Latest / The Money Puzzle / If banks are cutting deposit rates, will lending rates follow?

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If banks are cutting deposit rates, will lending rates follow? · The Money Puzzle

• 0:11
  Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
• 0:14
  Speaker 1: James Kirby, the wealth editor at The Australian. Welcome aboard, everybody.
• 0:18
  Speaker 1: If you're an investor, it's worth knowing that this week
• 0:22
  Speaker 1: may well be a turning point on rates, which are
• 0:26
  Speaker 1: so important, of course, to investors. The big banks have
• 0:29
  Speaker 1: been cutting their deposit rates that they offer retail customers.
• 0:35
  Speaker 1: Three of the big four have moved in the last
• 0:37
  Speaker 1: few days, cutting their rates by about half. a percent
• 0:41
  Speaker 1: roughly from a 5% or so to 4.5% on the deposit.
• 0:45
  Speaker 1: That means that the banks really do believe that rates
• 0:50
  Speaker 1: are coming down. Cynically, of course, you might say they're
• 0:53
  Speaker 1: moving well ahead of time and maybe moving ahead of
• 0:57
  Speaker 1: any cut we even get. We'll talk about that in
• 0:59
  Speaker 1: a moment. We've also been talking about how all year,
• 1:03
  Speaker 1: if you've listened to various shows, I've had several guests
• 1:06
  Speaker 1: saying that units are going to go better than standalone
• 1:09
  Speaker 1: houses on price. And that is exactly what's been happening
• 1:12
  Speaker 1: in recent times. You'll see that reported. And one other,
• 1:15
  Speaker 1: I thought, quite topical, newsworthy item is today the major
• 1:21
  Speaker 1: report on childcare has come out. It's from Victoria University.
• 1:25
  Speaker 1: And it gives a lie of the land on childcare. Basically,
• 1:30
  Speaker 1: it says that one in four Australians live in what
• 1:33
  Speaker 1: they call a childcare desert. That is where there are
• 1:35
  Speaker 1: three or more kids for each spot. the child care
• 1:38
  Speaker 1: center there are regional towns and suburbs where those stats
• 1:43
  Speaker 1: go off the deep end and there are six kids
• 1:46
  Speaker 1: for every spot and that's on the basis that you
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  Speaker 1: can even get into a child care my guest today
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  Speaker 1: is impeccably credentialed to talk about all this because a
• 1:55
  Speaker 1: she's economist at amp b she's a regular guest on
• 1:59
  Speaker 1: the show and c she just did a very interesting
• 2:03
  Speaker 1: What would you call it? A social media video about childcare.
• 2:07
  Speaker 1: And she filmed herself going down to the childcare centre
• 2:11
  Speaker 1: and speaking as an economist, but also someone dashing to childcare,
• 2:14
  Speaker 1: which if you've ever done that, you'll never forget it.
• 2:16
  Speaker 1: And you know all about it. It's Diana Messina of
• 2:19
  Speaker 1: A & P. How are you, Diana? Hi, James. I'm good.
• 2:22
  Speaker 2: Thank you for having me on.
• 2:23
  Speaker 1: Great to have you on. Great to have you on.
• 2:25
  Speaker 1: The thing about childcare, and call me a cynic if
• 2:27
  Speaker 1: you will, but the thing about childcare is you're so
• 2:30
  Speaker 1: interested in childcare. I'm just remembering that I was on
• 2:35
  Speaker 1: the board of a childcare centre when we had kids
• 2:37
  Speaker 1: in childcare. And I can remember actually being applying for
• 2:41
  Speaker 1: grants to renovate the place and all that sort of thing.
• 2:44
  Speaker 1: And you're so involved. And then your kids move on.
• 2:46
  Speaker 1: And well, it's only human. You're not as intensely interested
• 2:50
  Speaker 1: as you were. But we will do that in a moment, folks.
• 2:52
  Speaker 1: But I want to talk to Diana, first of all,
• 2:54
  Speaker 1: about some big picture things, because it's news to me, actually,
• 2:57
  Speaker 1: that the big banks have been cutting the rates. They... depositors.
• 3:03
  Speaker 1: And that to me is them really moving now. It's
• 3:06
  Speaker 1: beyond theory now. They are of the belief that rates
• 3:08
  Speaker 1: are going to fall. Do you think that tells us
• 3:11
  Speaker 1: anything we didn't already know about where rates are going, Diana?
• 3:16
  Speaker 2: Well, the banks price their fixed rates and the deposit
• 3:20
  Speaker 2: rates of what money market expectations tell us. And money
• 3:26
  Speaker 2: markets are pricing in a rate cut by the end
• 3:28
  Speaker 2: of the year in Australia here, four rate cuts in
• 3:30
  Speaker 2: the U.S., And money market expectations in Australia are very
• 3:34
  Speaker 2: much influenced by what happens globally, particularly in the US.
• 3:38
  Speaker 2: So we may not get a rate cut by the
• 3:40
  Speaker 2: end of the year, but clearly the market has moved
• 3:43
  Speaker 2: and is signaling that there are going to be rate
• 3:45
  Speaker 2: cuts within the next 12 months. The market jumps around
• 3:48
  Speaker 2: a lot. We can't necessarily take it to heart that
• 3:52
  Speaker 2: this is exactly what's going to happen. But I think
• 3:54
  Speaker 2: that's just what the banks are responding to, this change
• 3:57
  Speaker 2: in money market expectations about where rates are.
• 3:59
  Speaker 1: Going to go.
• 4:00
  Speaker 2: The banks don't have any clue as to what the
• 4:04
  Speaker 2: Reserve Bank is actually going to do because the Reserve
• 4:06
  Speaker 2: Bank hasn't met yet. They are the ones that decide
• 4:09
  Speaker 2: the rates on that day. So I think it's just
• 4:12
  Speaker 2: them responding to what the financial markets are saying right now.
