1 December 2024
Victoria’s high rise development plan will fail to get off the ground.
The financially near-destitute Victorian Government has trumpeted a plan to develop a large number of mid-level and high-rise apartment towers in what are termed “activity centers” of established suburbs. The plan cannot be achieved due to building costs. It sounds good until exposed to critical analysis as to why it is not going to happen. New apartments cost significantly more to build per meter than an equivalent new detached house.
Construction costs have risen so much that developers now need to sell apartments at the rate of $14,000 per square meter or more for a project to be feasible. This figure translates to a small new one-bedroom apartment costing around $650,000, a two-bedroom apartment of 70 square meters at nearly $1 million or a reasonably sized three-bedroom “family” apartment at about $1,500,000. These prices are beyond the means of most first home buyers and lower income earners.
The market is now heavily skewed toward premium, downsizer apartments with entry level units all but evaporating from sales. Construction of units in Melbourne has collapsed from about 25,000 per year in the mid 2010’s to about 4,000 per year presently. Previously higher numbers were driven by ‘off the plan’ sales to foreign investors in high rise towers augmented by local build to rent investors. Both have been driven from the market by government actions including rising land tax on rental properties. Developers can only source finance for high rise builds if they can achieve the proportion of ‘off the plan’ sales on binding contracts demanded by lenders. This is usually at least 70 percent pre-sales on binding contracts with a 10 percent deposit. This is now extraordinarily hard to achieve. Current builds are mainly restricted to satisfying cashed up downsizers. In essence the Victorian high rise apartment construction industry has collapsed. The plan to create vast amounts of new high-rise apartments in “activity hubs” across greater Melbourne appears to be unachievable.
Are we approaching the best time for first home buyers to purchase a home?
Assuming other factors are equal then it is a question of the best point in the interest rate cycle to make the purchase.
Worst time to buy.
The worst time to buy is when interest rates are at the very bottom of a Reserve Bank interest rate setting cycle and have only one direction to go—i.e. to increase. As interest rates increase, intending buyers find that banks set decreasing limits on the amount that they are prepared to lend and intending buyers are forced to have lower buying limits. As a consequence of interest rates increasing, house prices weaken (i.e. fall). This is not always apparent in the beginning as in the first instance some intending sellers withdraw properties from the market. Those who had bought at the bottom of the interest rate cycles suffer the pain of sharply increasing interest payments and the dismay of their houses falling in value. Real estate agents try to disguise the early part of a falling market saying that “they cannot get enough stock!”.
Best time to buy.
When signs point to interest rates being at or near their peak, as is the present situation, the housing market will have come off its peak with a proportion of sales being from owners unable to service their loans. When an interest rate peak lasts a number of months distressed property sales occur in increasing numbers. Distressed selling is not transparent as usually banks advise them quietly that it is best for them to place their house on the market while they still have control over their situation rather than hanging on with increasing loan arrears and facing a bank lender in possession situation. This is actually the point in the interest rate cycle where house prices are weakest and hence likely to be the best time to buy. We are at, or about at, that point now with most economic commentators viewing the current interest rates as being at their cyclical peak but likely to remain at the present height for six to twelve months.
Those who buy when interest rates are at or very near their peak have a real prospect of their new home appreciating in value if interest rates ease. Critically the present is a far better time to buy than was the point a couple of years ago with interest rates at the long-term low point. Many of those who bought when interest rates were lowest have been faced with thirteen successive interest rate increases if they had variable rate loans. If they had fixed their interest-rate they are confronted with huge increases in loan repayments as the fixed period ends. Banks are only prepared to offer fixed rate loans for limited periods. Some borrowers cannot afford to hold onto their homes and are forced sellers. Property is being forced onto the market.
The key issue.
In summary those who by at the bottom of the interest rate cycle experience increased loan payments and falling home prices.
Those who buy at the top of the interest rate cycle face stable loan repayments and often experience increasing home value.
Why, despite President Trump’s past personal behaviour, did voters support him in record numbers?
1. The economy.
In 1992 The then Democratic nominee for the presidency, Bill Clinton, made the telling observation of President George Bush Senior’s administration:
“it’s the economy stupid”.
In 2024 a majority of Americans placed concerns about economic conditions and border security at the forefront of their presidential choice and were prepared to overlook Trump’s character flaws.
2. Choice of Democrat candidate.
It was assumed that Joe Biden would be a one-term president who would pass the baton to a younger candidate in 2024. When he decided to contest the 2024 election it nullified the party’s primary selection process. When Biden’s senility could not be hidden it was too late to hold normal primaries. There were differences of opinion between party grandees, the Clintons and the Obamas. The Obamas wanted the party to have an abbreviated selection process during the party convention, the Clintons wanted to stick with Kamala Harris since she was already named on the ticket as Biden’s running mate and a large amount of donations already in the bank could be legally used toward financing her campaign but not by a new candidate. Circumstances led to her choice as presidential nominee when she was far from the best potential candidate compared to several Democratic governors of significant states. Nor did prominent Democrat politicians want to be the vice-presidential running mate to a lightweight candidate. The running mate chosen was not up to the task. Trump’s vice-presidential candidate performed strongly.
