Mort Report

06/02/2009

When I was 12 my Father wrote to my English teacher “I say, the boy hardly reads what do you suggest” For the summer holidays that year he compiled a list of books he thought might interest such a recalcitrant and included Nevil Shute’s 1957 novel “On the Beach”

A nuclear war has devastated the Northern Hemisphere. Australia has not been hit, but a lethal cloud of fall - out is gradually drifting southwards. It’s inevitable the country will go the same way as the rest of the world, but how to prepare the country for that eventuality. The current economic situation feels like that. The US, Europe and Japan have been in recession all year; the impact on Australia has been slow to arrive, but its coming.

No wonder then, the RBA cut rates by 1% this week to take the cash rate to 3.25% - all the major banks are passing on the full reduction to take effect at various times next week. If you want to receive the cut you must call their help desk and advise you want your mortgage payment reduced, otherwise the existing arrangement remains and whist that reduces the term of the loan and increases your redraw, it won’t help your cash flow.

The incoming cloud of recession is also the reason why the Government has been so aggressive in their stimulus package, expected to cost $42B. We all know from the "Hitchhikers Guide to the Galaxy" 42 is the answer to everything. The package is split $28B in infrastructure spend and $13B in one off cash bonuses spread over 5 groups. There are also bits to do with funding for insulation and energy conservation of homes. Further, you can receive an additional 30% deduction in investment allowances to encourage spending on capital equipment and vehicles. Call me if you need help on any of this.

The budget will move in to deficit for the first time in a decade. This is not a bad thing – in buoyant times the country runs a surplus as the Government receives more than it spends. But in times like these, the Government receives less as economic activity declines – it must pick up the slack from the private sector. And is exactly what it’s doing.

The greatest concern for all is the likelihood of unemployment increasing from its current 4.5% to at least 7 % - that’s a big increase. The impact on our social fabric and how we deal with one another will be immense. It’ll also be a measure of what sort of society we have become.

Clearly real estate prices must fall given this environment. Whilst I’m not expecting the serious, sharp shunt in the US, UK, Spain and Ireland – say 25% and climbing, we will see lower prices – figures out this week from the ABS show prices fell in the December ¼, 0.8% nationally, Sydney, not too badly off at 0.3%.  Despite the gloom I doubt property can fall as much as elsewhere given the shortage of housing, the cut in interest rates and the changes to the FHOG (first home owner’s grant). You currently receive $14K as a first home buyer and if you’re constructing or purchasing a newly constructed home then an additional $7K and in NSW $10K. There are still some lenders who will go to 95% LVR (loan to valuation ratio).

There’s a 1 bedroom terrace for rent at $415 pw, that’s nearly $22K pa in a street around the corner from where I live, it’s small and poky, but it is in a great location in the inner west. I figure it’s worth $400K in the current market. With the changes in the FHOG and a 95% loan you’ll need to find $6K to move in and own your own home. Sure it might fall in value as the recession bites, but do you care, you’re not going to sell it, you want to live in it and enjoy it. But what you’re paying in rent could fund a mortgage on your own property.

The point is, as interest rates fall, so property becomes more affordable and whilst unemployment might climb to 7% that still leaves 93% employed. And with interest rates at 5% we’re close to the cost of rent.

Never before has the country so anticipated a recession; in the past we have woken up to it and reacted, this time we’re being proactive. I’d like to think we’re better prepared.

There’s a scene in Gallipoli with Bill Hunter writing to his wife hours before he has to go over the top at dawn to defend “king and country”, the music is the duet from the “The Pearl Fishers” by Georges Bizet, it’s marvelous, and it’s moving.

But the night is dark; it is always dark just before dawn and it is always darkest at the bottom of any market. The stock market and really the international score card of how we’re doing is grinding out a range basis the Dow between 8000 and 9000. There’s great support at 7500. What’s interesting is how the market is discounting bad news. Every day we hear of closures, job losses and fraud, but it seems the market is taking it in its stride, as if it’s immune from bad news and the price reflects the expectation of bad news. Just imagine how it will react on good news – a positive from all the global stimulus packages. Whilst 7500 holds I think it will rotate towards the high side of the range and eventually move even higher, recovering some of the losses from the past 18 months. If I’m right about this it will signal a recovery in the global economy.

And finally, nearly 40 years ago I shared a flat in Chelsea, London with an old mate Colin Dowse who amongst other things maintains a blog. At least, now he's an old mate. During the week he wrote about ones political compass. There’s a site you can measure where you sit politically, depending on how you respond to various social and economic questions http://www.politicalcompass.org/test Check it out, I was pleased to learn I’m close to Mahatma Gandhi and Nelson Mandela and far removed from Stalin and Hitler

Fees, charges and conditions apply; the CRS is based on borrowing 300K over 30 years.

Various low doc and full doc loans for credit impaired customers.

Warning: This Comparison Rate applies only to the example given. Different amounts and terms will result in different Comparison Rates. Costs such as redraw fees or early repayment fees, and costs savings such as fees waivers, are not included in the Comparison Rate but may influence the cost of the loan. A comparison schedule is available at the office of Mort Financial Pty. Ltd. by contacting David Mortlock.

Lender special deals include the following: -

• Several lenders who don't require genuine savings
• No - doc loans to 70% valuation
• Lo - doc owner builder
• Several lenders who will write a family pledge product
• Various discounted and nill application fees
• Several lenders in the Reverse Mortgage market
• Several lenders who offer 100% home loans - no deposit
• Fixed rate packages, with no penalty for extra repayments

For more detail on the above rates, details on lender specials and their discounts and ways to reduce your mortgage commitment.

Contact David Mortlock:

mort@mort.com.au