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  Speaker 1: I thought that the depositors were very important to our
• 4:21
  Speaker 1: local banks in terms of where they set their rates today.
• 4:25
  Speaker 2: Well, absolutely they are. We've been in this period where
• 4:29
  Speaker 2: deposit rates have been extremely high over the past 12
• 4:34
  Speaker 2: to 18 months. So this is a normalisation to the
• 4:38
  Speaker 2: rates that we've had.
• 4:39
  Speaker 1: Are they high on what measure? Above inflation or historically or.
• 4:47
  Speaker 2: They're high relative to the last five to 10 year average.
• 4:52
  Speaker 2: The deposit rates have basically moved in line with the
• 4:56
  Speaker 2: rate hikes and the variable interest rates, about 85% of
• 5:03
  Speaker 2: the rate hikes have been passed onto the average variable rate.
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  Speaker 2: I usually look at the one that's discounted because most
• 5:11
  Speaker 2: of the banks are still giving discounts to the headline
• 5:13
  Speaker 2: rates Usually in most rate cycles, we see about 90%
• 5:17
  Speaker 2: pass-through from changes to the cash rate to the actual
• 5:21
  Speaker 2: variable interest rate. So it's been a little bit less
• 5:23
  Speaker 2: than normal.
• 5:24
  Speaker 1: Well, I must say, folks, if you are thinking of
• 5:26
  Speaker 1: locking in some money on a term deposit and you
• 5:29
  Speaker 1: were waiting for the top, well, they say no one
• 5:31
  Speaker 1: rings a bell at the top, right? But this is
• 5:34
  Speaker 1: as close as you'll get to it, I think, where
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  Speaker 1: they're just starting what could be the first of a
• 5:41
  Speaker 1: sequence of cuts. OK, now, the other thing that I
• 5:46
  Speaker 1: wanted to talk to you about briefly was that unemployment
• 5:49
  Speaker 1: turned out to be stronger than people thought. The numbers
• 5:53
  Speaker 1: behind the scenes were stronger. And I'm taking from that
• 5:55
  Speaker 1: full employment is still here. And I'm taking from that
• 5:57
  Speaker 1: that basically rental, the demand for rents isn't going to
• 6:00
  Speaker 1: change much because people will be able to pay them.
• 6:02
  Speaker 1: There really is no sign of unemployment going the wrong
• 6:05
  Speaker 1: way at the moment. I know the headline number moved
• 6:08
  Speaker 1: ever so slightly up. But could you explain what your
• 6:11
  Speaker 1: interpretation of the unemployment numbers are?
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  Speaker 2: The labour market's been quite interesting in Australia. What we've
• 6:17
  Speaker 2: seen is employment growth being quite high, actually, but the
• 6:22
  Speaker 2: unemployment rate trending up. And the two moving in line
• 6:25
  Speaker 2: doesn't necessarily make a lot of sense. Usually, you would
• 6:27
  Speaker 2: expect that if employment growth was slowing, you would see
• 6:31
  Speaker 2: the unemployment rate go up. What's been happening in Australia
• 6:34
  Speaker 2: is that we are seeing an increasing amount of people
• 6:38
  Speaker 2: actually in the labour force. So people who are in
• 6:39
  Speaker 2: the labour force are either those who are working or
• 6:42
  Speaker 2: looking for work, therefore technically unemployed. The participation rate in
• 6:46
  Speaker 2: the labour force has gone up to a record high.
• 6:48
  Speaker 2: So the number of people age over 15 going into
• 6:51
  Speaker 2: the labour force is at its highest level that it's
• 6:53
  Speaker 2: ever been in Australia. That's a result of high immigration
• 6:57
  Speaker 2: into the country and forcing people into the workforce, but
• 7:00
  Speaker 2: also that people are feeling confident enough to go and
• 7:02
  Speaker 2: try and find a job, which is why employment growth
• 7:05
  Speaker 2: is still holding up, but the unemployment rate is moving
• 7:07
  Speaker 2: up just quite slowly, I'd say. It bottomed at 3.5%,
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  Speaker 2: it's now 4.2%. As you said, the unemployment rate is
• 7:16
  Speaker 2: moving higher, but it's still not at a level where
• 7:18
  Speaker 2: you'd be becoming concerned about the state of the consumer.
• 7:22
  Speaker 2: I think, obviously, the consumer has weakened in the past
• 7:25
  Speaker 2: 18 months, and we've seen that through lower retail spending,
• 7:29
  Speaker 2: particularly in volumes, per capita retail spending overall, very weak
• 7:33
  Speaker 2: consumer confidence, negative real disposable income growth. But we're not
• 7:39
  Speaker 2: at the point where consumers are having to double down
• 7:44
  Speaker 2: on their mortgages and are forced to sell. We haven't
• 7:47
  Speaker 2: seen a huge increase in arrears or delinquency rates. If
• 7:51
  Speaker 2: the unemployment rate gets up a little bit higher, we
• 7:53
  Speaker 2: think it will get to four and a half, 4.6%.
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  Speaker 2: That's probably at a level where you might see some
• 8:00
  Speaker 2: further weakening in consumer spending, but not enough where you're
• 8:03
  Speaker 2: going to see levels of forced selling in the property market.
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  Speaker 1: So those numbers from an investor's point of view and
• 8:09
  Speaker 1: say a property investor point of view, talk about defaults
• 8:12
  Speaker 1: or bargains in the market where people are defaulting on
• 8:15
  Speaker 1: their mortgages. Folks, there is no signal in results, particularly
• 8:21
  Speaker 1: from banks, that is happening in any significant fashion whatsoever. However, Diana,
• 8:26
  Speaker 1: what about if I'm trying to make a decision as
• 8:29
  Speaker 1: an investor on rates and the RBA is out there
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  Speaker 1: saying there's no rates till Christmas, the biggest bank in
• 8:36
  Speaker 1: the country is out there cutting rates already because they Well,
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  Speaker 1: they can, but also, of course, cutting them for depositors,
• 8:45
  Speaker 1: that is, not borrowers. But the point I want to
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  Speaker 1: ask you is, is the chance of a rate cut
• 8:50
  Speaker 1: elevated then? And is it even worth waiting for?
