26 July 2022
How High Will Home Loan Rates Go? How Significant Will the Economic Fallout Be? When to Buy?
Bank fixed term home loans for 5 years are now being priced at 5 percent per annum. This is a clear sign regarding where banks expect variable rates to get to in the next 12 months.
Inevitably as interest rates rise, home prices fall—albeit there will always be the odd exception. Already the housing market is off its highs of late 2021 and Deutsche Bank is the latest to predict further falls of 15 percent year on year from 1 July 2022.
This is consistent with the increase in long term bond yields, a predictor of the direction of changes in bank interest rates, and with indications by both the US Federal Reserve (the Fed) and Australia’s Reserve bank that further interest rate increases are in the pipeline.
It is definitely not yet the time to buy/upgrade a home. Those contemplating buying will be best advised to wait 12 months while rising interest rates suppress house prices. Existing home owners wishing to upgrade will lessen their risk by selling first in a falling market. To do otherwise is to risk being caught with rising interest on a new debt while their existing house falls sharply in value waiting for a sale. This is the opposite strategy to that applicable in a rising market.
Searching For Value in The Share Market: Be Patient; Possible Tactics
The Australian share market fell by 10.2 percent in the year to 30 June and the outlook remains weak. It takes time for economic statistics to catch up, but there are indications that the USA may already have entered a recession. While the Australian economy appears to be stronger, there are worrying signs.
A tactic which works in falling markets is to place buy orders on good stocks at a discount to the current market and if prices fall, we automatically buy when the share price reaches that particular stock’s target. Naturally there is the risk that the price may not fall to that point or more unlikely that an unexpected bull market will emerge negating the strategy.
Rising home and business interest rates, rising bond yields and indications of increasing rates by the Fed and its reducing market liquidity by allowing its stock of government and corporate securities to mature rather than be rolled over are signs that reserve bankers are determined to force the suppression of inflation even at the expense of economic pain.
The large year-on-year falls on US stock markets, particularly the tech heavy NASDAQ exchange, are likely to be the harbinger of more falls to come. The odd day in which markets are up are typical of the occasional dead cat bounce rather than a turn around. Inevitably, share markets will reach a bottom but that time may be well into next year. Now is a time for keeping lots of cash in superannuation funds and reserve some of it by placing orders for selected stocks at prices, say, 10 percent below current market. Our own family superannuation fund is currently about two thirds invested in cash and bank hybrid securities issued by the four major trading banks and Macquarie Bank.
Carsales.Com Ltd are Raising Cash to Purchase the Remaining 51 Percent of US Business Trader Interactive Which It Does Not Yet Own
The acquisition is claimed to be earnings accretive by Carsales which has a proven history of making sound purchases of compatible businesses. For further information, look up Carsales via ASX 200 listing.
The Stupidity of ANZ’s Proposed Purchase of MYOB
MYOB was a growth business under founder and long-term CEO Craig Winkler but was taken over by a private equity raider and has since gone through two further changes of ownership. Under Craig Winkler, MYOB had impressive growth but recently has been unprofitable. More importantly Xero emerged about the time of the original private equity buy out of MYOB and had the foresight to bring Craig Winkler onto its board with other big names.
Xero has developed and bought in innovative products in the accounting and business services field winning a huge amount of market share off MYOB and far surpassing it in its penetration of the Australian accounting market. Xero’s strategy is to reinvest all of its earnings to grow market share in Australia, New Zealand, USA and Europe but in the fullness of time, when it reduces its search for growth, is likely to be very profitable. Xero has developed and purchased a suite of business services bolt-on applications. MYOB looks like yesterday’s business and Xero is today and tomorrow’s business. ANZ’s proposed purchase of MYOB has been widely criticized—indeed pilloried—by financial commentators as a particularly misguided acquisition. ANZ is arguably the worst managed of the major banks and its proposed MYOB acquisition looks like a desperate attempt by its management to pull a rabbit out of a hat. The price of $4 billion plus is double the price paid by the present private equity buyers the last time it changed hands in 2019. Xero increased its subscriber numbers in Australia by 20 percent in 2021 and by 22 percent in 2022 Financial years. It is likely that this was largely at the expense of MYOB. Readers should look up ZERO’s periodic announcements to the ASX indicating the net inflow of new customers in the last three years. The market reacted negatively to the announcement that ANZ was considering the purchase of MYOB. The fact that ANZ is apparently prepared to pay double what the present owners paid for MYOB three years ago when it has since been losing market share to Xero at a rapid rate suggests that ANZ management has too little respect for its shareholders money.
Purchase of Established Profitable Dental Practices Offers Long Term Advantages Over Employment, Particularly for Well Performed Dentists with Good Interpersonal Skills
The dentist who buys a practice and who conducts it roughly in line with average DEBDIT percentage and steady but not unusual growth in patient numbers inevitably ends up much better off financially than do dentists who spend their careers in corporate employment. The difference often amounts to millions of dollars of net worth by retirement.
1. A practice owner makes more per dollar of fees earned in their own surgery than would a dentist employed on a corporate contract.
2. The practice owner builds up the goodwill value of their practice which may be enhanced by employing other providers. The corporate employee does not.
3. Many practice owners purchase their own premises and improve them over time with most achieving impressive capital growth over their period of ownership. The corporate employee lacks this opportunity.
4. Many practice owners are able to employ a spouse within fairly generous ATO guidelines or in many cases share ownership with their spouse. The corporate employee/contractor cannot. They also make superannuation payments on behalf of their spouse and consequently usually have far bigger superannuation funds at retirement.
5. At eventual sale for retirement, the dental practice goodwill and the premises usually fall within the parameters governing the small business capital gains tax concessions for sale of active business assets. This is a significant advantage compared to sale of non-active business investments.
