If the ‘bond market rout’ continues it could affect home prices

By Christine Brown, Monash University

For the past three decades the yields on long-term bonds have been on a downward trend. This has dramatically reversed since the election of Donald Trump, with more than a trillion dollars wiped off the global bond market in the past week and a half.

But it’s not just investors that are affected by this spectacular reversal. The bond market is a backbone of the global financial system, meaning the sell-off has implications far and wide, from economic growth through to real estate prices.

What’s happening in bond markets

Bonds are a type of long-term debt – companies and governments sell bonds to investors and these will in turn be bought and sold on the bond markets.

The thing to look at with bonds is the market price, which is reflected in the yield quoted or price paid when a bond is bought and sold. Investors in bonds receive their returns in regular interest payments and the return of principal when the bond matures.

As the price of the bond rises, the yield will drop. With the price of bonds steadily rising during the 30 year bull market, yields have fallen away significantly, bringing down the interest rates around the world.

Why we pay attention to the bond market

The price of bonds filters through into the rest of the economy. This is because government bonds are considered relatively risk free, and so act as a benchmark for pricing (relatively more risky) securities in all other markets.

A company’s shares, for example, are expected to yield the risk-free rate (what a government bond would yield) plus an additional amount to compensate investors for their riskiness – called the “equity risk premium”. Investment in corporate bonds can be expected to yield the risk-free rate plus a premium for taking on the added default risk.

The US bond market is especially important, as it is the largest and its prices act as a benchmark for interest rates globally. Rising bond yields in the US signal a number of things – higher expected inflation from the touted tax cuts and higher spending, and the need to borrow to fund this expansion. All of this puts further downward pressure on bond prices and upward pressure on interest rates, increasing yields.

Overall, bond prices serve as a “barometer” of what the market is “thinking”. Especially what it thinks will happen in the future, as the relation between long term interest rates and short term interest rates has a mechanical effect on future interest rates.

What this could mean

The sudden increase in bond yields, most notably the 10 Year US Government bond yields, has broad implications for the economy.

Mortgage rates are tied to the 10 year bond yield, for example, meaning borrowers will need to pay more for housing loans. This won’t happen overnight and we will have to wait to see the long-term effect on real estate prices.

But taking in past history, here are a range of possibilities from the end of the bull market.

First, when long-term interest rates are higher than short-term interest rates, the market expects interest rates in the future to be higher. This suggests that this market sell off isn’t an aberration, we can expect higher yields and lower bond prices in the future, and this trend will continue.

Second, long-term bond yields generally reflect an economy’s long-term real growth rate plus a premium for inflation. Inflation measures around the globe have been quite low and central banks have struggled to reach their inflation targets. Rising bond yields could mean the growth starts to tick up.

Third, there will be more uncertainty in global markets until the implications of a Trump presidency are known. Investors will expect a greater return to investment in US government bonds because of this heightened uncertainty. So yields on long-term US Treasuries are likely to stay up and even increase further in the foreseeable future. But even so interest rates are still low by historical standards.

Fourth, new borrowing for housing will be more costly. The risk of rising interest rates on existing mortgages has been mostly shifted elsewhere in the US economy. Let’s hope that the institutions or individuals holding that risk fare better than the institutions which collapsed during the savings and loans crisis in the US in the late 1980s.

Fifth, this is a permanent change in the nature of global interest rates. Rising bond yields could push up interest rates. Australia’s Reserve Bank Governor Phillip Lowe has signalled no further interest rate cuts unless inflation drops well below its current 1.5% level.

The Conversation

Christine Brown, Professor and Head of the Department of Banking and Finance, Monash University

This article was originally published on The Conversation. Read the original article.

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The ‘F’ word. Don’t let finance and housing affordability get you down

You can’t seem to move these days without hearing about housing affordability. The media has us hyped up to believe that we’ll never get to own property because it’s being constantly priced out of reach… or is it?

When you scratch beneath the surface, it’s not as simple as you’d think. I listened to a fantastic podcast recently, in which finance expert Ross Greenwood discovered that properties are more affordable TODAY than they were in 1990 when interest rates hit an all-time high.

Greenwood says that when you calculate today’s house prices, combined with our current wages and interest rates, that we are actually ahead right now. He says it’s not as scary as people think and I agree.

Whether you’re buying as an owner-occupier or as an investor, there are still plenty of opportunities from both angles. You just need to make sure you’ve got the essentials covered in order to get your strategy right:

  • As an owner-occupier, what do you need from this property? Proximity to schooling, work, transport? Are you buying for a family, or do you plan to have one in the future? Or are you at the other end of the scale and starting to downsize?
  • If you’re buying as an investor, how will this next dwelling fit into your portfolio? You can’t just add property like a pick-and-mix at a lolly shop. It has to be strategically purchased to meet your long-term wealth creation goals.