• 8:54
  Speaker 2: If you're looking to get into the market and you
• 8:58
  Speaker 2: want a variable interest rate, then you do have to
• 9:00
  Speaker 2: wait for it because variable interest rates aren't being cut yet.
• 9:04
  Speaker 2: Some of the fixed rates have come off. their highs,
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  Speaker 2: but that was already happening even six months ago when,
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  Speaker 2: as I said before, the fixed rate moves with money
• 9:12
  Speaker 2: market expectations around interest rates. So it depends what sort
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  Speaker 2: of stage you're in terms of the investment cycle. I
• 9:20
  Speaker 2: think a rate cut is still worth waiting for in
• 9:23
  Speaker 2: the sense that there is still the risk of a
• 9:26
  Speaker 2: rate rise here. If you listen to what the Reserve
• 9:28
  Speaker 2: Bank is saying, they still sound hawkish. If we get
• 9:31
  Speaker 2: an upside surprise in inflation in the next six months,
• 9:35
  Speaker 2: they could potentially lift interest rates again if they're becoming
• 9:40
  Speaker 2: concerned about inflation again.
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  Speaker 1: And that means those banks would never cut their borrowing
• 9:45
  Speaker 1: rates and would just lift those deposit rates back up.
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  Speaker 2: Well, that's usually how it works.
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  Speaker 1: Okay. Keep that in mind, folks. You might think that
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  Speaker 1: it's a natural line to draw that if they're cutting
• 9:55
  Speaker 1: their deposit rates, well, the lending rates must be coming down.
• 9:58
  Speaker 1: Not necessarily. Sorry, but don't make that assumption because you
• 10:03
  Speaker 1: would be running ahead of yourself. And the banks can
• 10:05
  Speaker 1: run ahead of themselves if they wish. Their banks, they're
• 10:08
  Speaker 1: operating in a different set of dynamics than you and I. Hey,
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  Speaker 1: one other thing I wanted to ask you about before
• 10:13
  Speaker 1: we go to the break. A question in a while
• 10:16
  Speaker 1: from Omar. Really interesting about how that in his particular suburb,
• 10:22
  Speaker 1: which must be in Melbourne because the prices weren't going anywhere,
• 10:26
  Speaker 1: the rates were going up at the same time. Council
• 10:28
  Speaker 1: rates were going up at the same time. I don't
• 10:29
  Speaker 1: know if you look at this as an issue, but
• 10:32
  Speaker 1: I do see spot reports all the time about councils
• 10:35
  Speaker 1: in funding, various funding crises and emergencies with that. Have
• 10:40
  Speaker 1: you looked at that at all, whether council rates may...
• 10:44
  Speaker 1: go up even in suburbs where prices aren't going up.
• 10:48
  Speaker 1: This is interesting.
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  Speaker 2: I think it probably reflects a lagged inflationary response from
• 10:53
  Speaker 2: the council. So usually the council rates do have to
• 10:57
  Speaker 2: respond to land values, which have been going up alongside
• 11:01
  Speaker 2: home prices. I mean, the home price index is basically
• 11:05
  Speaker 2: a value of land and the cost of building. So
• 11:09
  Speaker 2: land values are still going up. across the nation, in
• 11:12
  Speaker 2: Victoria and Melbourne in particular, it's been a different story.
• 11:15
  Speaker 2: Melbourne prices have been going down, as you mentioned. I
• 11:18
  Speaker 2: think the council rate increases are probably reflecting just the
• 11:21
  Speaker 2: high inflation environment that we've been in. And those types
• 11:25
  Speaker 2: of rates, like even in utilities, insurance, all those types
• 11:30
  Speaker 2: of rates that we pay usually tend to lag the
• 11:34
  Speaker 2: broader inflation cycles. I think it's probably only a matter
• 11:37
  Speaker 2: of time before we see some softer inflation in some
• 11:40
  Speaker 2: of those council rates, but probably not outright deflation. Unfortunately,
• 11:44
  Speaker 2: that's not the way the councils operate.
• 11:46
  Speaker 1: Does that mean that the rate increases might not be
• 11:50
  Speaker 1: as severe as they have been?
• 11:51
  Speaker 2: I think that they have to stop being as high.
• 11:53
  Speaker 2: And we've basically already seen the peak in insurance premiums
• 11:57
  Speaker 2: and insurance costs and finance costs as well. Those types
• 12:01
  Speaker 2: of rates just tend to reflect what happened in inflation
• 12:04
  Speaker 2: a few months ago. And also, of course, the specifics
• 12:07
  Speaker 2: that go alongside that industry, like in insurance, they've had
• 12:10
  Speaker 2: their own issues that have been going on that have
• 12:12
  Speaker 2: led to higher premiums and these higher costs for consumers.
• 12:16
  Speaker 2: But obviously, the broader inflationary environment impacts a lot of
• 12:21
  Speaker 2: those rate-setting agencies.
• 12:24
  Speaker 1: Hey, I want to ask you one last thing. It
• 12:26
  Speaker 1: came up once or twice on the show. In certain
• 12:28
  Speaker 1: parts of the country... And even in the big cities,
• 12:32
  Speaker 1: the economics of property, particularly unit investments, was that the
• 12:37
  Speaker 1: replacement cost of building apartment towers in some areas are
• 12:44
  Speaker 1: as high, if not higher, than the cost of the
• 12:47
  Speaker 1: apartments inside existing towers. And that's like a real fundamental
• 12:50
  Speaker 1: economic thing, isn't it? That if you can get something
• 12:53
  Speaker 1: and it's actually a discount on its replacement cost, then
• 12:56
  Speaker 1: you really have, from a textbook point of view, a
• 12:58
  Speaker 1: bargain apparently. Have you come across it? Are you aware
• 13:01
  Speaker 1: of it? Could you explain to even the listeners why
• 13:05
  Speaker 1: that's significant?
