The Elephant in the Room Property Podcast | Australian real estate
The Elephant In The Room Property Podcast with Veronica Morgan & Chris Bates


Episode 88 | 14 interest rate cuts in a row & more to come? | Alan Kohler, Editor-in-Chief, InvestSmart


How to prepare for a low growth world

We’re honored to be joined by Alan Kohler, one of Australia’s most respected finance reporters. For decades readers & viewers have enjoyed his expert opinion in the press, TV & more recently as Editor-in-Chief at InvestSMART.

We love to look at the wider world of investing - beyond property. We enjoy discovering alternative investment methodologies & frameworks - always with our filter of low risk & sustainability & we loved our chat with Alan! 

Here’s some highlights:

  • Is Australia headed for a recession or could be be headed for a boom?

  • Why it is important to wait to invest after the valley of death?

  • Who is deeply invested in propping up the housing market?

  • Our GDP growth is from population growth so should we open up the gates?

  • What will happen if we go into negative interest rates & what does it even mean?

  • How can the average investor prepare for a low growth economy?

This is an episode you won’t want to miss.

Alan Kohler - The Eureka Report

Alan Kohler - Editor in Chief, InvestSmart

Work with Veronica?
Work with Chris?


Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness…

This episode was recorded on 11th September, 2019.

Veronica: You're listening to the Elephant in the Room Property Podcast where the big things that never get talked about actually get talked about. I'm Veronica Morgan, real estate agent buyer's agent, cohost of Foxtel's Location, Location, Location Australia and author of a new book "Auction Ready How to buy Property even though you're Scared Shitless."

Chris: And I'm Chris Bates, financial planner, mortgage broker, and together we're going to uncover who's really making the decisions when you buy a property.

Veronica: Don't forget that you can access the transcript for this episode on the website as well as download our free Fool or Forecast Report. Which experts can you trust to get it right?

Chris: Please stick around for this week's elephant rider bootcamp and we have a cracking dumbo of the week coming up!

Chris: Before we get started. Everything we talk about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyers agent. They will tailor and document their advice to your personal circumstances. Now let's get cracking.

Veronica: You know, how we love to look at the wider world of investing beyond property, beyond even Australia. We enjoy discovering alternative investment methodologies and frameworks, but always with our filter of low risk and sustainability. Now we prefer investing over gambling and we draw a very clear distinction between the two. Today's guest is pretty pragmatic and we're confident that he will contribute meaningfully to our quest for lifelong learning. In this episode, we're honored to be joined by Alan Kohler, one of Australia's most respected finance reporters for decades. Readers and viewers have enjoyed his expert opinion in the press on television and more recently online via his website, the Constant Investor. And in case you aren't familiar with the name, he's currently the business editor at large at the Australian, finance presenter on ABC News, famous for your charts, presenter of the Talking Business Channel on Qantas inflight radio, Adjunct Professor in the Business Faculty of Victoria University. And also what's your role at invest smart?

Alan: Well, so, um, I did have a, a business called the constant investor, which uh, I sold to Invest Smart. So, uh, and uh, it's now been merged with the original businesses business that I created called Eureka Report, which Invest Smart bought. So I'm now running Eureka Report for Invest Smart and having done a bit of a circle.

Veronica: All things come around again. There you go. Well, so I obviously read a slightly out of date bio originally. Okay. Allen's writing and interviews bring a context to the issues that matter to investors and he also has a particular gift with charts as I've mentioned earlier and we will include some links in the show notes. Thank you so much for joining us today, Alan.

Alan: Not at all. It's great to talk to you.

Chris: Thank you Alab. Um, I know you love your charts and, um, what some of the charts that you've been looking at recently that just blow your mind because we are in, you know, uncharted territories in on many fronts, but I mean, some things you just think, how the hell are we where we are?

Alan: Okay. Well, the chart that blows my mind at the moment is the amount of, um, uh, bonds in the world that, uh, have a negative yield. It's hard to get your mind around that makes firstly explain what a bond is. A bond is basically an IOU or fixed interest security that, um, you invest in, you get, you get your money back at the end of the time and they pay you interest over the period. And you know, uh, most of them are a lot of them. There are other issued by governments or companies. Um, and uh, there are 17 trillion US dollars worth of bonds currently, uh, that have a negative interest rate. And what does that mean? It means if you bought it, if you bought one of the bonds and you held it for the rest of the term, whatever that might be, whether it was five years or eight years or nine years, um, what you'd got back at the end of the time, plus the interest would be less than you paid.

Alan: So you would lose money. It would get be guaranteed to lose money. He says $17 trillion worth of bonds, which is about 45% of all the bonds that are trading in the world at 45%, um, are a negative yielding, which means that it guaranteed to lose money. So what's going on? Yeah, the answer is there is what you might call a bubble in bonds. The bond prices, when bond prices go up, the yields come down negative yields. Uh, uh, one aspect of it, the other aspect is that, um, yields in general, of bonds are really low, um, the Australian government's 10 year bond, uh, currently pays an interest rate of 1%. Oh, uh, yeah, 1%. So that means that, you know, if you're locking money up for 10 years, you get 1% interest.

Veronica: You get in the bank anyway, so why bother?

Alan: Why bother? And the government bond is a, is gum or guaranteed obviously. So it was really secure, but 1% heaven's above. Um,

Chris: people have been calling the bond bubble over. You know, I remember back in advice was maybe 2011, 2012. Um, you know, we'd go lots of investments, sort of, you know, financial advice or, you know, the, what of the talk was, oh, the bond bubbles over and you know, it's not going to go lower and

Alan: It just keeps going. Yeah. Um, yeah, no, there been people saying it can't keep going, you know, but the bonds kept coming down, you know, 3%, 2%, 1%. Um,

Veronica: I am a bit of a novice of this right? So I'm a property person, I'm trying to expand the mind in my view from my understanding was that a bond was always, um, low risk and therefore low return. So, you know, high risk high return, maybe, um, low risk, low return. So that's low risk, but that's negative return. That's sort of not acceptable. Why would people invest in them?

