Two weeks back I went along to the annual budget presentation by Bill Evans, who is the chief economist for Westpac. Each year he forecasts where things are likely to be in 12 months time, but he also reviews his previous year’s forecasts which keep him accountable to the audience. I’ve seen him speak this past 5 years and he’s pretty well on the money. Here are 14 things that I picked up that I believe are relative to you and I…
I listened with interest as he spoke for close to two hours, it wasn’t all doom and gloom that they use to sell newspapers, nor was it all through an optimists rose coloured glasses, it was logical information drawn from reliable sources. So what I’ve done is taken a snapshot of what I thought you’d find of interest in his presentation and broken it into 14 sub-headings below.
If you’d like a full copy of his power point presentation you can get a copy from here.
1/ Govt net debt is not as bad as the opposition would like you to believe
We hear the opposition leader and every other news report, rabbiting on about our national debt running too high. Is it? Compared to who we should ask?
Well if you take our government’s net debt as a percentage against our Gross Domestic Product (as Bill did in slide 5/63) and compare against other countries we’re actually ok, to the point we’re the lowest. So maybe everything we hear isn’t always true…
From lowest to highest
2/ Govt revenue slippage against projected
So every year the Govt forecasts what they expect in total receipts and then use that for budgeting on how much they’ll have to spend throughout the year. Same as you do in your own household. That we know yes. So this year they didn’t receive as much as they’d planned on. To the tune of ~ $20 billion. That in turn makes them cut costs, same as you would in your household. It would be like reducing your pay by 7%, you’d need to cut costs somewhere to make ends meet.
3/ Mining projects – spending to peak end of 2013 early 2014
This comment I found interesting (though not alarming). Many residential property investors are still considering these mining towns. Research is the key here; it may be time to sell as opposed to buying. We’re also seeing many lenders loose their appetite for these areas too. My message here caveat emptor (Buyer beware).
4/ Consumer sentiment still low
As you already know, much of the country’s consumer spending runs in parallel with their confidence. The lower interest rate environment is lifting the consumer’s confidence, this is good, but it’s still a long way short of 2001/02. Tracking about the same as the year preceding the Global financial Crisis.
5/ Unemployment only going one way
Unfortunately unemployment seems to be tracking up, over 5% and on its way to ~ 6%. At least we’re not like some of the European countries like France and Italy over 10% and Spain over 25%. On the flip side to this if you’re an employer now is a good time to be looking at recruiting, something we have been doing of late.
6/ Rental yields close to interest rates
Being on the coal face we’ve seen this for a few months now. It’s very easy to buy a property now and have it cash flow neutral to cash flow positive from the get go. Certainly a good time to buy better quality property and consider locking away a low fixed rate.
7/ Investors responding to cheap money
I also saw another slide that rang true to what we are seeing day to day, and that was investors were responding in NSW to the lower rates and taking advantage of the yields on offer.
8/ First home buyers not responding to interest rate cuts
As the interest rates fall the first home buyers aren’t responding by purchasing property, not sure what they’re doing but it’s not taking on the Australian dream. Be good to see them return because they’re good at stimulating the building sector.
9/ House prices showing solid increases
2013 and 2014 should see house prices picking up in Sydney and Brisbane, but not Adelaide or Melbourne. The tide is turning, with small increases now becoming evident. We are also hearing the same from Buyers agents in Brisbane and Sydney as they compete for properties for clients. It’s still early days though as we’re not seeing it in the valuation reports as of yet.
10/ Westpac loan book showing consumer caution
This slide was interesting (17/63) in that it showed an index with the median months mortgage holders ahead with their home loan (Just over two years).
Not very reflective of investors, as many have large buffers on interest only loans, but what it does show is that the average consumer is currently cautious with debt and continuing to pay ahead. This would also ring true with the consumer sentiment (No.4) being low.
11/ New Housing lending slowly picking up
The graph showed the line going up instead of down, which is always good… but only slightly. Credit growth is expected to be ~ 4.5% this year. This might sound low, but if this was retail they’d be ecstatic. Growth at the end of the day is still growth.
12/ House prices slow to respond to rate cuts
Interesting matrix, in that it measured how quick the populous responded to the low interest rates compared against other low interest rate periods like 2001 / 02. So this means house prices are slow to respond, sounds like there could be a correlation between consumer sentiment No.4 and Westpac loan book showing caution No.11?
13/ Last year’s budget forecasts against this years actual
So last year Bill forecasted for May 2013 that the cash rate would be around 3.25%, its sitting at 2.75%, so a little off there. He also forecasted that the USD would be at 105 cents, and it’s currently trading ~ 98 cents, but it was that high last month, so pretty close in my books. The interesting thing is he sees the cash rate dropping down a further 50 basis points to 2% which would most likely have an affect on the variable mortgage rates sneaking below 5%. But he also suggested that the fixed rates are about at the bottom of their cycle and when the rates do move upward (Both variable and fixed) they will move quickly. So my take home from that is, if you you’d like to hedge some of your debt, now could be a good time to do that.
14/ Key take homes
Our sovereign debt ratio is not that significant when compared to other countries. Much of the media hype is white noise.
RBA may cut the cash rate some more, but fixed are about as low as they’ll go.
Risks associated around the mining sector now on the horizon.
Housing prices may see a small rise, but no boom.
If you’d like to see all 63 slides, we’ve made them available for you here.