Ascientials Update May 2023
Updated: Jun 22
In this edition
Where to now for interest rates?
Budget 2023: Good news for property investors.
Affordability: The Big 4 Capitals
Client Capital Growth Results: Brisbane & Perth
Where to for interest rates?
After 11 consecutive interest rate rises by the RBA, property investors may be wondering where interest rates are heading next. The good news is, financial markets are anticipating that official interest rates will fall - and the yield curve would seem to agree.
In his missive last week, Michael Matusik captured it nicely when he reported that the yield curve* is:
"...the difference between the price of long money versus short term
returns - and it is a great bellwether when it comes to the future
direction of official interest rates.
It typically leads by between three and six months."
To demonstrate why Matusik calls it a "great bellwether" for interest rates, Graph 1 shows the Yield Curve graphed against the RBA Cash Rate (official interest rates) over a 22 year period. Note that, each time the yield curve dropped below the 0.5% line, the RBA Cash Rate began to decline 3-6mths later.
Graph 2 (Matusik) shows the current yield curve. Note that the yield curve is in sharp decline below the 0.5% line. As Matusik puts it: "...by the end of calendar 2023 we are likely to see the cash rate start to fall. And just like the overzealous hikes of late, the decline could also be steep."
*When the 90 day bank bill rate is deducted from the 10 year government bonds rate and the results are plotted over time, we see the yield curve. If that curve is above the 0.5% line, interest rates are likely to increase within 3-6 months. If the curve is below the 0.5% line, interest rates are likely to fall within 3-6 months.
Great news for property investors
In it's 2023-24 budget the Albanese government instituted a change in the capital depreciation rules for investment properties where construction commences after 7.30pm (AEST) on 9th May 2023. In an effort to encourage investment in build-to-rent projects (to address the drastic shortage of housing), the government has increased the capital works tax deduction (depreciation) from 2.5% per year to 4% per year. For an average Asciential investment property purchase, this equates to around $33pw*. This means it costs around $33 per week less to hold a new investment property. * Based on an average income earner at $128,000pa, 5.17% interest rate. The estimate stated is general in nature and should not be read as applying to the reader specifically. Each individual investor's financial situation is different and should be assessed by a qualified and licensed accountant..
The Big 4 Capitals
Time for a quick update on where each of the big 4 capitals sit in relation to the supply and demand equation. Understanding the supply and demand equation at a state level provides valuable insight into the ability of a state's property market to be in growth. As a reminder, for a market to be capable of growth we need to see:
High demand driven by strong affordability (loan payment 36% or less of gross household wage)
Low supply (vacancy rates should be less than 3.5%).
Population growth should be strong (preferably over 1%).
Table 1 shows the key growth components for each of the big 4 capitals. The colours are indicative and correlate with the Asciential Property Clock down below: red being out of balance for growth, orange being little room for growth, and green representing strongly in balance for growth.
The Asciential Property Clock
Client capital growth results:
Asciential clients have achieved strong capital growth results across Brisbane and Perth in the past few years. A cross-section of these results can be viewed here. Brisbane's growth cycle has now ended - with Asciential ceasing to put clients into that market in January 2022. Perth's market is in prime position for growth and property values have been increasing nicely over there - but as the property clock indicates, there is considerable remaining growth in the Perth market. With interest rates likely to begin declining by end of 2023 (or sooner), now is the time to invest. Contact Peter on 0404 02 6000 to investigate your options.