Most months I have trouble coming up with something half intelligent
and hopefully entertaining to say in these bulletins. This month is
different. World events, the activities of our politicians and the possible
impacts here in the Land of Oz leave me with much to talk about, but
where to start. Perhaps I should confine myself to the view I’m enjoying
from our holiday rental apartment at Coolangatta. The waves are
breaking around Greenmount Point, there’s a volleyball festival on the
beach out front, and one of my favourite bands is playing this arvo at the
legendary Coolangatta Hotel.
The managing director and I have taken my mum to Cooly for a little
holiday after my dad passed away late last year. Many happy memories
of the southern end of the Goldy revisited and a cracking outlook from
Reflections by the Sea. For our money the views are the best on the
coast and while some of the units are getting a little tired you simply
can’t beat the location. Nice staff too.
The views do contain one sad vista. The old Greenmount Resort is now
a pile of rubble to be replaced by a new residential development. Prices
start circa $4.8M so God knows what a penthouse will be worth! If the
number of mega buck residential apartment projects either on the go or
in planning are any indication, there is some serious money looking for
a home on the Gold Coast and in Northern NSW. You’d have to think
that will put upward pressure on existing unit values and with that clever
segue, it’s crystal ball time.
Let’s say values of new off plan units continue to hit stratospheric
numbers. It’s true that these new projects provide a level of
architectural elegance and amenity mostly unmatched by existing
apartment buildings. But, as the old saying goes, a rising tide lifts all
boats and it’s hard to see unit values at, say Reflections, not rising as a
result of the prices at Greenmount. Even if you’ve got to do a full reno
the value proposition is hard to argue against. Of course, such a trend
might not be all good news for management rights operators with
expensive managers apartments. The old unit to business value ratio
challenge may mean that unit values giveth and business values taketh
away. Will any of this happen? I have no idea.
Let’s say our rulers in Canberra decide to tinker with negative gearing
and capital gains tax concessions. In fact, let’s say they abolish both but
grandfather existing arrangements. If you are already in the market, you
are now a property investor with a tax arrangement that new investment
buyers can’t access. While you hold the asset, and when you decide to
sell, you can take advantage of negative gearing and/or capital gain
concessions. The person you sell to cannot. Therein lies a strong
motive to retain the property and take advantage of tax concessions
both while you hold and when you sell.
Maybe such a situation would stem letting pool losses to owner
occupiers. Almost certainly new investor demand would slow. Would
that result in falling prices for traditional investor stock? Will any of this
happen? I have no idea.
Let’s say there is a war in the Middle East, and the net result is
constricted world oil supply. Let’s say that while our politicians say we
have plenty of reserves we really don’t. Petrol prices rise and so do the
costs of every service and function in our economy that relies on oil.
Think the grocery stores, delivery drivers, farmers, airlines, etc etc. All
of this is of course inflationary, and we all know what that means. The
blunt instrument of interest rate increases comes down upon 3.3 million
owner occupiers, 2.2 million investors and 2 million businesses. But
here’s the thing. There is demand and supply side inflation, concepts
that our treasurer is currently studying so he can differentiate. What I’m
talking about is supply side and no amount of tinkering with interest
rates is going to stop me from buying toilet paper, no matter how
expensive. Will the RBA apply some nuance at its next board meeting
or bring out the hammer? I have no idea.
Let’s say all this has you thinking about interest rates. To quote
Shakespeare, “what light from yonder window breaks”…………. ahh,
wrong one. Let’s try “To fix or not to fix, that is the question”. On this we
can be fairly clear. Fixing is for the fearful and variable is for the brave.
Throwaway line but grounded in truth. If you borrowed a few bob 30
years ago and stayed on variable the whole time you’d be, on average,
ahead of the fixed rate curve. That doesn’t mean that through fortunate
timing some fixed rate punters haven’t done well, particularly if you fixed
during a pandemic. Hope we never have one of those. If you sleep
better knowing your loan payments are locked in go right ahead. For
the rest of us variable is the go. Of course, there are numerous interest
rate management options the banks will try and flog you. Hedging,
caps, collars and split facilities, to name a few. My advice is to take the
advice of Alan Bond, legendary businessman, borrower, fraudster and
sailor. If you owe the bank $1M you got a problem, if you owe them
$100M, they got a problem. Will fixing work for you? I have no idea.
Let’s say you borrow some dough and want to preserve a few bob for
emergencies. You also want to pay down debt as fast as you can.
Maybe you want to park your money in an account that pays you no
interest but offsets that balance against your loan balance. For you the
interest rate question has been answered. It’s gotta be variable.
Provided your loan has a redraw facility and redrawing funds doesn’t
create a tax problem there seems no need for an offset account. Just
pay off more than you must and know that if a nasty surprise arrives you
can redraw the funds. The banks tend to promote offset accounts which
seemed weird to me if a paydown and redraw facility is available.
Then I read ASIC’s annual report on areas they will be focusing on in
the banking industry. Turns out some banks hadn’t been properly
linking offset accounts to loans, and some hadn’t been offsetting
interest at the same rate. To be fair some banks self-reported these
“discrepancies” while others got caught fair and square. I reckon these
dramas are almost always related to outdated IT and rarely if ever an
evil plot. Having said that, will the Australian banking industry ever sort
out these dramas and cease paying fines to the regulator? I have no
idea………………. Do they?
In closing some clarifying remarks:
RBA is the Reserve Bank of Australia, not Resort Brokers Australia.
Stop it you guys.
Negative gearing is, of itself, a complete waste of time and money.
Don’t do it for its own sake.
Borrow as much as you can, make sure you spend the money on an
appreciating income producing asset and pay it off as fast as you can.
Debt is good but only if it builds wealth. Debt for a new TV is bad.
Always trust your finance broker.
None of this is financial advice.
Please consult someone who has an idea.
If you really want to be guided by Shakespeare, may I suggest Side 1,
Track 2 of Making Movies. Will it change your life? I have no idea.
How did I become so opinionated and grumpy, and how does the
managing director put up with me? I have no idea.
In memory of my Dad, Ross Phipps (1935-2025), who loved these
articles. What a great role model….. you have no idea.
Mike Phipps F Fin
Director | Phippsfin Pty Ltd