2014 Federal Budget
There is considerable speculation about a whole range of harsh measures being announced in the Federal Budget, to be announced on Tuesday 13 May. I will be issuing a Budget Newsletter the next day summarising key measures that may impact you.
Sydney House Prices
House prices are always a favourite topic for Australians, particularly when they are rising as they have been in Sydney in recent times. The rate of increase in Sydney has exceeded all other major cities in the past year but the picture is very different if we look at the rate of increase over the past 10 years, as shown in the table below:
|City||Dwelling Prices (% increase p.a)|
|I yr to Mar 14||10 yrs to Mar 14|
Attached is an article by CBA Global Markets Research that provides some useful analysis of what has been happening: House Prices: Just the Facts
The AUD: why isn’t it falling?
With the important caveat that I said it is always difficult to predict the exchange rate, like most people I have been somewhat surprised that in recent months the AUD has been rising rather than falling. It is difficult to explain why but some relevant factors include:
- Commodity prices haven’t fallen as much as expected
- Interest rate expectations in Australia have changed somewhat with many now expecting the next move will be an increase rather than a fall in rates
- Many AUD forecasts have been based on the weakness of the economy compared with Australia’s recent past (the mining boom) when the key issue is really the state of the Australian economy relative to other countries, many of which remain weak
- There is evidence in housing and other areas of more foreigners wanting to buy Australian physical and financial assets relative to other countries. This increases the demand for Australian dollars. Former RBA Board member Warwick McKibbin says that this shift in portfolio preferences has recently become important and that his research suggests a 100 basis point reduction in the risk of investing in Australia would appreciate the exchange rate by 10 per cent.
It is not clear where we go from here but it is by no means certain that the AUD will resume its fall against the USD and the Euro and if the factors mentioned above gain more traction, it may even strengthen further. Foreigners are expected to be keen bidders for a range of infrastructure assets likely to be sold off in coming years. For example, four consortiums that include investors from Europe, Canada, the Middle East and Asia are currently finalising offers for toll road operator Queensland Motorways which is expected to sell for $5 billion or more.
Deeming of account-based pensions- impacts future recipients of the Centrelink Age Pension
Currently, pension payments received from an account-based pension are treated more favourably in Centrelink’s income test calculation than income generated by other financial investments, such as money in a bank account. This is because income payments from an account-based pension attract a non-assessable portion, which generally recognises that a part of these payments represents a return of capital.
Legislation has recently been introduced into parliament which will extend the normal deeming rules which apply to other financial assets to account-based pensions from 1 January 2015. Importantly, some account-based pensions commenced prior to 1 January 2015, will be grandfathered, that is for Centrelink income test purposes these pensions will continue to be assessed under the current more favourable income test approach.
For grandfathering to apply, the account-based pension must have been commenced prior to 1 January 2015, and the recipient of the account-based pension must have also been in receipt of Centrelink income support immediately before 1 January 2015.
If you or someone you know is eligible to commence a pension before the end of this year, even if you would initially only qualify for a small Centrelink benefit, it may be advantageous to do so. Please contact me if you think this may impact you.
Australia’s Free-Trade Deals
The Federal Government has recently signed free trade agreements with Japan and South Korea which should provide some long term benefits to various agricultural areas as well as being of benefit to the economy overall. While these deals would be more accurately described as “freer” trade rather than free trade, given some tariff and other barriers will remain, they are beneficial and thus to be welcomed.
A free trade deal with China is also being progressed, though when that will be finalised remains somewhat uncertain. The Editor-in-Chief of the Australian Financial Review, Michael Stuchbury, was in China with the entourage following Prime Minister Abbott on his Asian tour and said on 11 April that “Chinese government officials spoke optimistically about the prospects for the free trade deal with Australia. Abbott’s key message was that Australia is open for business and sees itself as providing China and Asia with resource security, food security and energy security. That dovetailed with Li’s stress on regional economic integration and further liberalisation (including its foreign exchange and financial system) as the means to maintain China’s 7 per cent plus growth rate and to lift its still low $US5, 000 per capita national income”.