• 13:07
  Speaker 2: I think that probably reflects the fact that the expectations
• 13:12
  Speaker 2: for home values are still that they're going to go
• 13:14
  Speaker 2: up in terms of the land value, but also that
• 13:17
  Speaker 2: the cost of the materials, the labour costs, that go
• 13:19
  Speaker 2: into building a potential new dwelling just continue to rise.
• 13:23
  Speaker 2: And we've seen that in that new dwelling construction cost
• 13:26
  Speaker 2: component of the consumer price index. We see that in
• 13:29
  Speaker 2: rents and in labour costs as well, particularly around construction,
• 13:33
  Speaker 2: because we've seen that the infrastructure construction space has basically
• 13:37
  Speaker 2: been crowding out the residential construction space, leading to higher
• 13:40
  Speaker 2: wages in the residential construction sector. So that probably explains
• 13:45
  Speaker 2: that dynamic. as well as this expectation that home prices
• 13:49
  Speaker 2: will continue to rise in Australia.
• 13:51
  Speaker 1: Yes. Well, it's interesting. Certainly, the numbers are there that
• 13:55
  Speaker 1: in some parts that is the case. It may reflect
• 13:57
  Speaker 1: that kind of inflation spike that really hit builders for
• 14:01
  Speaker 1: a while. And when you come across that, if you
• 14:06
  Speaker 1: find a place that is where the existing stock is
• 14:09
  Speaker 1: actually at a discount or replacement value, then you're really
• 14:11
  Speaker 1: onto something. We'll take a short break. We're going to
• 14:14
  Speaker 1: have a look at childcare. I expect that for most listeners,
• 14:18
  Speaker 1: if you're involved with childcare, you're going to find this
• 14:20
  Speaker 1: really interesting. If childcare is coming down the line in
• 14:22
  Speaker 1: your life, you're going to find it really interesting. If
• 14:24
  Speaker 1: you've passed the childcare point of your life, you might
• 14:28
  Speaker 1: skip the segment, except to say, folks, that there is
• 14:31
  Speaker 1: also a property dimension here, of course, with big childcare
• 14:34
  Speaker 1: listed groups and what's going on there. So we will
• 14:37
  Speaker 1: deal with that in a moment, and then we'll have
• 14:39
  Speaker 1: some questions. Hello, welcome back to the Australian's Money Puzzle podcast.
• 14:52
  Speaker 1: I'm James Kirby talking to Diana Mussina of AMP. Diana
• 14:56
  Speaker 1: is an economist who's been on the show regularly. Now,
• 14:59
  Speaker 1: this wasn't my plan at all, but it's very useful
• 15:02
  Speaker 1: that this major child care report came out today from
• 15:06
  Speaker 1: Victoria University. It's getting a lot of coverage around the place.
• 15:09
  Speaker 1: I see it was released exclusively to the ABC, which,
• 15:12
  Speaker 1: of course, I would be very annoyed about because I
• 15:15
  Speaker 1: like these things to be released to everybody at the
• 15:17
  Speaker 1: same time. Just a point there, Victoria University. And it's
• 15:21
  Speaker 1: a major report, really, as it looks at Australian childcare issues,
• 15:26
  Speaker 1: it looks at overseas issues, and it looks at the
• 15:29
  Speaker 1: availability of places. A couple of broad points. The situation
• 15:33
  Speaker 1: has improved ever so slightly in recent times. That's one
• 15:36
  Speaker 1: thing in terms of the supply of centres. But then
• 15:39
  Speaker 1: there are Spots all over the country where there is
• 15:42
  Speaker 1: what they call deserts. Regional areas, pretty obvious it wouldn't
• 15:46
  Speaker 1: be a childcare center, but also lower socioeconomic areas. And
• 15:50
  Speaker 1: parts of the city where there's just bad luck, where
• 15:53
  Speaker 1: there are less spots than there are children. So let's
• 15:57
  Speaker 1: talk about macro first and then specifically your own experience here.
• 16:00
  Speaker 1: Where are we on childcare, do you think? Do you
• 16:03
  Speaker 1: think it's improving broadly on a macro point of view
• 16:06
  Speaker 1: in terms of a service locally?
• 16:09
  Speaker 2: There's actually been a huge amount of change in the
• 16:12
  Speaker 2: childcare sector in the last few years. The Labor government
• 16:14
  Speaker 2: introduced some new policies last year that increased the childcare
• 16:19
  Speaker 2: benefit to many families, broadened it out, also gave some
• 16:23
  Speaker 2: additional funds to the preschool sector, which is different to childcare.
• 16:28
  Speaker 2: I think a lot of people think of as basically
• 16:30
  Speaker 2: from one year to three and a half or four,
• 16:33
  Speaker 2: but there's also this preschool sector. And Australia is quite
• 16:36
  Speaker 2: strange in that we have some community funded preschools, in
• 16:40
  Speaker 2: some specific areas, but if you're lucky enough to live
• 16:43
  Speaker 2: in that area, you get it. If you're not too bad,
• 16:45
  Speaker 2: you have to pay $ 180 or $ 200 a day for
• 16:48
  Speaker 2: continued childcare. So that, and that's only something that I've
• 16:52
  Speaker 2: discovered after becoming a parent myself. I think we still
• 16:55
  Speaker 2: have a long way to go to solve some of
• 16:59
  Speaker 2: the issues that you say around the right provisions of
• 17:02
  Speaker 2: the number of centres in specific areas. We've seen a
• 17:04
  Speaker 2: huge boom in in demand for centres in terms of
• 17:08
  Speaker 2: where people are living. So in their local areas, there
• 17:10
  Speaker 2: are no spots for children, but in areas like the CBD,
• 17:14
  Speaker 2: for example, childcare centres have actually had to close because
• 17:17
  Speaker 2: less people are working in the city. A lot of
• 17:19
  Speaker 2: them have actually merged together in the CBDs as people
• 17:23
  Speaker 2: have chosen to send their kids to more local centres.