Harris was tied to the disastrous failure on immigration, demonstrated negligible grasp of economic issues and barely spoke of defense or international affairs. She was ill-prepared for the campaign. She beat Trump in their one debate, her one bright moment, but avoided media interviews. She failed to adequately address issues of primary concern to voters.
3. A resounding vote against gender and identity politicians.
Opinion polling revealed that voters decided that economic and border security worries were more important than gender and identity issues.
A large proportion of Latinos voted for Trump. Men strongly favored Trump as did white women. Black Americans voted for Harris but in reduced numbers.
Trump won all seven of the “swing” states and his victory was apparent early in the voting count. The Republicans also won control of the Senate, one third of which is elected each two years for a six-year term.
The Republicans have won the lower house, all seats of which are elected each two years. This tends to mean that the party of an incumbent president often loses control of the lower house at the mid-term elections. Hence Trump has his best chance of implementing proposed changes within the first two years of his presidency. The Republicans with a current senate majority of six and only one third of senators due for re-election at the next mid-terms may maintain control of the Senate.
Some of Trump’s cabinet choices are weird and it is likely that a couple may not be confirmed by the Senate, albeit a Republican controlled Senate. His initial nominee as attorney general has already been forced to withdraw his nomination.
4. Blue collar swapping places with professionals.
The traditional political groupings of the wealthier/professional groups of voters favoring the Republican Party and the blue collar/working class voters being Democratic Party adherents has largely been turned upside down.
This phenomenon is also visible in Australia with a proportion of traditional Labor voters switching places with traditional Liberal voters in significant numbers.
5. Weight of money negated
The Harris campaign garnered about a $1 billion of donations, substantially more than the Trump campaign but the Trump campaign made better use of internet connectivity. Trump’s campaign was effective at connecting with voters despite the media advertising of the Harris campaign being vastly greater. Trump’s campaign negated what had been touted as a superior Democrat door to door ground game with timely and effective messaging.
6. The bookies got it right
The betting markets leading toward the US election had Trump a clear favorite to win and they hardly wavered. Collectively, punters had a more accurate read on the election than did the pollsters.
Australian betting currently favors a Coalition victory at the coming election but is not yet sufficiently authoritative. Conventional wisdom currently points to a minority government result.
Investment choices for the largely disinterested
Some retirees are in the happy position of their superannuation pensions exceeding their financial need particularly where two partners each had a substantial superannuation balance prior to retirement. After an initial travel burst early in their retirement most choose a quieter life and a surplus accumulates in bank accounts earning low interest rates. Some gift a lot of it to their children. Others wonder what to do with it but don’t want the hassle of paying an investment adviser a substantial sum relative to the amount of cash to receive a lengthy, possibly A I generated, report telling them to invest in the advisers permitted range of investments. Nor do they realize that many advisers work under a franchised licensing system with the actual license holder restricted to an approved list of investments. If they sign an agreement with the adviser periodically, they will receive an advice, probably generated by A I to sell a particular stock and buy another giving the impression that their adviser is on the ball.
A possibly cheaper alternative strategy. Things an investment adviser probably will not tell you.
Simply purchase a limited selection of premium low management expense ratio (low MERs) exchange traded funds, a couple of long-established investment companies with very low MERs and the century old Washington Soul Pattinson Ltd which is a cross between an operating business and an investment company. Join the dividend reinvestment options, set and forget. Once per year your accountant can downgrade the data to complete your tax return. It is likely that the long-term results will be about as effective as engaging an adviser and making frequent changes to investments. Five possible investment choices are:
1. The Standard and Poors 500 Exchange traded fund (ETF) ASX code IVV, which is invested across the 500 largest stocks listed on the New York Stock Exchange and NASDAQ. Since many of these stocks are global in their operations this ETF covers many regions and there is no need to consider purchasing an array of smaller ETFs centered on various parts of the world. It negates the adviser mantra about not having too many eggs(stocks) in one basket. Stock brokers don’t cover it because it appeals to investors who buy and hold rather than those who trade actively. It has a very low internal MER compared to many managed investments.
2. The Vanguard US Total Market Shares Index Exchange traded fund ASX code VTS covers most of the same stocks as the Standard and Poors 500 above. Long term performance has been closely aligned. Stockbrokers don’t cover it because it appeals to investors who buy and hold rather than those who trade shares actively. It has a very low MER ratio compared to many managed investments.