That’s all very well, but it’s not your money on the line…

You’re right, well, half right! I’m an owner occupier, but it hasn’t always been that way. I had to start over again in my 30s, following my marriage breakdown. I went from owning my own home (and faced those hefty interest rates in the 1990s) to becoming a “rentvestor” ie living in a rental property near my children’s schooling, whilst starting to invest elsewhere.

And as a residential property investor in today’s market, I’m always looking to add to my portfolio. I have a keen interest in housing prices for myself as much as for my clients. I know that there is still value to be found within our capital cities.

You just have to know where to look… and realestate.com.au is not the answer. There is still affordable, quality property available in the off-market space – which is what property portfolio strategists have access to, with a direct line to developers.

It is possible to get into the market and don’t listen to anyone who’ll tell you otherwise.

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Basketballer in court on fraud counts

Former Olympic basketballer Shane Heal has appeared in the Brisbane Magistrates Court charged with three counts of fraud under the Criminal Code (Queensland).

The Australian Securities and Investments Commission (ASIC) alleges that Heal:

  • in 2008, dishonestly gained a benefit of $250,000 from an investor for Shyfox Pty Ltd
  • in 2009, dishonestly gained a benefit of $250,000 from an investor for Cre8ive Constructions Queensland Pty Ltd
  • in 2010, dishonestly gained a benefit of $250,000 from an investor for 23 Investments Pty Ltd.

At the time of the alleged conduct, Heal was the sole director of Shyfox, Cre8ive Constructions and 23 Investments, and the charges were brought against him following an ASIC investigation into his conduct as the director of those companies.

Heal did not enter a plea.

The matter was adjourned for further mention. Heal has entered into bail to appear at the Brisbane Magistrates Court on December 16, 2016.

The Commonwealth Director of Public Prosecutions is prosecuting the matter.

Heal, who was the franchise player for the Sydney Kings in the early 2000s, has been charged with three counts of fraud under section 408C(1)(d) of the Criminal Code (Queensland) 1899.

A receiver was appointed to Shyfox in January, 2012 and the company was subsequently deregistered in April 2013. Cre8ive Constructions was deregistered in February 2014, and a liquidator was appointed to 23 Investments in March, 2012, with the company being subsequently deregistered in October 2013.

Meanwhile, ASIC has banned South Australian financial adviser James McCarthy from providing financial services until November 2024.

McCarthy is the sole director of McCarthy Financial Solutions Pty Ltd and was an authorised representative of AMP Financial Planning Pty Ltd from December 2011 to April 2015.

ASIC found that McCarthy created and backdated statements of advice and “authority to proceed” documents and forged client signatures for the purpose of complying with an internal AMP Financial Planning audit in March 2015.

McCarthy did not provide any of the false documents to clients.

ASIC deputy chair Peter Kell says: “ASIC is committed to raising standards of conduct and compliance in the wealth management industry and will act to remove advisers who engage in misleading conduct.”

McCarthy has the right to appeal to the Administrative Appeals Tribunal for a review of ASIC’s decision.


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Tick, Tick Tick – Editor Observations

As we predicted 12 months ago, 2013 was indeed the year of recovery. With interest rates falling to historic lows and confidence improving, that recovery is set to build momentum in 2014, possibly making it the boom year of this property cycle in many major cities.

There’s already a buying frenzy in pockets of some capital cities, namely Sydney, Melbourne, Brisbane and Perth.

The country’s largest mortgage brokerage, Australian Finance Group, recorded its best month ever in October, processing more than $4 billion worth of home loans – 12 percent higher than the previous month and a staggering 61 per cent higher than October 2011, just before the Reserve Bank began cutting rates.

And while first homebuyers accounted for only 125 percent of all housing loans in September, according to the Australian Bureau of Statistics (the lowest reading in 23 years), home loan approvals Overall were the highest since October 2009.

Economists are describing the property sector as the “shining light” of the nation’s economy, with housing expected to take the baton from the mining industry as the country’s key economic driver. Some of the most attractive buying conditions we’ve seen in years have combined with post election confidence to bring a new energy to the marketplace, with some remarkable sales results being achieved.

However, it’s worth noting that the market recovery is different this time. Self-managed superannuation funds are increasingly being used to purchase residential real estate, there’s more activity from Asian buyers and interest rates are at a now low.

If you define a boom as being double digit price growth, then were not there yet. Much of the growth in many areas has simply gone towards restoring prices to pro-GFC levels.

It’s never a bad time to buy, even if the market is heating up, as long as there’s merit to your investment decision that goes beyond the “fear of missing out. Knowledge is the key.