Chris: Two reasons. One is that there are speculators who are, uh, expecting the price to go even higher. So it's past the parcel. No looking for hot potato. We're looking for greater fool to buy it off you. It's like any bubble, you know, the, the, bubble of the late nineties and so on. Everyone would, um, was I'm hoping the pat paying heaps for Internet stocks expecting that somebody else would pay more. So that's one reason. The other reason is that a lot of investors, pension funds, banks and so on are required to buy bonds. So they have to, so there's two types of buyers of these things. One is speculators, the other is mandated buyers. Um, what is the ones pushing the price up? Yeah, look, I think the context though, I mean, look, we are focusing on bonds and probably everyone's eyes are just closing line over button.

Chris: But the thing is that interest rates, all interest rates are really low. And that's just one kind of extreme aspect of what's going on. The, the uh, RBA cash rate, which we report on every month. The RBA has a meeting on Tuesday, first Tuesday of every month. They decide what they're going to do with the overnight cash rate, which then flows through everything else. Currently, 1% record low came down, came down in two jumps in June and July from one and a half percent. Even my reckons it'll come down again to at least three quarters of a percent, possibly half a percent. Um, so that's a part, another part of the low interest rate story. The, another part of the large stride story is the European equivalent of the RBA. European Central Bank. It's policy, right? Their equivalent of the cash rate of the RBA moves, is -.4.

Alan: Mm. Um, the Swiss one and the, the Swedish one, all a left, there's about half a dozen countries that have got their central bank policy right. At negative means you've got to pay them to keep your money. Yes. It's bizarre, isn't it? Sorry. So, and then I've heard of stories of what a bank in Denmark actually paying people take mortgage. That's the logical extension of this, isn't it? Exactly. That's right. So interest rates, let's just agree that interest rates are really low, historically really low. And you know, that's, um, that's an interesting thing. I mean, because, uh, what that means, I mean, you like talking about property, but yeah. What that means is that, um, the property market's taking off again. Yeah. As a result of those two rate cuts in, uh, June and July. And you know, if there are another couple of more rate cuts. And the other thing that I, I mean the other thing to say about that is that the lower the starting point of the cash, right? Um, the bigger the percentage reduction portion, the bigger the proportion reduction in borrowing costs. Yeah. So the cash rate cut from one and a half to 1% was a 33% reduction before the GFC. The average, uh, cash rate for a decade or two before the GFC was over 6%. And so every time they'd cash, right move by quarter of a percent, it was like a 5% change. Yeah. But now it's like 33% huge change. And what's actually happening now as well as it is the bank servicing

Chris: the way that they, how much though money they'll lend you is based on the interest rate. So the further rights go down, the more you can borrow. Um, you know, that's the way that APRA changed are rules. So not only we're getting lower rates, but now we can borrow more. And so you kind of getting a double kick people are going, you can borrow more money at cheaper rates, so they're just going to go and spend it. And I guess that's the wire ease is that when right starts to rise one day. But you know, Japan have had no low rates for 30 years almost. How is the world gonna potentially get off this kind of sugar hit with low rates?

Alan: Oh, I think we're going to have it for a long time. I think there's a couple of reasons that are a few reasons for what's going on, um, that aren't going away in a hurry. One of them is technology and the fact that, um, a technology is driving process down removing company's ability to raise their prices. Um, it's, it's a, uh, commonly called zero marginal costs. That is to say the extra product. If Facebook's extra pages of Facebook, uh, cost nothing. Um, yeah, a extra extra power from a solar farm has a zero marginal cost. So all these products now, because they are digital or you know, um, uh, renewable energy, our, um, a zero cost, uh, the fundamentally the cost of building the farm is there. But once you've built it, it's sunk. And so the cost of providing the electricity then becomes there. So what we're finding is last week for example, um, there were two days on which for six hours, ah, power prices into the national electricity market were negative. So companies were paying to put their power to put their power in. So, um, prices are being driven down all over the place.

Chris: And robotics and things like that are come into it as well. You know, wrote robot can go 24, seven, you're not going to have to pay his wage once.

Alan: That's right. And it's not just companies that are having their pricing power removed, its labor workers can't get away dryers. Um, partly because they're being replaced by robots or algorithms. And so, uh, that's a really important part of what's, what's going on.

Chris: Does that worry you for, you know, people of younger generations. Do you think that or do you think that, you know, there's an argument, two arguments. One person says, Oh, you know, we're gonna lose 40% of jobs and then the more optimistic half full person says, well, we'll replace that with more jobs. What's your thoughts on that kind of, yeah, the future economy. Is it, does it worry you or do you think that we adapt as humans that we will, T.

Alan: That worries me a lot. Excellent. What is real, real luck? I mean, everyone, a lot of people say the optimists say, yeah, yeah, it'll be fine. You know, we've had a technology revolutions before. Look at the industrial revolution. We all got through it. That's fine. Uh, I, we did get through, obviously the life went on after the industrial revolution, but there was, there was a long period of time in the 19th century where a lot of people were really poor and I didn't have jobs. I mean, there was a lot of hardship caused by the industrial revolution, um, which we eventually got through. Um, so look, I think it's possible that there will be a lot of hardship. I don't quite know how it's gonna work in. Um, I am worried about that.

Chris: But I mean, a lot of people think I'm Australia is the lucky country because we have had, you know, 20 odd years of outer recession and it's beautiful. It's great lifestyle. Are we really the lucky country or is it just that we're in this kind of bubble as well where we haven't had, you know, severe traumatic event? I guess

Alan: that a phrase that was coined by Donald Horn in the book by that name was ironic. Excellent. It wasn't, it didn't mean that we're lucky, right? We think we're lucky.

Chris: Well, Bernard Salt said isn't it the avocado time's like not got taken out of context.

