The BFG Report

Welcome to the 2015 Spring Edition of the BFG Report.

Bubbling House Prices – Where To From Here ?

Reports of record-breaking sale prices, high auction clearance rates and Glenn Stevens, Governor of the Reserve Bank of Australia (RBA), talking of ‘crazy’ house prices has greatly inflated the housing bubble debate.

House prices are one of the most popular economic topics because many people have an opinion. Either people are renting and waiting to buy or they have already bought, usually as a co-owner with a bank. In both cases people are likely to have a view on the outlook for house prices. In September 2013, the RBA said that there was no evidence of a house price bubble but that view has now changed because house prices in certain parts of Sydney have risen sharply. Let’s delve into the numbers.

What Are The Facts?

When we look at house prices at a national level the bubble story begins to wobble. The Australian Bureau of Statistics (ABS) regularly reports average residential dwelling prices, including units and houses, at the state and national level. In the period between March 2012 and March 2015, the average house price in Australia rose by 18 per cent, certainly well above the rate of inflation but not the level of growth that would be needed to describe it as a bubble.

The picture becomes more interesting when we look at how different states have performed over the same period. In New South Wales, prices have risen by 30 per cent, in Western Australia they are up by 11 per cent, while Tasmania only managed growth of 1.6 per cent **. This diversity in the growth of house prices points to low interest rates not being the dominant factor at work, instead, job availability and wage growth may play more of a role.

What Is The Outlook?

The housing market behaves in the same way as any market, prices move in a cycle and from time to time overshoot and undershoot what could be considered a ‘reasonable’ price. The rate of recent price growth in certain pockets of the housing market, notably in parts of Sydney, indicates that prices may be overshooting and therefore we could expect price growth to moderate or even turn negative in those areas. The broader national picture is different as price growth has varied considerably, driven more by local demand and supply factors rather than low interest rates.

Australia compares favourably to other countries in terms of how much money is spent on housing. Having enough space is not a problem, with each person having an average of 2.3 rooms to live in, making Australia one of the roomiest countries when it comes to housing. Of course, in cities like Sydney and Melbourne, the cost of housing is higher than the average across the whole of Australia.

** Source: 6416.0 — Residential Property Price Indexes: Eight Capital Cities, Mar 2015 — Table 6.

Investment Market Review – Quarter Ending 30 June 2015

Asset Class – Australian Shares
Index – S&P/ASX 300 Accumulation index
1 year return is 5.61% p.a.
5 year return is 9.45% p.a.

The S&P/ASX 300 Accumulation index experienced its largest quarterly decline since September 2011, ending down -6.5%. In a more defensive market environment, the better performing sectors during the quarter were Energy (up 0.3%), Industrials (down 2.1%), A-REITs (down 2.3%), Utilities (down 2.4%) and Telcos (down 2.4%). Sectors which underperformed included Consumer Staples (down 10.0%) led down by Woolworths, Consumer Discretionary (down 9.1%) also struggled after profit downgrades from Flight Centre, Nine Entertainment and Seek. Financials (down 8.0%) were led lower by the major banks. By the end of the quarter, fears around Greece’s inability to service its debt obligations heightened, adversely affecting investor sentiment.

Asset Class – Listed Property Trusts
Index – S&P/ASX 300 A-REIT index
1 year return is 20.20% p.a.
5 year return is 14.23% p.a.

The A-REIT sector generated a return of -2.33% for the June quarter. The rise in Australian and global bond yields impacted the sector. The major drivers of A-REIT’s negative performance was a steep rise in domestic bond yields with the 10 year Australian bond yield rising by 69 basis points. Major A-REIT news included Charter Hall group’s $225M capital raising and Novion receiving regulatory approval for its merger with Federation.

Asset Class – International Shares
Index – MSCI World accumulation index (AUD)
1 year return is 24.56% p.a.
5 year return is 15.25% p.a.

The major global markets were mixed, with the S&P 500 down 1.1% and the FTSE 100 down 5.4%, while the Nikkei rose 4.3%. Debate surrounding the timing of the US Federal Reserve’s monetary tightening policy continued, with the market shifting its expectations from June to September 2015 as the quarter progressed. Negotiations with Greece captured the market’s attention as the 30 June deadline for payment to the International Monetary Fund approached. Europe and Japan each reported solid activity outcomes through April and May, only for momentum to fade as the quarter ended, particularly in Japan. Policy easing was a strong theme, with the People’s Bank of China cutting benchmark one-year lending and deposit rates by 0.25% and the bank’s reserve requirement ratio by 0.5%.

Asset Class – Fixed interest and cash
Index – Bloomberg AusBond Composite index (Previously called UBS Composite Bond All Maturities index)
1 year return is 5.63% p.a.
5 year return is 6.44% p.a.

Global bond yields moved sharply higher over the quarter. Over the quarter the benchmark 10-year Government bond rate in Germany, the US and Australia rose by 58, 43 and 69 basis points to close at 0.76%, 2.35% and 3.01% respectively. Domestically, the increase in yields on short to medium maturities was constrained by the unbalanced nature of the Australian economy and possible further monetary easing. The Australian three-year bond yield rose by 32 basis points to close the quarter at 2.02%. These trends resulted in a significant steepening of the yield curve.

Asset Class – Cash
Index – Bloomberg AusBond Bank Index 0+Y (previously called UBS Bank Bill index)
1 year return is 2.60% p.a.
5 year return is 3.65% p.a.

The RBA lowered the cash rate during the June quarter to a record low of 2.0%. Economic data was mixed with better than expected GDP growth for the March quarter of 0.9% with a strong contribution for net exports whilst business investment was a significant drag.

High Yielding Internet Savings Accounts

Financial Institution and Interest Rate

ING Savings Maximiser – Rate 3.50% p.a.

St George – Maxi Saver – Rate 3.50% p.a.

UBank – USaver with Ultra – Rate 3.37% p.a.

BankWest – Hero Saver – Rate 3.25% p.a.

Westpac ESaver – Rate 3.25% p.a.

ANZ – Online Saver – Rate 3.10% p.a.

Rates sourced from and are subject to conditions and change.

Rates are correct as at 3/9/2015.