist is an excellent tool to see how you are progressing towards your goals and to help identify any specific areas you might need to focus on in the immediate future.

The key issues to consider are:

Home loan review

If you’re still making repayments, is it time to revisit your progress? Are you able to increase your payment amounts or frequency to save interest? With interest rates on the move upwards, should you investigate locking in at a fixed rate?

Other debts

Review the amount of personal loans, credit card or other debts currently being paid off. If the total of all loans exceeds 10% of household income, you need to implement a plan to reduce them as a matter of priority. Consolidating debts could help control interest costs but take steps to ensure this doesn’t become an excuse to spend more.

Savings

How much money did you save this past year? Are you spending first and saving what’s left? If your savings aren’t as healthy as you would have hoped by this time of the year, remember to pay yourself first by allocating up to 10% of your income to a regular savings plan.

Insurance

When illness or accidents strike, most people are caught insufficiently protected. It’s important to regularly review your insurance policies to ensure that you and your family have adequate cover. When was the last time you reviewed your insurance cover?

Superannuation

What is the current value of your super? If you don’t know, now is a good time to check. Is it working as hard as it should be? Are the fees reasonable? Are you on track to meeting your retirement needs or should you start making extra contributions?

Your Will

Making a Will itself is not particularly difficult or even terribly expensive. It is a fact of life that people get married, have children, change relationships, get divorced or establish new interests. Left unaddressed, any of these may result in a Will being legally challenged. Estate planning matters such as Powers of Attorney and Medical Directives should be regularly reviewed in addition to your Will.

You don’t have to wait until the first day of January to review your financial situation … do it today, and you may find that your other “New Year” resolutions are more easily achievable as a result!