Alan: Now look, I suppose the, the luckiness is that we're a big country, um, which means we've got o w there's a lot of resources in the ground where, you know, like, we're not like Japan or Thailand or something where we haven't got much. We've got tons of resources. So it means that, you know, we, we, uh, we can keep digging them up, but the trouble is that these days, especially these days, those resources industries aren't creating a lot of jobs. You know, all of the mines thought all the iron ore mines that are sort of supporting the country and paying all the taxes that are supporting the budget and taking the budget in the surplus. That's all fine. Uh, but there's no people in them anymore. They're all robots. The trucks are being driven from Perth by somebody in a screen. Uh, you know, sitting in front of the screen. All the trucks in the mines in Perth, in the Pillbra or I made, are driven from Perth. Yeah. Self-Driving. Yeah. Isn't that wild? That is so wild. The trains, the trucks, the whole mines have been run from Perth.

Veronica: So all that, that, you know, this, the cubs though, the fly in fly out so that basically, you know, all that double income, which is one of the reasons obviously Perth's property market suffering on a lawn mowing. Yeah. Yeah,

Alan: that's right. Because there's no jobs. I mean the last time there was put the last resources, boom Perth property market took off. Um, now the property, the Perth property market is, it's been languishing for ages and the lack of jobs in the mining industry is not allowing it to turn around. Even though the iron ore price has been high, the mining industry is going fine. Um, but the, the Perth property market is not. So it is a question of whether a Perth is a, good place to buy property. Yes, it's low. The prices are cheap.

Chris: Yeah, it doesn't rain. It's going to go off.

Veronica: Doesn't mean it's going to go up. Affordability argument doesn't it, that people who can't afford body say investment in Sydney and Melbourne and say, Oh, I'm going to bomb Perth because it's affordable. It's like, yes, there's a good reason for that. And why are you investing in the first place which you want to return. And it could be back in the negative returns back into a...

Chris: you said construction a though. Um, what's, you know, cause obviously the mining industries having a bit of a struggle, the construction industry though has had it pretty good. How do you see that playing out? Because it's not looking as positive in the years to come,

Alan: well the construction industry has had, as you say, has had a good time. Um, ah, it's weakened this year. It's coming off now. There's been a, you know, there's kind of enough apartments for the time being, um, of the construction industry is basically has been a function of the population growth in 2006 our pop, our immigration levels, um, doubled, uh, John Howard basically doubled immigration. Uh, that's been persisted ever since. So, you know, we're now bringing in a couple, 100,000 people a year instead of a hundred, all less than a hundred. And so, uh, they have to be accommodated. And the problem is that, you know, and they have been accommodated, you know, like there's been a huge boom in construction of apartments in particular in Melbourne, Sydney and Brisbane. Huge and Brisbane. Huge boom, massive. Um, problem is that, um, it's, it's not as easy to build roads because the GAM, the governments Pifer that private sector has been building the apartments and they've been cleaning up. Government has to build the roads and we don't yet. And so the roads are all full and we can't get around. It's terrible. So that, and that's contributing to a low productivity .

Veronica: It's all interlinked. It's mind blowing.

Chris: but I mean if got this much money in the construction industry, but you're right, if we can't keep the people around, then the people get a bit annoyed because there's congestion and they've got to build the roads. But now it's a bit too late because they've already got the people here.

Speaker 3: Yeah. And then it becomes an election issue. The population growth and then the pressures on the government. So should reduce the population growth and then then that's got a knock on effect too, right?

Alan: Yeah. So we have enough apartments, more or less. I mean all the wrongs I have, so I have to keep, but I have to keep building the apartments because the popular, the cause, the immigration is going to continue. Um, so I don't think the construction industry is going to go through some sort of a big bust,

Veronica: Although there are issues there. I mean, obviously there's been, you know, slow down of approvals. There's been the, the confidence amongst the buying population in terms of buying apartments, you know, because of all the well publicized failure of individual buildings. Um, but also the, the settlement risk, you know, at a term that probably didn't exist a couple of years ago. Um, so, and there's now more or better publicized that that apartments are, well, it's certainly in Melbourne and Brisbane and probably heading to Sydney more likely to lose money over a 10 year period than gain money in terms of value. So there's a lot of issues there that can if people we spawned as you would think a sensible person might respond, is gonna take away demand for new apartments despite the fact that, that people need houses.

Alan: I think that the, um, uh, the, the, the construction problems, you know, the things that have been published, uh, publicized about cracks and all that stuff to the bad building, um, the bad building practices I think has been really damaging for the industry. And so it has turned people off buying apartments quite rightly. And sensibly. I mean, I don't think you should buy off the plan. I think it's a bad idea. Um, you know, uh, buying off the plan means you, you're by you, you're paying someone's cost plus margin, you know, you're not paying the match market price. You should pay market price, not cost plus.

Veronica: No, no, it's nuts, isn't it?

Alan: Well, and so, so that's, I think there's, there's a bit of dialing back of buying off the plan, rightly so. Um, so I, you know, as to how, how it goes from here, I'm not sure. I, I mean, I think, and that leads to settlement risk and we talk about settlement risk that we're talking about people who commit to buying off the plan, pay a deposit, and then don't cough up the, um, the settlement price.

New Speaker: Well because, oh, the evaluations coming lower as well, you know, because they're actually worth less than what they were. The you know, the prostate, they agreed.

Chris: Especially if they're falling down.

Veronica: Yeah, there's a bit of a problem, although weirdly enough, they haven't fallen down before settling none of these buildings. So the people carrying the can effectively are the individual buyers, you know,

Chris: the greatest and dream you've seen it, you know, I've been around for a few years. Um, you've seen it changed over the years as well. Where do you see that the greatest trying dream going for, you know, younger generations?

Alan: I saw a chart this week of, um, of finance approvals, housing, finance approvals, and um, uh, the first time buyer line was the highest it's been for a very long time. Yeah. It was actually just about touching the investor line.

Veronica: really, because that doesn't often happen, does it?

Alan: No. So the investor investment, a finance is well down. Um, it's up a bit, went up a bit in the latest month, but, um, so firsthand buyers are back in the market. Um, you know, I think that the dream of owning a house is a real, I mean, people are still in it. Uh, first time buyers, uh, are in there now because the houses are more, more affordable.

Veronica: And do you mean houses as in housing?

Alan: As in dwellings I suppose. I guess. I mean, uh, W W it's true that there's lot more apartments now. People are living in apartments more than I, and I used to mainly because they have to, I guess.