It’s our aim every month to bring you the latest information on the opportunities that are presenting themselves to investors, regardless of whether the market is hot Cold or lukewarm.

On page 20 you’ll find an exclusive report on new rezonings which are creating profitable opportunities for the small developer and don’t miss our special report on page 82 about one of Australia’s largest ever infrastructure projects and the areas set to reap the rewards.

API also aims to inspire, and this month’s cover story on investors under 30 creating property wealth of their own does just that.

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Fifth of Aussie renovators have no contingency plan

One in five Australian renovators set aside no money at all as a contingency.

The alarming statistic, discovered through a recent survey conducted by jobs website ServiceSeeking.com.au, could dramatically influence the success of home renovations.

“An accurate and extensive budget, with at least 5 per cent contingency, will give your renovation the best chance of success,” ServiceSeeking.com.au CEO Jeremy Levitt says.

“Not enough people set aside money in case of disaster, and this can really affect how stressful the renovation process is.”

A third of couples who put no money aside for contingency argued about their renovation. Disputes arise from under-budgeting, overspending and underestimating the duration of their home improvement.

Comparatively, just 18 per cent of those who ensured they had a contingency of at least 5 per cent of their overall budget had disputes over the renovation process.

It’s not surprising then that, for 65 per cent of people, sticking to budget is incredibly important.

Forty per cent of renovators have tackled a whole house renovation; 36 per cent have updated kitchens; and 32 per cent upgraded bathrooms.

Despite the large-scale renovations taking place, too many Australians still don’t have adequate contingency.

“With no contingency, there’s no room to go over budget,” Levitt says.

“That means when surprises crop up, as they inevitably do, people run into strife and many must forego aspects of the renovation they most desire. Always have backup funds in case of disaster,” he suggests.

(Statistics were from a survey of more than 2,200 ServiceSeeking customers.)

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The excursion is actually a group or specific going to the art gallery, tourist attractions, shows and so forth. The goal of the trip – a trip, a stroll for the educational, clinical, sports or amusement uses. Display physical objects are within the oversight of your certified man or woman – helpful tips which transmits the audience object perspective, analysis from the memorial internet site, the comprehension of the ancient events related to this item. Fellow member expeditions – tripper. For that travelers involve those living in any section of less than round the clock.

Using this type of edge, the resort will organize a number of expeditions and trips to areas of memory for that company. In each and every motel possesses its own software achievable adventures. In addition, the different visits could be structured, considering the individual wishes of clients. To function involved guides with understanding of foreign different languages. There is a pursuing classification of your Visit, which will be taken into account:

1) sightseeing and tours (multidisciplinary) led tours usually include lots of different subject areas and are created using ancient and modern-day substance. traditional and cultural monuments, properties, natural things, activities, locations, metropolis beautification aspects, businesses and other – When displaying distinct items can be utilized. taking in the sights trips differs from other varieties in this celebration offers a detailed-up, that gives an over-all idea.www.conciergegroup.org/

2) Thematic organized tours might be historical, environmental, artwork (in artwork art galleries and exhibition places, galleries), structural and village planning (having a show of design properties of the metropolis), connected with the demonstrate design monuments of any specific historical time period, which gives an idea of the task of an architect or unveiled in the organizing and progression of cities.

Providing individual and group expeditions

Presently, the majority of visitors take pleasure in team tours, but in recent years has grown to be more popular then ever specific travel and leisure, if the system is written “within the guest’s get”, it is intended to provide the automobile together with the motorist as well as the information, who operates the necessary language.

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The shape of the visit can be digital – is the company kind of instruction, vary from the actual display in the digital tours of real things (museums and galleries, park systems, metropolis streets, and so forth.) To make conditions for personal-viewing, gathering the desired information.

What expeditions feature a concierge assistance?

Adventure providers involve arranging and carrying out excursions, manual services, information-interpreter, related professional services. Carefully guided organized tours on the hotel may be provided individually, alone (concierge service is developing a assistance), or supplied on a contractual schedule (in this instance only concierge requests currently developed a tour).

The 2nd way is very common, given that the roll-out of the trip – a complicated process that requires a fantastic creative work. However, it learned that the concierge support itself is developing a software excursion.

The whole process of planning a whole new visit features a concept of this issue, placing targets and goals from the trip, the investigation and collection of adventure web sites, drawing up a course excursions, research the literature on expeditions, exhibitions and galleries and museums, foundations, expert meetings and the like. The preparing in the excursion must be based on those guidelines and specifications, since the relationship of training and schooling, sign up of the main topic of logic, regularity and regularity, lucidity and accessibility of business presentation, quality, emotion, age-correct trippers.

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