6. A practice owner has autonomy over the streaming of patients to their own surgery and the mix of dental work they choose to concentrate on. A corporate employee lacks this control.
The above offers significant reasons why corporate ownership of practices is much lower in Australia than in the USA.
Why Establishing New Veterinary Practices Near Existing Large Corporate Practices is a Recipe for Long Term Success
A number of veterinary sources are indicating that veterinary corporates are experiencing major staffing disruptions with clinics unable to fill veterinary rosters and being placed on bypass. Where Vets choose to open clinics as near as possible to large corporate practices and are prepared to work hard, preferably in partnerships, they gain new clients quickly because of dissatisfaction with inconsistent availability of vets at the corporate practice including inability to bond with a vet of long-term choice. I wonder how private equity owners can on sell their aggregations profitably. Any organization considering a trade buy or a float onto the share market would need to do exhaustive due diligence on veterinary staffing and review relative performance of practices several years after purchase by the corporate to compare comparative results a year or two after former private owners have completed their contractual earn out obligations and retired. Over the years I observed many examples of vet practices being opened and operated successfully near large corporate practices.
Why Crypto Cannot Replace Major Currencies
· Its value fluctuates too widely to be a basis for contractual arrangements in the non-crypto economies. Whereas crypto promoters presented these currencies as being more stable than mainstream currencies, the reverse has proved to be the case and the very existence of a variety of crypto currencies is now under threat.
· Banks will not specify crypto payments on home mortgages.
· Employers cannot make employee PAYG tax payments to the ATO in crypto.
· There is insufficient regulation of crypto promoters, if any, and it is becoming a vehicle for massive wealth transfers from innocent ‘investors’ to Ponzi scheme promoters.
According to recent information there are now 10,000 crypto currencies which suggests the late stage of a speculative bubble reaching its climax prior to collapse. This reminds me of historical bubbles such as England’s South Sea Bubble which bankrupted many of the landed gentry.
The Biggest Bitcoin Heist
In August 2016 hackers penetrated Bitfinex currency exchange computers, changed the exchange’s daily withdrawal limit to 1 million bitcoins from 2500 and over the next 3 hours and 51 minutes stole 119,754 bitcoins—more than half the holding—which by 2021 were worth more than $US 8 billion.
Bitcoin exchanges have the job of keeping the cash and crypto sent by users safe but have consistently failed to do so. An exchange called Mt. Gox filed for bankruptcy in 2014 saying it had lost 7 percent of all bitcoins in existence!
Coincheck was robbed of $US 530 million in 2018.
Kucoin was hacked for $US 280Million in 2020.
Crypto-security company Chainanalysis indicated that a total of $ 3.2 billion USD was stolen during 2021. This is 100 times more than all the money stolen in bank robberies in an average year in the US.
Financial Success for Dentists
Financial Success for Dentists: Rules for How to Approach Your Dental Career sets out the key strategies which make dentists successful. It is specifically written for those dentists and dental specialists owning their own practices and for those aspiring to own practices. Among the topics included:
· Understand key practice valuation criteria.
· Learn how some dentists inadvertently reduce the value of their practice by $500,000
· Avoid long term errors when purchasing your practice.
There are many accountants, financial advisers, marketing consultants, web site designers and practice advisers who give advice from their particular disciplinary experience, but very few have the wider breadth of experience to define for their clients the key rules to follow to optimize their practice and their long-term financial outcomes. An otherwise competent financial adviser may have little understanding of what makes one practice much more successful than another. Many accountants have detailed knowledge of the taxation rules but cannot identify if a dental client has broached invisible barriers to practice growth or a threat to practice goodwill value.
I spent 33 years examining dental practice financial outcomes and reviewing the key strategies and decisions which separated successful Australian dental practices and practice owners from the less successful and this led to relevant conclusions and advice to dental practice owners.
A complete and comprehensive career guide for mature and aspiring dentists.
Based on real life situations and a lifetime of dealing with dental practice ownership outcomes this book is worthy of Text Book status for every dental teaching school.
—Merv Saultry, Founder Dental Innovations Network
To Obtain a Copy:
· Go to the Delany Foundation website at http://www.delanyfoundation.org.au
· Click on the Donations tab and make a donation of minimum $60. This is easiest by Mastercard or Visa.
· Email graham.george.middleton@gmail.com confirming that your donation has been made, as well as your name and mail address
· A copy of the book will be mailed directly to you
All production costs and mail costs are met by me personally, so all money donated goes to the Delany Foundation which contributes toward the running of schools in Ghana, Kenya and Papua New Guinea. Naturally donations above $60 are welcome.
The donation to obtain this publication will be the most cost-effective practice advice most dentists will ever receive.
Please Pass On
If you like these newsletters, please pass them on to colleagues. Past newsletters and articles in Australasian Dental magazine on business issues are at grahammiddleton.com. I can be contacted directly at graham.george.middleton@gmail.com
Independence And Disclosure
I am not a representative of any accounting practice, financial planning firm, business or marketing consultancy. I spent 33 years as a business and financial adviser to mainly dental, medical and veterinary specialist and general practitioners. Since I retired as a director of a financial services group, of which I had been a founder, on 30 June 2020, I am no longer licensed as an investment adviser. Readers should treat the above as general advice and take professional advice as required.
General Advice
I sold my interest in a financial services and accounting group on 30 June 2020 and have no intention of starting another financial services business. My website is now available at grahammiddleton.com.
Those who find my newsletters of value to them are asked to consider making a donation to the Delany Foundation, a registered charity which assists schools in Papua New Guinea, Ghana and Kenya. Delany Foundation c/- Holy Cross College, 517 Victoria Road Ryde NSW 2112.
Best wishes to all readers
Graham Middleton