Chris: And you see a lot of what's, you know, what's probably has had a great run for say 20-30 years. But do you see that, you know, a lot of people believe, you know, probably doubles every seven or 10 years or they, you know, they can just buy a property and you know, it all goes up. What's your view on the growth of property and what we've seen over the last 30 years and you know, where things go in the future?

Alan: Well, we've learned over the last two years that probably doesn't always go up. It comes down, right? So last couple of years, property prices have come down by 10% or so. Um, and that's kind of par for the course, you know, there's every decade or so there's a correction of 10% or so in the market and you know, that's what you have to expect. Um, the best time to buy is at the end of a 10% correction. Um, you know, we haven't had in Australia in my memory, a 30% correction of the sort that America had in 2007-8 when American house prices fell by 30 to 35% across the country.

Chris: Um, and lots of other countries as well. Ireland Spain, England, right.

Alan: So, you know, we haven't had that. Um, a lot of people were looking at the, you know, the start of the downturn in Australia, uh, 2016 and 17 and said, oh, we're going to have that here and I did so high, we're definitely going to have a big crash. And a few kind of, well publicized predictions occurred or 30 to 40%. Yeah, that's right. Yeah. So they didn't happen or at least haven't happened yet. The market seems to have bottomed. Seems to have started rising again. And it's certainly been the case that the regulators both APRA and the Reserve Bank, uh, intent on making the housing market go up.

Chris: Why do you think that is? Cause I obviously I completely agree that, you know, property is too big to fail, but why do you think that everyone is so invested in propping up the housing market?

Veronica: Not just that going up is different because, you know, we had this sort of, the prudential measures that they caught the ended the boom, the bubbles supposedly, which needed to happen. I think the pendulum was far too much in one direction. But why is it seem to be going again in that same direction?

Alan: Well, because they're frightened of having a recession. I think that they have a decided to abolish recessions. Um, well you don't have it on your watch.

Chris: Do you don't want to be the first prime minister in 20 odd years.

Alan: Probably the one that caused the recession. But it is, it is worth noting that the last recession was caused by the Reserve Bank. It actually was deliberate.

Veronica: Yeah. The recession we had to have.

Alan: It was, it was indeed the recession. We had to have Paul Keating did it they put up interest rates in 1989 in order to, okay. Basically in order to have a recession, the recession, the recession before that in the early eighties was also caused by the Reserve Bank. I mean, central banks in the past, I've always caused recessions, but now they're doing anything to avoid it. And they were frightened that if the property market kept falling, there'd be a recession, so they had to stop the fall. The other reason I think that they've, they're operating in the property market is because nothing else is responding. I mean, they've cut, they've been cutting interest rates for eight years. They've cut interest rate 14 times in a row. Wow. Um, you know, they've come down from, um, four of four and three quarters to 1%. I mean like nothing's, happening, the economy's still weakening, you know, in terms of consumer spending, a wage growth, employment, unemployment is 5.2. It's not that terrible, but it's not coming down there so they can't get anything else to move. So they're trying to get the, um, they're trying to make the economy start up again using the property market. Cause that's the only thing they can actually have an impact on.

Chris: Well, they're trying to do a lot of infrastructure as well, but yeah, there's only so much they can do. Right. You know, they're trying to do roads and trains.

Alan: The infrastructure is just catching up to the population growth as we've talked about before.

Chris: I mean, it's not trying to create more productivity too much.

Alan: No, I mean it's quite even a, as busy on topic. But it is true. I mean, if you look at the, uh, June, uh, so the, the most recent, um, uh, GDP numbers, national accounts came out last week for the June quarter. The June quarter GDP increase was half a percent. Right? Uh, the contribution to that from government spending was half a percent. So, uh, it was really to a large extent, about government spending. So the, the, you know, the, the airport that's measured by GDP is all about government spending on, on the infrastructure stuff. But the really, in my view is just to catch up.

Veronica: But there's no leverage from that. It's like you get what you give by the sounds of it. There's no, like you say,

Chris: Where's the here's a limit. You can't keep, I can't do 5% of GDP spending because yeah. That isn't got that money. Or they've got the, you know, the ability to do that.

Veronica: So it's not returning greater than the input.

Alan: No, that's right. And, uh, when, when it stops, it stops. That's it. And so government spending comes and goes, um, you know, I'm in the going to have to the, they're going to have to keep building railways and keep building roads, uh, as they have been doing. So the government spending will, will be very tightened. And of course, um,

Chris: what's the next sugar hit? So rates go from one down to half a percent now, because we don't know what the lower bland is. It could be hops, it could be zero. We just don't know. But let's say it goes to the lowest possible at some point though. Yeah. The bank's not going to pass it on anyway, so it's going to run out of steam.

Alan: You synich you ?

Chris: Surprisingly I say passed on a lot more in the last two cuts then everyone thought they would, you know. Um, from a broking point of view we were thinking maybe 20 basis points of the 50, but I didn't almost 30, 35 40. So there was actually much more and um, but I mean at some point they can't do it anymore. What do you think the next sugar hits? Cause no one would want to have that recession. So what do you think their next thing they'll do?

Alan: I think we're off sugar for a while. Yeah. Isn't that a sugar hits her over? There's no, I mean it's basically what we've got for a long time. I think we were in for a long period of time of low growth, low inflation, low growth, low interest rates. We're going to have to get used to low growth.

Veronica: Well, the definition of a recession is?

Alan: two quarters of negative growth, salaries to side contraction. Uh, I don't think we're gonna have that either. I don't think we're in for recession, but don't think we're in for boom.

Chris: So the elephant in the room is 100% for you.

Veronica: The reason that Chris and I do this podcast is because we passionately believe that property buyers can do it better. We really want to help all of you understand all the risks, but also the ways in which you can avoid your elephant making the decisions.

Chris: But what we would love for you to do is just to share this episode and share other episodes with people around you that are going through the property process. Just by you sharing our episodes, you're really helping.

Veronica: Give us a review on iTunes. Five Star please would be very appreciated because this is about making sure that we all benefit from the wonderful information that our guests have been sharing with us.