• 17:26
  Speaker 2: So this is The childcare dynamic is really changing. And
• 17:29
  Speaker 2: then we've had also some large wage gains that have
• 17:31
  Speaker 2: gone to the childcare sector, which reflects the fact that
• 17:34
  Speaker 2: the aged care sector had these wage gains last year,
• 17:38
  Speaker 2: and that pushed people out of childcare into aged care.
• 17:41
  Speaker 2: So there's not enough staff going back into childcare. Hopefully
• 17:44
  Speaker 2: these wage gains can actually encourage more people into the sector.
• 17:47
  Speaker 2: And I personally think that the wage gains were very
• 17:49
  Speaker 2: much needed for that space.
• 17:51
  Speaker 1: And there's the services that are so important and wages
• 17:54
  Speaker 1: had run terribly behind in some of those services, aged care,
• 17:58
  Speaker 1: childcare too. Now, from a property perspective, still with big picture,
• 18:01
  Speaker 1: there was a time, perhaps there are still some believers
• 18:04
  Speaker 1: out there that childcare could be a business. Not only
• 18:07
  Speaker 1: could it be a business, a successful business, but so
• 18:09
  Speaker 1: successful that it could be listed on the stock market
• 18:11
  Speaker 1: and we could all be investors in successful childcare centres.
• 18:15
  Speaker 1: This idea was cabooshed by ABC Childcare Centres, which spectacularly
• 18:22
  Speaker 1: went off the rails. This is some years ago. But
• 18:25
  Speaker 1: I mention it because from the ashes of that, if
• 18:27
  Speaker 1: you like, came Goodstart. And there are now really three
• 18:30
  Speaker 1: big childcare chains in Australia. Goodstart, which is a non-profit company,
• 18:35
  Speaker 1: and was created from the wreckage, if you like, of
• 18:39
  Speaker 1: the ABC Child Care Centres group when it went under.
• 18:42
  Speaker 1: Then there's Guardian, which is very big across the country
• 18:45
  Speaker 1: and is currently for sale, owned by Private Equity Group.
• 18:49
  Speaker 1: And then there's G8, which is a listed stock and
• 18:53
  Speaker 1: is at least 20 or 30% lower now than it
• 18:55
  Speaker 1: was five years ago. Not a successful stock, but was
• 18:58
  Speaker 1: put forward to people as a property play. as much
• 19:01
  Speaker 1: as a childcare business because they had property underneath them.
• 19:05
  Speaker 1: I'm using this as a lead-in to ask you, Diana,
• 19:07
  Speaker 1: whether you think it's actually, not that it's legitimate, I'm
• 19:10
  Speaker 1: not interested in the sort of philosophical part of all this,
• 19:13
  Speaker 1: but whether childcare as a business is a feasible investment
• 19:18
  Speaker 1: for private industry and whether anyone could ever really expect
• 19:22
  Speaker 1: to make money as an investor, shareholder in listed childcare centres.
• 19:28
  Speaker 1: Have you ever looked at that?
• 19:29
  Speaker 2: To be honest, I think... The answer is probably more no,
• 19:34
  Speaker 2: because when I think about the long-term drivers of a
• 19:38
  Speaker 2: stock performance, I'm not a stock analyst, but when I
• 19:41
  Speaker 2: think about generally what drives shares in the long term,
• 19:44
  Speaker 2: it's profit growth. And I don't think fundamentally that childcare is...
• 19:50
  Speaker 2: a profitable investment. It's very highly regulated. So it has
• 19:56
  Speaker 2: a lot of public sector involvement and funding. And I
• 20:00
  Speaker 2: find it difficult to imagine that the profit margins are
• 20:04
  Speaker 2: high or that you could potentially expect to be running
• 20:08
  Speaker 2: high profit growth in that type of very highly regulated area.
• 20:13
  Speaker 2: So I feel childcare, while it is privately provided in Australia,
• 20:17
  Speaker 2: it has so much public influence. And I think that personally,
• 20:21
  Speaker 2: it should have more public influence. We should be going
• 20:24
  Speaker 2: more down the path of some Scandinavian countries that are
• 20:27
  Speaker 2: basically all regulated by the government. Because The best examples
• 20:32
  Speaker 2: of early childcare provision is one that is provided by
• 20:35
  Speaker 2: the government, like our public primary schools.
• 20:38
  Speaker 1: Now, tell me your own experience. Did you say 200
• 20:40
  Speaker 1: bucks a day? Is that what it is now?
• 20:42
  Speaker 2: It's a bit less than that, but in some areas
• 20:46
  Speaker 2: in Sydney, I've heard people paying $ 200 a day in
• 20:50
  Speaker 2: areas like Paddington, apparently. That doesn't include any benefit that
• 20:53
  Speaker 2: you get from the childcare rebate. A family income is
• 20:56
  Speaker 2: now means tested up to about $ 500, 000 for a family.
• 21:01
  Speaker 2: But it obviously steps down after a certain amount. So
• 21:05
  Speaker 2: there is some benefit involved there. I think the bigger issue, though,
• 21:08
  Speaker 2: is that we just don't have enough provision of public preschools.
• 21:13
  Speaker 2: I mentioned that briefly before. So if you're lucky enough
• 21:15
  Speaker 2: to live in an area where there's public preschools, that's great.
• 21:19
  Speaker 2: And you could pay $ 50, $ 70 a day, much cheaper
• 21:21
  Speaker 2: rates than childcare amounts. But if you don't live in
• 21:27
  Speaker 2: the areas where those are provided, then you're stuck to
• 21:29
  Speaker 2: just putting your children into childcare, which is much more expensive.