Women are better at financial planning than men (humour)!!
Dennis was a single guy living at home with his father and working in the family business.
When he found out he was going to inherit a fortune when his sickly father died, he decided he needed to find a wife with whom to share his fortune.
One evening, at an investment meeting, he spotted the most beautiful woman he had ever seen. Her natural beauty took his breath away.
“I may look like just an ordinary guy,” he said to her, “but in just a few years, my father will die and I will inherit $200 million.”
Impressed, the woman asked for his business card. Three days later, she became his stepmother.
Women are much better at financial planning than men………
Pension Increases effective from 20 March 2014
The full single Age Pension, including allowances, has increased to $842.80 per fortnight ($21,912 p.a.) The full Age Pension, including allowances, for each member of a couple has increased to $635.30 per fortnight ($16,518 p.a.) or $33,035 p.a. combined.
For further detail click on this link to the Department of Social Services
Commonwealth Seniors Health Card – indexation of income thresholds
The Commonwealth Seniors Health Card (CSHC) is available to older Australians who are of age
pension age and do not receive an income support payment, such as the Age Pension. It gives older Australians access to cheaper prescription medicines, Australian government funded medical services, and other government concessions. To qualify for the card the income limits are currently as follows: adjusted taxable income must be a maximum of $50,000 (singles); $80,000 (couples, combined).
The Social Services and Other Legislation Amendment (Seniors Health Card and Other Measures) Bill 2014, recently introduced to Parliament, introduces annual indexation of the income thresholds that apply when determining eligibility for the Commonwealth Seniors Health Care Card. Indexation will commence from September 2014.
Greece – sounds like better news in Europe but I don’t buy it
Since 2010 Greece has been wholly reliant on help from euro-zone governments and the IMF to meet its financing needs. In May 2010 it received its first three-year bail-out, of €110 billion. Less than two years later Greece required a second and even bigger bail-out, raising the total amount of funding from euro-zone lenders and the IMF to €246 billion by 2016, equivalent to 135% of last year’s GDP. Public debt, at 175% of GDP this year, is much higher than before the first bail-out. That burden is made bearable only through concessions by the European lenders who now hold most of the debt. Their loans are at ultra-low interest rates.
The Economist reports that Greece “has spent over half the time since it became independent in 1830 in default”.
Yet Greek Finance Minister Yannis Stournaras said recently that Greece was planning to issue new government bonds by June. There was no hurry, he said, but his country would manage to do so in the first half of 2014. Looking at the yields on 10-year Greek government bonds, Stournaras’ optimism looks almost appropriate. They are currently trading at just over 6 per cent, which is much lower than at the peak of the Greek crisis when yields had skyrocketed to more than 40 per cent.
However, just looking at yields is highly misleading. At the same time that Greece’s yields have fallen, practically all other economic indicators have deteriorated. As a percentage of GDP, Greek government debt is now slightly higher than it was three years ago when yields peaked. At the same time that Stournaras is trying to spread optimism about Greece’s recovery, it still looks likely that the country will receive its third bailout package.
It only really makes sense that anyone would buy Greek bonds at current yields under the assumption that Greece will forever be able to rely on its European neighbours for help. If Greece was on its own, with no EU support, and it had close to 180 per cent debt to GDP, would its bonds yield just over 6 per cent? Certainly not. Investors would rightly run a mile.
With the core Eurozone countries on standby to stabilise Greece as needed, it is obviously a different story. Markets seem to have concluded after the past five years that Greece is somehow unsinkable thanks to Europe’s unwavering support. This significantly reduces the risk of investing in Greek bonds, which explains the falling yields.
My personal view is that there is an air of unreality and unsustainability about this and Greece is a microcosm of a bigger European problem, the failure to implement meaningful reforms. Without these the potential remains for major debt defaults and even a future collapse of the weaker economies. The comparatively strong Euro and the current sense of calm may not last so I remain very cautious on Europe.
This newsletter is not advice and provides information only. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.