Chris: In Saying that that around, um, low growth, but are we already in a recession? Technically, if we weren't importing people because from a GDP per capita basis, we are, do you think that that's, you know, the only way that we're going to keep the economy growing is we keep importing kind of people. We keep, you know, selling university, we keep getting tourism on the back of that importing people. Do you think that's really the only option for the government right now is to keep upping immigration?

Alan: That's been the case for awhile. That the only growth, the only GDP growth as being coming from a population growth, the, the, the GDP growth for the latest 12 months was 1.4%. Population growth was 1.6%. So, uh, per capita GDP is kind of either flat or slightly negative. Um, no people talk about it per capita recession. But the thing is that, you know, w w the way we define a recession is two quarters of actual overall real GDP going down. And that's not going to happen. So there won't be a recession. Uh, it'll be a little, probably feel like one to a lot of people.

Chris: And so for younger generations, cause you know, a lot of people haven't seen and that they only know what they know, right. So then you know what they've gone through. So a lot of people in their 20s, um, probably don't remember the JFC. I was in London when the GFC happened. So I've gotten a bit of an experience of witnessing what happens when a recession hits and businesses shut down and unemployment and, you know, and the whole psychology of that. What would be some of the advice you would give though to the younger generation if we're going to these low growth world? What are some of the things that you should be doing to prepare themselves? Are this new world?

Alan: Um, well, I mean, it's all about jobs. I mean, in a recession, if you keep your job, you're fine. Hmm. Kinda, that's what it's about really. Um, because generally what happens in a recession is as your side businesses closed, prices come down. Um, you know, uh, unemployment goes up, the last recession in Australia or unemployment got to 11%, you know, which is kind of double what it is now. Um, uh, as long as you keep your job, you're okay. So the answer is keep your job. That's the main thing to do in a recession obviously is not always possible you get laid off.

Chris: But I mean, I think that's it. A lot of millennials probably believe it. They'll always have a job because they've just, you know, cause they've come out of uni, they've got a job and things like that. And you know, I don't think a lot of people really ever consider that they will lose their job.

Veronica: I thought millenials were more pessimistic than that?

Alan: Well, you know, maybe they, maybe they are pesimistic but they think they'll keep their job. I don't know.

Veronica: Yeah, I mean, isn't it the sort of the thing about the future worth it? It's about reinventing what the jobs look like.

Chris: And I don't think anyone reinvents unless you're forced to re-invent, you know, until you've actually lost your job and then you're like, Oh God, I actually didn't think that would happen. And then now I've got to go get a new job. You know, it's very, I think people are very, it takes them a while for them to actually sink in, that they should be doing things for their future, I guess.

Alan: Well, you should certainly be thinking about the job you're in and to try to ensure that it's a job that's relatively defensible. Um, there's not just gonna Disappear.

Veronica: You make a positive contribution to your employer. The employment doesn't disappear as well.

Alan: I mean, you know, precisely. Yeah. Yeah. So I mean, I think that's the number one thing. I mean, most people, obviously everyone's saving superannuation, doing superannuation, nine a hundred percent of salary going into a fund, a for most people, young people, 20s and 30s and forties, um, you're not really in control of that. The money's just invest invested by the Fund and you to hope that that works out. Okay. Um, uh, if you can afford it, you've got to bit a spare cash and you can, um, negatively gear a property, then fine, go do that and now's a good time.

Veronica: Although with Low interest rates. That's not going to be so lucrative is it as in, in terms of the, well it's not that you'd never buy for tax reasons, let's face it, but, but you know, your actual, um, deductions. So that's really their passions. As you say. It's all about the tax.

Alan: It's really about the capital gain. But um, and there is a good time to do that if somebody can afford to confirm to fund the loss, um, which you have to do. Even if you get a texted us, you know, fun. Um, if you can afford to fund the loss then probably, uh, that's good. That's a good idea to supplement your super.

Chris: Yeah. A lot of the older generation right now. Are they're a bit upset because cash rates are so low. Um, but then they think, well what else do I do with it? I don't want to put into shares cause you know, the share market, it's expensive. Uh, and then I worry about bonds because bonds are all very, highly priced. How do you think a lot of, you know, what sort of things that should they be thinking about in terms of, um, you know, how do I actually, how do they actually play it? Cause they just got this money sitting in the bank and they're like, what do I do with things? It's just, there's not many, many options for this.

Alan: That's the thing about monetary policy, the Reserve Bank strategy is all about oppressing those who rely on savings. Um, and benefiting those who borrow. It's about transferring wealth from savers to borrowers. That's kind of what they try to do. And the savers are in strife, no doubt about it. You know, you're getting, you're getting oppressed. Um, uh, I think what the RBA is trying to do is make this to force you to um, to buy shares really. Um, and the, the average, uh, dividend yield on the stock market is about four and a half percent. So you are getting, you know, and there are quite a good lot of good companies. You know, you can buy banks, transurban a good solid companies that'll pay dividends. The share prices might fall 10 to 20% over the next 12 months for some reason. You know, there's corrections in the share market happen all the time, but your income is reasonably secure. So I do think, um, people who rely on, you know, income for them, uh, you know, from their capital, from their savings should look at the share market that, you know, they shouldn't sit there in the bank. Getting 1.5% nt that's really a train to know where.

Chris: I think the challenge with that, I think it's they go and do that. But yeah, that's reliant on the company still paying out the income. Right. And so, um, and then that's kind of unproductive for our country a lot of the time because you know, instead of the company keeping the profits and reinvesting and creating more production and you know, et Cetera, et, what the companies incentivize to do is just to keep on paying income cause that's what's holding its share price up. So I feel like we're, we're, we're screwing over the savers so they go and buy the shares, but the show, the share investors just want income. And so that would screwing over our economy getting, that's kind of makes sense. Or is it,

Alan: look, the average payout ratio of profits is around about 70%. It's higher than in Australia than elsewhere in the world. That's true. Companies are disgorging more of their profits to shareholders, but it's not like, it's not terrible. It's okay. And Anyway, um, people who are relying on income to fund their savings, um, shouldn't really worry too much about the economy. Yeah. I mean, you know, you just need to, you just need to make some money to live on.