• 21:33
  Speaker 2: So again, this government influence, that's partly funded by state
• 21:36
  Speaker 2: and local governments in terms of those preschools. So we
• 21:39
  Speaker 2: really need to see more of that, I think, to
• 21:42
  Speaker 2: solve some of the issues that we have in the
• 21:43
  Speaker 2: childcare sector.
• 21:45
  Speaker 1: So are you paying hundreds of dollars a week for childcare?
• 21:47
  Speaker 2: Yeah. Lucky I have some grandparent support and some childcare.
• 21:52
  Speaker 2: So it's not five days of childcare.
• 21:54
  Speaker 1: It's tough. I know we didn't have anything like that
• 21:56
  Speaker 1: at all, of course. And I remember there was a,
• 21:59
  Speaker 1: we lived about 20, I worked about 20 kilometres from
• 22:02
  Speaker 1: the childcare centre. And every day, my wife used to
• 22:06
  Speaker 1: bring them over in the morning and I used to
• 22:07
  Speaker 1: go down and get them in the late afternoon. And
• 22:09
  Speaker 1: there was a fine if you were late. You had
• 22:11
  Speaker 1: to drive down this highway every day.
• 22:13
  Speaker 2: It's now $ 2 a minute.
• 22:16
  Speaker 1: Yeah, I remember driving down this highway every afternoon with
• 22:19
  Speaker 1: this fine hanging over my head, whether I'd make it
• 22:22
  Speaker 1: or not. Oh, God, it's a tough phase. And if
• 22:25
  Speaker 1: you haven't done it yet, as I say, folks, you
• 22:28
  Speaker 1: will find that child care, you have intense interest in
• 22:31
  Speaker 1: the issue. When you have people in child care, just
• 22:33
  Speaker 1: like aged care, I expect is the very same. All right,
• 22:36
  Speaker 1: we'll be back in a moment with some very interesting questions. Hello,
• 22:47
  Speaker 1: welcome back to the Australian's Money Puzzle podcast. Diana, I'm
• 22:50
  Speaker 1: just going to read something first. There were some questions,
• 22:52
  Speaker 1: but this was a comment, and I'd like you, if
• 22:55
  Speaker 1: you've anything to say on this as well. So it's
• 22:57
  Speaker 1: about the FIRE movement, F-I-R-E, Financial Independence Retire Early. We
• 23:02
  Speaker 1: did a special on it last week, and we were sceptical,
• 23:08
  Speaker 1: not about it. I think some of the habits and
• 23:11
  Speaker 1: principles of it are very good. I'm very interested in
• 23:14
  Speaker 1: the first part, financial independence. I was sceptical about how
• 23:18
  Speaker 1: the possibilities of retiring early, and I thought the movement
• 23:21
  Speaker 1: perhaps made that seem a little bit too easy. In
• 23:24
  Speaker 1: any event, needless to say, and entirely fairly, the FIRE
• 23:28
  Speaker 1: movement in Australia, Brenda, who represents them and speaks for
• 23:33
  Speaker 1: them and runs meetings once a week in Melbourne, I believe, has,
• 23:38
  Speaker 1: I'm just editing from her response, but this is part
• 23:41
  Speaker 1: of what she had to say right of reply. The
• 23:43
  Speaker 1: media left a home in on the reduced spending to
• 23:46
  Speaker 1: only live on rice and beans rhetoric and bitpick about
• 23:50
  Speaker 1: being frugal and that we don't enjoy life as followers
• 23:54
  Speaker 1: of the FIRE movement. It's actually the opposite. The FIRE
• 23:57
  Speaker 1: movement is about plugging holes where money just escapes from
• 24:00
  Speaker 1: most people and using that to build portfolios in and
• 24:03
  Speaker 1: out of super. I would say you are correct that
• 24:06
  Speaker 1: many pursue FIRE using shares and ETFs particularly. Perhaps a
• 24:11
  Speaker 1: third of the FIRE... Movement followers in Australia use property
• 24:16
  Speaker 1: investments as part of their strategy or a combination of both.
• 24:20
  Speaker 1: We advocate for things like comparing insurance, finding a better
• 24:23
  Speaker 1: deal on bills, and yes, seeing where you can reduce spending,
• 24:26
  Speaker 1: but only where it doesn't align with your values. Okay.
• 24:30
  Speaker 1: Thank you, Brenda. Have you come across the FIRE movement?
• 24:34
  Speaker 2: Well, a lot of the research that we do at
• 24:36
  Speaker 2: AMP shows that about 90% of people die with the
• 24:41
  Speaker 2: majority of their super still intact. So they're not drawing
• 24:44
  Speaker 2: down their super because of fear that they're not going
• 24:47
  Speaker 2: to have enough to live on. So it is a
• 24:49
  Speaker 2: massive issue. You need to give retirees the confidence to retire.
• 24:53
  Speaker 1: Yes. Do you think part of that is not so
• 24:54
  Speaker 1: much fear, but determination to have an inheritance over?
• 25:00
  Speaker 2: Well, based on the surveys that I've seen within AMP,
• 25:04
  Speaker 2: that's not the major issue. The major issue is actually
• 25:06
  Speaker 2: this concern that they're not going to have enough to
• 25:10
  Speaker 2: live on. So I guess it's not knowing how much
• 25:12
  Speaker 2: they're spending or how much they want to spend every year.
• 25:15
  Speaker 2: So not having a financial plan in place, not being
• 25:17
  Speaker 2: concerned about the returns from their super and worried that
• 25:21
  Speaker 2: the returns are going to go down or that the
• 25:22
  Speaker 2: actual value of their capital is going to fall. And
• 25:26
  Speaker 2: leaving something for inheritance is probably the third or the
• 25:29
  Speaker 2: fourth issue, but not the first.
• 25:31
  Speaker 1: Interesting. And thanks, Brenda. And we will come back to
• 25:34
  Speaker 1: fire movement. I want to see what people think about it.