3. Argo Investments Ltd code ARG. This is a traditional listed investment company which was formed in 1946. It owns a wide selection of major Australian stocks and may be expected to broadly follow the ASX 200 index in its long-term performance. Recent market capitalization was $6.8 Billion. Stockbrokers don’t cover it because it appeals to investors who buy it and hold rather than those who trade stocks actively. It has a low internal MER which differs substantially from listed investment companies of much more recent formation. It is a regular franked dividend payer.
4. Australian Foundation Investment Company code AFI is very similar to Argo above. It listed on the Australian Stock Exchange in 1962. It owns a wide selection of leading Australian company shares and may be expected to broadly follow the ASX 200 index in its long- term performance. Its recent market capitalization was $9.4 Billion. Stockbrokers don’t cover it because it appeals to investors who buy it and hold rather than those who trade shares actively. It has a much lower internal MER than many more recently formed listed investment companies. It is a regular franked dividend payer.
5. Washington H Soul Pattinson code SOL. This is an Australian active investment company which is part an active manager of major investments and part a passive investor in a wide range of businesses and some profitable emerging businesses. It has strategic investments and board representation in Brickworks Ltd, New Hope Ltd and TPG Telecom Ltd. It has investments in a wide range of other companies. It has been listed on the stock market since 1903 and has paid a dividend every year from 1903 onwards. Its dividends are franked. Stockbrokers don’t cover it because it appeals to investors who buy it and hold rather than those who trade shares actively. Investors should access its annual report by dialing up ASX 200 then entering its code SOL.
Investors not wishing to become active market traders nor feeling that they need an investment adviser can consider placing spare cash in some or all of the above and holding long term. They are likely to receive a return closely aligned with the Australian market for the latter three and with the Wall Street market for the first two. Naturally additional personal research is advised. Do be aware that no investment company/ETF is immune from the impact of major events but each of the above has shown resilience over long periods. Each are widely diversified in their investments. They offer the advantage of simplifying accounting since your accountant can download the dividends/distributions of a small number of investments.
Those investors who choose to study the market closely and make astute investments may do better than the above. However few investors have the knowledge, spare time and self- discipline to do so. Most investment advisers are limited by rules imposed by their licensing regime which tend to adopt a minimum risk strategy which may prevent best choice of investment mix. It is questionable whether the fees of some of them are worth their engagement. Financial planners are often not well informed on listed stocks while stockbrokers are often limited in respect of financial planning issues.
Beware of investment advisers claiming to invest like Warren Buffett. Most of what Buffett does is hidden from view.
A major part of Berkshire Hathaway’s massive investments are its insurance company operations including its massive involvement in re-insurance treaties. This activity is beyond the comprehension of Australian advisory organizations. The massive cash holdings underpin both insurance and re-insurance businesses. The ability to take up large slices of massive insurance contracts via treaties with other massive insurers is enabled by the vast amount of cash. In the top end of this market other global players are only prepared to share the action with those who they are confident can underwrite their share of the risk. Berkshire Hathaway also owns a number of unlisted businesses as well as a huge railway investment with long distance rail freight another investment. Much of its business empire is beyond the financial capacity knowledge and understanding of Australian advisory organizations.
The last Australian Government to produce a genuine budget surplus was the Howard-Costello Government.
Recent surpluses are based on accounting trickery with lots of expenditure classified as being of a capital nature and therefore off budget despite much of the expenditure being unlikely to achieve a return. The national debt has grown substantially and has exploded in the states, particularly in Victoria. The Howard/Costello government repaid debt and began the Future Fund. It is the last commonwealth government to produce real budget surpluses.
The Delaney Foundation.
Those who find this newsletter of value are also invited to check my website at grahammiddleton.com
If you find the information of use, please consider making a donation to the Delany Foundation the registered charity that we support. Donations are tax deductible. Almost all administration is done by volunteers so donations are put to intended use.
Best wishes to all
Graham Middleton
grahamgeorgemiddleton@gmail.com
General advice and need to confirm.
As I sold out of an accounting and financial services group, of which I had been a founding partner, on 30 June 2020 I am no longer licensed. The above is general advice and should be confirmed with a currently licensed investment adviser. One I would recommend to you is Campbell Thompson at Ord Minette who is both courteous and experienced. His number is 0407 839 229. His assistant Simone Shelton 0402 085 892 is a helpful person also. If you are after simple transaction advice, they are ideal. I use them but have absolutely no financial interest in any services that they provide to others.
My Financial interest.
I have no financial interest in the advice I provided and seek no fee. I am secure financially and I seek no personal remuneration. If you find it worthwhile you are able to acknowledge it by making a tax-deductible donation to the registered charity which I support, the Delany Foundation who, I am confident, will apply it to worthy use.
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 by email at graham.george.middleton@gmail.com and by mail at Graham Middleton, 37 Charteris Drive, Ivanhoe East, VIC 3079.