Chris: Yeah. I know you said sorry. I mean a lot of the older generation shouldn't be, can cause, I mean they, they're still never tired. Right. And they just want the income.

Alan: Yeah. So it's a question of do you go for money in the bank or do you buy some shares? I say, you know, yes. Okay. Use the money in the bank to some extent, but really you need to get your income up. Um, and uh, buy shares you know, like, uh, BHP is an income stock now. I mean, it's, it's fine. Good company.

Chris: It's funny you say that around the older generation not needing to care about the economy. I kind of feel like that, um, every election time that comes around though, because you know, a lot of older generations are growing part of our election base advice and um, what they are kind of, they're not really too concerned about the economy sometimes because you know, they just want to get their income. They've retired. Um, but they're a huge part of our voting base. How do you think that that problem is going to continue to apply out over the longer term?

Alan: I think that probably amazing dividend franking is not going to get abolished anytime. Um, the Labor party had a crack at that and failed. The trouble was having, you know, having, um, a whole lot of policies as the lead party did. They had, you know, policies as long as your arm, you don't know which one was the one that lost in the election. Maybe it was all of them sort of lumped together. It was too many. But the trouble is,

Veronica: well we got that compared to a three word slogan, you know, I want to dumb it down and I want to choose the easy way. And then there's the three word slogan is surprisingly compelling.

Alan: Exactly. And so the Labor party stuffed it up. Um, but I think it means that, you know, dividend franking is going to stick around for a while.

Veronica: The thing is with that though, will you agree with it or disagree with it, is that it's not just the oldies who are living off it. It's the fact that they also spoke to their kids and they were influenced as well. So I've anecdotally spoken to a lot of people whose parents have been benefiting from that for years and they voted accordingly. So even though it's not them particularly, so it's not just, you know, they're growing older population. It's also the kids are that other older population and feeling that their parents had been hard done by

Chris: well also the kids know that they're going to have to cough up.

Alan: Yeah. The parents. So the parents are down, parents are down by $20,000 a year. That's hard. You know, the kids might have to choose one to cough up. [inaudible] go to granny flat, whatever. That's true.

Chris: And so the, um, the property market condo is a bit of a high clearance rates at the moment and you know, a lot of hype at the market's kind of coming back. What's your thoughts on kind of where things are kind of coming in the next, obviously there's very low stock. What are you thinking we actually out of that, out of the kind of the downturn? Or do you think that there's things that people aren't thinking about that could happen? Like global recession, all sorts of things?

Alan: Oh, well, if there's a global recession, all bets are off, but I don't think there will be one. Uh, I think the property market has bottomed. Um, uh, will there be another boom? Well, I wasn't, I wasn't thinking that, but you know, look, it's looking pretty hot at the moment. It is true that as the spring develops, a lot more stock will come onto the market and there'll be tested to much greater extent than it has been. Um, and you know, we'll let stock get sucked up on it. No, I mean I think probably the thing are moderate. I'd say the market or moderate to some extent you might. Yeah, you won't see, I mean the, the risers in Melbourne and Sydney in August, were 1.6 and 1.4% for the month. That's huge. Multiply that by 12 and yeah, really. So I don't think that's going to continue at all. I think probably come back to half percent but that's fine. I mean

Veronica: I think it was probably a of how it went a little bit below, you know, sort of went too far and then it's slight correction. I can't see it continue at that, at that level at all either. Well because individual, you know, anecdotally as well, I'm dealing with buyers all the time and they pulled out of the market because they feel it was overheated so there were the Murray reentering it now because they feel like they got an opportunity, they'll pull out a game if they feel it's overheated again.

Chris: Yeah. A lot of first time buyers are entering. And that's the, as you can see on your stats that you know, a lot of hot first and buyers, Angie, there's so much pent up demand or first time buyers that bought apartments because they were forced to because they couldn't afford a house and now the kids are a bit older or they've got more cash and now they're wanting to buy houses. So I think there is so much pent up demand. That's what's entering the market now with very little stock.

Veronica: Also only so much stock. Exactly. That appeals or applies to the first time buyer. So yeah, it's going to be interesting how that, yeah, the fuel underneath the pot so to speak.

Alan: Yeah. The, but w what might change matters is if, uh, the interest rates are cut again from 1% to half percent now, uh, how much of that gets passed on or some will, um, I mean that that cut in the cash rate is a 50% reduction in borrowing costs from one to half percent. The, um, I think the average mortgage variable mortgage rate is around about 3.1%. Now there's quite a few lenders who are lending with a two in front of a 2.9 2.85%. Um, uh, so will that come down by half percent? Possibly both a third. So that's 3% 3% comes down by 30 basis points. It's a 10% reduction in borrowing costs that will spur things on.

Chris: I think what's happening now is that, uh, yeah, in 2014, 15 the investor costs went up a lot more because they're all the same rate. And then investors went up. My is didn't go up that much. And then the interest only, Kat basically forced the banks to lift interest only rates a lot higher as well. So those double things really hit the investors and that's where they targeted. But what we're saying now in the last two or three months is the, the investor rights are really starting to drop a lot faster than the homeowner rights. Um, and so, you know, because it's trying to get investors into the market. Yeah. And so what we're actually saying, even though the RBA rates only cutting half a basis, uh, you know, 50 basis points the investor rights for and a lot more than that, you know, might've even a full 70 or 80 basis points.

Chris: So we're starting to get real like investment interest only rates around 3.5% for five years. And so at some point investors are going to be like, this is a risk free bet. Um, almost cause I can get a three, 4% yield, um, and I can go interest only for five years. So I think that's when you will start to really see the markers and you get the whole boom like scenario where you've got investors and um, you know, home buyers competing. Um, I guess the, you know, no worry about negative gearing going for the short term.

Alan: Yeah. Well, so you're talking the market up, that could be a bit of a spike next year.

Chris: Yeah. Well I think there's, you know, not all across all properties, right? So not, um, things that are traditionally bought by investors like apartments and high rises, et Cetera. I think investors in now finally switched on the read the AFR or the Australian enough, um, to realize that they shouldn't buy apartments. And that's where investors have generally gone. So though by old apartments, but that's what the home buyers want. Um, although by houses and that's what home buyers wants. So those type of properties, yes. But the new stuff, um,

Chris: not so much because maybe there'll be a two tier market old. Oh yeah. Right.