• 25:37
  Speaker 1: I know it's very popular, particularly in the US, and
• 25:39
  Speaker 1: I know that it's popular here, and I would like
• 25:41
  Speaker 1: to know, folks, what you think about it. And we
• 25:44
  Speaker 1: had some replies, but I thought we'd have more. So
• 25:46
  Speaker 1: let us know what you think. All right. Julie, I
• 25:48
  Speaker 1: read at the weekend units are outperforming houses. Is this
• 25:50
  Speaker 1: a blip or something more important? Yes, I refer to
• 25:53
  Speaker 1: that in the preamble. Units are outperforming houses, Diana. So
• 25:58
  Speaker 1: are they a better investment?
• 26:01
  Speaker 2: Everything goes through cycles, right? So we've seen houses outperform
• 26:05
  Speaker 2: now through basically through most of that post COVID recovery. Again,
• 26:09
  Speaker 2: it depends what capital city you're looking at. It's not
• 26:12
  Speaker 2: a national uniform market. There are differences, the different performances
• 26:17
  Speaker 2: across the different capital cities and even across the regions.
• 26:19
  Speaker 2: The regions did so well after the initial stage of
• 26:22
  Speaker 2: the pandemic. And now we're seeing those areas fall. Melbourne
• 26:25
  Speaker 2: prices are declining significantly. Unit values are getting some more
• 26:29
  Speaker 2: demand because of high population growth. So a lot of
• 26:31
  Speaker 2: the demand that's coming through is for units because a
• 26:34
  Speaker 2: lot of the immigration that's coming through is from students.
• 26:39
  Speaker 2: And that's why we're seeing this increased demand for units
• 26:42
  Speaker 2: and also because houses outperformed before. So it's not to
• 26:45
  Speaker 2: say that units are going to outperform forever. It's just
• 26:47
  Speaker 2: at this current point in the cycle, this is what
• 26:49
  Speaker 2: we're seeing.
• 26:50
  Speaker 1: Is it a reversion to the mean? Are you coming
• 26:54
  Speaker 1: through with that economic concept?
• 26:57
  Speaker 2: Well, a lot of the time I think that everything
• 26:58
  Speaker 2: does revert to its mean. I guess the housing market
• 27:01
  Speaker 2: is a little bit different because if it reverted to
• 27:03
  Speaker 2: its mean, then we should have seen some bigger falls
• 27:05
  Speaker 2: to home prices and we haven't. I think probably the
• 27:09
  Speaker 2: better performance in units can continue for a little while
• 27:12
  Speaker 2: longer because we've got this strong immigration coming through. The
• 27:16
  Speaker 2: student numbers have declined and the government is clamping down
• 27:19
  Speaker 2: on a lot of those visas. So we may see
• 27:23
  Speaker 2: some weakness coming through later next year, but we're also
• 27:26
  Speaker 2: seeing that there's a lower number of people that are
• 27:28
  Speaker 2: living per dwelling. So we're obviously needing some more demand
• 27:32
  Speaker 2: for things like units. We don't have enough housing supply
• 27:35
  Speaker 2: in Australia as a nation and particularly in New South
• 27:37
  Speaker 2: Wales and Queensland. So people will be attracted to the
• 27:41
  Speaker 2: unit market to get into the housing market and just
• 27:44
  Speaker 2: to get their foot in the door. But I think
• 27:47
  Speaker 2: eventually this difference between unit and house performance will probably
• 27:50
  Speaker 2: revert to more normal.
• 27:52
  Speaker 1: The gap. Yeah. And I think the gap used to
• 27:54
  Speaker 1: be like 10% and now it's 30%, something like that.
• 27:57
  Speaker 1: It's blown out as a debt ratio. I don't know
• 28:00
  Speaker 1: how they measure that ratio, but that's that ratio that
• 28:02
  Speaker 1: measures the gap between the units and the houses. It
• 28:06
  Speaker 1: blew out to about 30% nationwide from about 10% nationwide.
• 28:10
  Speaker 1: Higher in some cities, of course. And now you see
• 28:13
  Speaker 1: that the prices, the price increases. of units are running
• 28:17
  Speaker 1: harder and higher and faster than houses. That's the main
• 28:20
  Speaker 1: point there. OK, Omar, well, we did cover this, Omar.
• 28:24
  Speaker 1: Do you know why all the data indicates is that
• 28:26
  Speaker 1: house prices in Melbourne are going down? However, council rates
• 28:29
  Speaker 1: are going up. And I think Diana explained that usefully, Omar.
• 28:34
  Speaker 1: And by the way, none of this is advice. Of course,
• 28:36
  Speaker 1: it's all information only. Henry, I wish you'd cover the
• 28:40
  Speaker 1: need to remove incentives around homes and get back to
• 28:44
  Speaker 1: houses as a place to live. The 30-year trend of
• 28:48
  Speaker 1: financialization of housing is really coming home to roost around
• 28:51
  Speaker 1: the world. Capital should really be invested in companies which
• 28:54
  Speaker 1: are productive, not houses. But I do concede it might
• 28:57
  Speaker 1: be hard to reverse the trend. How about some strong
• 29:00
  Speaker 1: tax disincentives for second homes? Well, Henry, I don't know
• 29:06
  Speaker 1: if you are familiar with the Victorian government, but they've
• 29:09
  Speaker 1: been doing exactly that. Exactly that. And guess what? As
• 29:14
  Speaker 1: we've already pointed out in the course of the show,
• 29:16
  Speaker 1: It's the state where house prices are weakest. In fact,
• 29:19
  Speaker 1: they're dropping. And there is a direct correspondent. It's not
• 29:22
  Speaker 1: entirely explained by a whole pile of new taxes that
• 29:25
  Speaker 1: came rolling down the line unexpectedly from the Victorian state government.
• 29:29
  Speaker 1: But it is to some extent associated with it because
• 29:33
  Speaker 1: that's exactly what they did recently. They brought in the
• 29:35
  Speaker 1: tax for second homes and holiday homes and all that
• 29:37
  Speaker 1: sort of thing. And I think it spooked investors. I
• 29:41
  Speaker 1: don't know where you come from on that, Diana. What's
• 29:44
  Speaker 1: your view?