Speaker 2: Then maybe we'll exacerbate it, but what can we one back to, why did the central, why was the need for APRA to slow things down back then?

Speaker 4: Cause I got a bit too hot. Yeah. They were worried about the market getting overheated and um, and crashing. And so now we've back where we started.

Alan: What they did then was they stopped, they prevented the crash. And I think that was tremendously successful. I mean, it was, it was fair. It was magnificent policy really. It was great. I mean, the way they, the way they chewed the market, they really, it was one of the best applications of policy I've ever seen. The way they did that. And then you've really gotta hand it to APRA. Um, because at the time the Reserve Bank was just sitting there on his hands with, you know, interest rates at one and a half percent for basically for about three years. Um, and so they were doing nothing and they weren't putting our rates up. They couldn't really, they, they were scared of causing a recession. So what APRA did was they just tuned the market and I went back the interest only lending to investors and all that stuff and it was just magnificent. I thought. Um, and then they've, now they've just chewed back the other way. It's, I've never seen, I've never really seen, I've been hanging around this, this area for 40 years. And I'll tell you what, I've never seen it so finely tuned.

Chris: Well they went for the right things cause I didn't want to increase interest rates on homeowners because homeowners are struggling. We don't want to increase rights. But there's too much hate in the market. Mainly investors because investors were more than home buyers in the market. So they went for the investors.

Alan: And they, and that's right. They targeted it in a way. And so they talked about macro prudential and all that stuff has been that the catch froze, but it wasn't that macro really. It was micro.

Chris: Yeah. So that hit the investors with three things, eat them, you know, one interest only rates up to, it's very hard to get interest. Only then I increased their investment rights and that smashed their, their servicing. And then finally they went into the bank's policy and said, right, they way you are lending money to investors it isn't really fair. I can borrow 10 times salary where home buyer can only borrow six. So now under these new calculator you've got to use, and at all the banks use it, you can only borrow six times salary. So anyone who's going to invest can't borrow anywhere near as much. And so they did says, sorry, so well, but then you get to the election wanting it back though.

Veronica: So, so all of those measures, what is going be retained?

Chris: Well, they, they also said to the banks, you've got to use a minimum servicing of 7% on your mortgages. So even though rates were three, 4% they said you need a buffer. Yeah. They've now just said it's can be 5.5% which is much lower than the 7% well that's good as the 2% on top of, yeah. Two and a half percent on top of 3% let's say. Um, you know, I don't think they can go any further now. So they probably have used that sugar.

Alan: They don't need to go any further. Yeah, that's right. That's fine. Yeah, exactly.

Veronica: the point I'm trying to make, or the question I have, does anyone have an answer? Is that are they going to just relax all the restrictions that are placed on investors? Are they relaxing everything? In which case it's just going to happen again.

Alan: I think APRAA now got this great sense of power. I think they feel strong. You know, they just, they're not gonna stop that. Or they'll, they'll keep, they'll keep the hands on the levers.

Veronica: Yeah. Yeah. It's right before you cannot really,

Alan: so then how would they know what to do now? I think that the, this last 12 to one or two years has been tremendously a significant learning experience for APRA and I think they've kind of learned a lot.

Veronica: So for investor's point of view then, so should we be looking for opportunities wherever APRA has eased things a bit quick, jumping in and get your interest, rate your interest free, whatever you want to lock in and then, and then, and then just watch for them. Just dive out again or they should do the opposite. They should actually, if they'd been smart in terms of timing, they should wait until APRA does the a e does the, um, the tightening up of the, the screws again and then they get in and buy.

Alan: Yeah, I think that's the time. Yeah. No. Tell them about the present.

Chris: The problem is if they tighten the screws, they might tighten it for inch. Totally. They might tighten for investors again, but they don't really want to tighten it for homeowners because they really need first time buyers is the demand that's keeps, you know, investors. Yeah. It's easy to target investors because you know, no one gets upset if you're talking to the investors. We could talk at home buyers, you know, that's not right. They'll probably be do things, but the investors aren't there anyway. They're only just starting to consider coming back into the market. So there's no need to slow them down for a long time. Um, I mean, I guess so you're constantly investor and you know, done a lot of our new investment space around kind of picking companies and things like that. How much do you think behavioral finance plays into the psychology of investing and you know, and how do people basically stuff it up because there's so many biases that we have that when we go and try to invest, we know I get affected by?

Alan: um, well I didn't really know what you mean by behavioral finance. I think the, you know, people are human beings there. They're in the, um, under the control of their emotions. Is that what you mean?

Chris: Yeah, just tell me, you know, something, some people will think that, you know, I can, I can maintain my emotions. I can go and buy a share and I know what I want, I want to sell it. I'll be able to being conscious and I'll be able to like at rational and I'll sell it at the right price and I'll, but if the market falls, what people do is naturally they sell, right? So you know that they fall for that. They fall for over confidence. They put all their shares flex often into super funds. You know, they've got a massive exposure to Australian shares and home buyers and then that share portfolio generally in the big banks and a couple of other companies. So they just invest in what they know. So that's another bias. So how do you think that these play out? Um, where a lot of investors, you know, don't know what they're doing, but they believe that they do, I guess.

Alan: Uh, well, you know, the best thing is to, is to try not to be subject to your emotions. And definitely, uh, I mean I think that if you ask me what people should do is, I think dollar cost averaging is a good way to go. Just kind of putting a small amount into the market, uh, into particularly a fixed cost, uh, item asset, um, regularly every month or every quarter or something like that. And that kind of tends to overcome the emotion of kind of buying at the top and selling at the bottom. That's really how people as a discipline approach. Well, yeah, I mean, look, yeah, I mean, it is important to be disciplined and not to buy the top and sell at the bottom. Let's kind of have most people lose their money

Chris: every week we hear incredible stories of the dumb things, property buyers do, dumb things that end up costing a whole lot of money and, or a whole lot of stress, mistakes that can be avoided. Please, Alan, can you give us an example of a property dumbo? We can all learn what not to do from these stories?