• 29:45
  Speaker 2: I think the taxes in Victoria are definitely having an
• 29:47
  Speaker 2: impact as well as on some analysis that I've done.
• 29:51
  Speaker 2: Victoria is actually in a state of oversupply. compared to
• 29:54
  Speaker 2: the other state. Melbourne, I think, is probably not in
• 29:57
  Speaker 2: a state of oversupply, but maybe in some specific suburbs,
• 30:00
  Speaker 2: but in Victoria overall. We've seen in the last two
• 30:03
  Speaker 2: years a big increase in net outflow out of the state,
• 30:08
  Speaker 2: so going into other states, particularly into Queensland, some into
• 30:11
  Speaker 2: South Australia. And that's why we've seen areas like Adelaide
• 30:15
  Speaker 2: and Brisbane outperform because they've seen this net positive migration
• 30:19
  Speaker 2: into those states, whereas Victoria is now in a state
• 30:22
  Speaker 2: of outflow, which really ramped up after the pandemic.
• 30:25
  Speaker 1: Issue of incentives. In Henry, the incentives that really matter
• 30:28
  Speaker 1: in housing are negative gearing and capital gains tax discounts.
• 30:32
  Speaker 1: That is what everybody's into. And not to mention the
• 30:34
  Speaker 1: fact that the house, the home is a sacred cow
• 30:39
  Speaker 1: inside the financial system. And not only do you not
• 30:41
  Speaker 1: pay tax on it, capital gains tax, but it isn't
• 30:45
  Speaker 1: measured or assessed in accessing the pension, which means you
• 30:50
  Speaker 1: can have a $ 4 million house and get the pension.
• 30:53
  Speaker 1: And the other person who has a $ 400, 000 house can
• 30:55
  Speaker 1: also get the pension. And that is the sort of
• 30:58
  Speaker 1: incentives that are in there. Do you think... I'm not
• 31:02
  Speaker 1: going to ask you because everyone... And the obvious thing
• 31:05
  Speaker 1: is I could throw that to you and you're going
• 31:06
  Speaker 1: to say politicians will never go near it because it's dangerous.
• 31:09
  Speaker 1: But let's move it on a bit and ask you, Diana,
• 31:11
  Speaker 1: whether you think any of those particular incentives inside the
• 31:14
  Speaker 1: housing market are vulnerable economically.
• 31:18
  Speaker 2: So it is really hard to see massive changes to
• 31:21
  Speaker 2: those incentives. I think the only one that could potentially
• 31:26
  Speaker 2: be touched in the next 10 years or so would
• 31:29
  Speaker 2: be around valuing the home in the pension test or
• 31:35
  Speaker 2: trying to provide more incentives for retirees to downsize. I
• 31:39
  Speaker 2: know that they've tried that in the last few budgets.
• 31:41
  Speaker 2: It hasn't really worked or putting in place some sort
• 31:43
  Speaker 2: of death tax, but it's just, it would be so
• 31:45
  Speaker 2: hard to do. That sort of seems to be the
• 31:49
  Speaker 2: area that we're going towards or potentially limiting negative gearing
• 31:54
  Speaker 2: to one home or to new builds that could also
• 31:59
  Speaker 2: come up. But for now, I don't see anything changing
• 32:03
  Speaker 2: in the next few years. I think if we have
• 32:05
  Speaker 2: a broader review on tax, this could be something that
• 32:08
  Speaker 2: might come up, particularly around testing the home in the pension,
• 32:11
  Speaker 2: or at least some sort of limit.
• 32:13
  Speaker 1: They could certainly start to lift that. And again, if
• 32:18
  Speaker 1: you come to a situation where you can sit back
• 32:21
  Speaker 1: and say, well, whatever, people won't march in the streets
• 32:23
  Speaker 1: about it. If someone has a $ 5 million house and
• 32:26
  Speaker 1: they're not allowed to get the pension anymore, I think
• 32:29
  Speaker 1: people won't march in the streets about that, just like
• 32:30
  Speaker 1: they haven't marched in the streets about the 3 million
• 32:32
  Speaker 1: super tax for all the trouble around it. It is
• 32:35
  Speaker 1: in the broader community. They just nod their head and
• 32:37
  Speaker 1: they say, well, 3 million seems to be a lot
• 32:39
  Speaker 1: to have in super per capita. And that's an understandable
• 32:42
  Speaker 1: point of view as well. Okay. Hey, really interesting. Thank
• 32:45
  Speaker 1: you for your time. Thanks for coming on the show. Thanks, James.
• 32:48
  Speaker 2: It's been a pleasure.
• 32:49
  Speaker 1: Great to get, that was a wide ranging conversation. That's
• 32:52
  Speaker 1: probably as wide ranging an interview as you'll do for
• 32:54
  Speaker 1: some time, I imagine. So thanks for putting you through
• 32:58
  Speaker 1: your paces there. It was really good. And I think
• 33:00
  Speaker 1: it was great value for everybody. who tuned in. That
• 33:04
  Speaker 1: was Diana Messina, economist at AMP, folks. And hopefully you
• 33:08
  Speaker 1: can hear her video and see her video, which is
• 33:12
  Speaker 1: out there on, I saw it on LinkedIn. Lots of
• 33:15
  Speaker 1: very interesting comments. And you see her going down to
• 33:17
  Speaker 1: a childcare center. Keep the emails rolling. The moneypuzzle at
• 33:21
  Speaker 1: theaustralian.com.au is our email. Do mention us to a friend.
• 33:26
  Speaker 1: We'd like that. If you would, just mention us to
• 33:28
  Speaker 1: one person. about the show if you like it. That
• 33:32
  Speaker 1: would be a great way to give us some support.
• 33:36
  Speaker 1: And today's show was produced by Leah Samangalu. Talk to
• 33:42
  Speaker 1: you soon.