Alan: Uh, th look, the thing that I've think that's really caught me out a couple of times now, or once especially is investing in companies that haven't made it through the valley of death yet. The Valley of death is where a startup has a great product or great service, but they haven't yet got a good business and they're burning cash and they need cash. And you know, even if you've got a good buyer, I invested in a business that had a fantastic product, which was a lighting, a smart lighting that cut, um, uh, warehouses and shopping centers, energy bills by 80% routinely. As soon as they install this product, the energy costs come down by 80%. Yeah, yeah, absolutely. No brainer. And I thought, right, that's fine. I put a fair bit of my hard earned in it and uh, didn't make it through the valley of death. Went broke, went to zero. Um, and that's kind of, I suppose the thing to watch, um, companies that burn cash often do make it, I mean, zero is a, is a, you know, eight or $9 billion business, but it's still burning cash. UBER is worth, I think, 150 billion in the, in the u s it's burning. It's burning millions and millions of dollars still. So that's, you know, it doesn't mean that you shouldn't invest in companies that burn cash, but, um, you have really know and believes that they're going to be able to make it the brake haven.

Chris: Yeah. It's like a good idea. It's not a business, right. But even a product isn't a business, right? Like it's even if you've got an amazing product, you still need to manage your sort of side of it. You need to be timing and aid, um, funding extension, a lot of 'em and I, I mean a lot of venture capital funds, um, you know, destroy businesses because you know, that they need to keep pumping up the price and you know, if it's not working for them, then they'll put their money elsewhere. And so you're right, like as that, it's usually a telling moment, I guess. And um, it's all about getting the right timing. Thank you.

Veronica: Thank you so much for coming in. So glad we got to talk a bit about negative interest rate environment as well.

Alan: Yeah. Thank you so much. I've enjoyed it. Thank you.

Veronica: We wanna make you better elephant riders and this week's elephant rider boot camp, is coming from Chris.

Speaker 2: So I think Alan spoke a lot about, um, well I asked him a question around, you know, what can you do for a recession? And he said, you know, the most important thing is keeping your job. And I think, um, you know, for a lot of our listeners is you always have to be thinking about your employment and you know, because if that does go for any reason, it's kind of the hardest time to get a job is when you haven't got a job as well. So that's your buffer, if you're going to go and invest and you're going to, you know, have debt, the most important thing is you can always service that debt because you never want to have to sell those assets. So you should always be building buffers. A lot of clients have come to me and they've either resigned and they're gonna look for another job, or they have been made redundant. Um, and we can't get bank finance, you know, and that's the thing. So if you are, um, you've still got a job and you've got able to get access to equity, you really build your buffers while you can as well. So you should always be looking to refinance, pull out a bit of cash, keep it there as a buffer because you can only get that money when you've got a job.

Veronica: And when you're talking about buffers, you're talking about sort of making sure you've got an offset account and there's plenty of access to cash there to pay down mortgages while you are out of work or you're talking about a line of credit or what are you talking about? Some of the options that people could have to give themselves that it's effectively an insurance policy, isn't it?

Chris: Yeah. So in the past you could always refinance up to 80% on the value of your properties and release that money. Um, pretty much, dude, not many questions, right? The bank would just give it to you. You'd put that money in an offset account and then it was up to you what you did with it. You know, um, banks are coming down a lot on cash out because, you know, they know that people do this and they just, they don't get paid on that money unless you spend it. So they don't really want you to have $500,000 sitting there available.

Veronica: Well you wouldn't be able to do it if you didn't have a job either. Is that what you're saying?

Chris: Yeah. And so stuff while you're still employed, why are you still working? You know, I had a client just recently resigned and said, um, and I was like, well, you've just resigned. You're gonna start a business, but you should have come before you did that cause you had a high salary. Um, and then you could have gone and got built yourself a buffer and then if you did resign, you've got access to the money there to protect you. But it's too late now cause you haven't got a job. So you've really gotta be thinking, you know, always about your employment and your buffers. Um, and just be, you know, cause something does happen, you know, the business could go under, you could get a restructure and um, you know, that might be great, but it does change your lending situation

Veronica: so effectively it's sort of almost like financing yourself, isn't it? So if you've got equity in your property, which is where we always go on about capital growth, um, you've actually got equity that you could actually access that equity while you're still in employment, have it sitting there in an accessible form of some description so that if anything happens, you're still able to basically fund those investments or your own home until you get to the point where then your business starts making money or you get yourself another job.

Speaker 2: Yeah. So it looks like you've got access, you pull out $200,000, right in your monthly remortgage repayment is $5,000 a month and you've got these $2,000 sitting there, $200,000 sitting there. Well, you've got three years of mortgage repayments just sitting there. Well, no, but it's slightly increased cause yeah, potentially, yeah, there'd be some higher repayments. But you know, maybe it's two years or two and a half years.

Chris: But buying yourself a lot of time, a lot of time. But if you didn't have that 200 grand there and then you have to pay $5,000 a month and you haven't, well I've got to get a job. We've got to get a job out. Yeah. And I've got a sell. Um, so you know that just building that buffer, just having it sitting there. I mean, you do need the discipline to not spend that money. So that is part of the problem. Um, you know, but if you ha, if you are disciplined with the money, there isn't, you should always do it because when you want to do it easy when you might be able to get the money,

Veronica: Please join us for our next episode when we have a little bit of argy bargy with Brendan Coats from the Grattan Institute. When I say a little bit of argy bargy, we are talking about affordability. We are talking about tax reform. We're talking about some of the smart people that are trying to influence government policy around these areas. We even talk about my pet favorite, which is land tax. You better tune in and find out how the argument turned out.

Alan: Don't forget, we're on all the social channels. We're on Facebook, we're on Linkedin, we're on Twitter.

Veronica: Or you can connect with us on The links are all there for you. Please connect and send us a message. We'd love to hear from you until next week. Don't be a dumbo!

Veronica: Now remember, everything we talked about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent who will tailor and document their advice to your personal circumstances with a statement of advice.

Veronica Morgan