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Is property inside super doomed? · The Money Puzzle

0:10
Speaker 1: Hello and welcome to The Australian's Money Puzzle podcast. I'm
0:13
Speaker 1: James Kirby. Welcome aboard everybody. You would think now with
0:17
Speaker 1: property expected to rise over the next two years, I
0:20
Speaker 1: saw a report from Bank of Queensland economists Moncton during
0:25
Speaker 1: the week saying, you know, he expects ten to fifteen
0:27
Speaker 1: percent gains in the next two years, that it would
0:30
Speaker 1: be an ideal time to consider property investment, which I
0:34
Speaker 1: think it may be. But the issue I think on
0:37
Speaker 1: the table for everybody just now is the structure in
0:41
Speaker 1: which you own property. And many people have put in
0:45
Speaker 1: this fifty billion at least worth of property inside Super
0:50
Speaker 1: and I wonder this week, with what's going on, whether
0:54
Speaker 1: those people have made a mistake. My guest today is
0:57
Speaker 1: Stuart Weems of the pro Solution Private Client Group and
1:00
Speaker 1: the Investopperly podcast. We've been talking to each other about
1:05
Speaker 1: these changes. It's time that we did a podcast on it.
1:07
Speaker 1: Hawai is Stuart.
1:09
Speaker 2: I'm really well, James, thanks for having me back.
1:11
Speaker 1: You're welcome. Let's te x explain to people. First of all,
1:14
Speaker 1: like that property holding property inside Super, it's been great
1:20
Speaker 1: that you can put that on the table. There's two
1:23
Speaker 1: types of property you might hold inside Super, but they
1:26
Speaker 1: called business real property. That's if you had a business,
1:29
Speaker 1: their business premises can go in Super. That was always
1:33
Speaker 1: a terrific advantage which a lot of people liked. More recently,
1:37
Speaker 1: of course, with the long profitable history of residential property,
1:41
Speaker 1: people have been putting residential property into Super. I have
1:44
Speaker 1: done it now. The issue is, of course, that two
1:49
Speaker 1: things have happened right that make it less attracted than
1:51
Speaker 1: it used to be. The banks withdrew to some degree,
1:55
Speaker 1: and mid rates very expensive for people to have property
2:00
Speaker 1: inside Super. This is before we talk about the Super tax, folks.
2:03
Speaker 1: So what to explain to listen to everyone if you
2:07
Speaker 1: could about property and Super, the good, the bad, and
2:10
Speaker 1: the ugly if you.
2:11
Speaker 2: Like, Yeah, sure, James. And one of the main attractions,
2:15
Speaker 2: or I guess why people are so attracted to investing
2:19
Speaker 2: in property inside Super is that if they get into
2:22
Speaker 2: pension phase, you know, in retirement, that they can go
2:26
Speaker 2: and sell that property and as long as they're below
2:29
Speaker 2: the transfer balance cap, which in a few weeks time
2:32
Speaker 2: will be two million dollars per person, they won't pay
2:34
Speaker 2: any capital gains tax. And everyone knows, you know, property
2:38
Speaker 2: compounds and great capital growth, and that's where most of
2:42
Speaker 2: my return is going to be. So if I buy
2:44
Speaker 2: a million dollar property today, in twenty years time, you know,
2:48
Speaker 2: hopefully at seven point two percent, they'll be worth four
2:50
Speaker 2: million dollars. I make a three million dollar gross capital
2:53
Speaker 2: gain and I pay no tax. That's super attractive, and
2:56
Speaker 2: I think James, that's the main attraction of people want
2:59
Speaker 2: to invest in property inside SUPER.
3:02
Speaker 1: A lot of people I talk to younger people who
3:04
Speaker 1: are thinking of but also love the idea that they
3:07
Speaker 1: have money in SUPER, which in many ways they feel
3:11
Speaker 1: they can't exploit if you like, or access. Obviously they
3:15
Speaker 1: can't access it till they tirement could be thirty years away,
3:18
Speaker 1: forty years away. But they can use the money in
3:22
Speaker 1: their super as a deposit, which they may not have.
3:27
Speaker 1: Most people don't have a deposit for a property in
3:31
Speaker 1: cash around the house, in the spare bank accountant there,
3:34
Speaker 1: it is in SUPER. So that's the other I suppose
3:36
Speaker 1: is that the other attraction.
3:38
Speaker 2: Yeah, And it's a very transparent way of investing your SUPER.
3:41
Speaker 2: I mean, you know, if you're putting industry fund, it's
3:44
Speaker 2: very difficult to kind of work out how it's invested.
3:47
Speaker 2: But if you've got a self marriage super funded and
3:48
Speaker 2: you go and buy an investment grade unit or something
3:52
Speaker 2: like that. You can drive past it, you know where
3:54
Speaker 2: it is, you can really monitor its performance, and it
3:58
Speaker 2: gives people, you know that bricks and mortar. Of course,
4:00
Speaker 2: property is half the volatility of the share market. That
4:03
Speaker 2: gives people a bit of comfort as well. But we
4:05
Speaker 2: should talk about the negatives well, because fossible.
4:09
Speaker 1: Why isn't it a mainstream Why are I is ended
4:12
Speaker 1: up in advertised? Why are the banks not offering loans
4:14
Speaker 1: in this area.
4:16
Speaker 2: It's a complex structure, and I don't think the banks.
4:19
Speaker 2: You know, typically that you're borrowing, the loan amounts are
4:22
Speaker 2: lower because you're borrowing so seventy percent, whereas someone investing
4:26
Speaker 2: property outside they typically borrow the full cost, so the
4:29
Speaker 2: loan amounts, the average loan size is the lower, and
4:32
Speaker 2: there's a lot of administration from the bank's perspectives. So
4:35
Speaker 2: I just think they view it as not a profitable
4:37
Speaker 2: part of the market, and they pulled out, you know,
4:40
Speaker 2: around this sort of just after the GFC, really a
4:43
Speaker 2: lot of them started exiting. I wouldn't be surprised if
4:46
Speaker 2: they come back into the market, though, particularly if there's
4:48
Speaker 2: a bit of a resurgence in terms of demand for
4:51
Speaker 2: borrowing because it's been it hasn't been that popular, I
4:54
Speaker 2: guess over the last few recent years.
4:56
Speaker 1: But who's doing the lending.
5:00
Speaker 2: Mostly mortgage managers, so they aren't eighty i's deposit institutions.
5:08
Speaker 2: And that's a bit of a red flag for people
5:10
Speaker 2: because a lot of these small mortgage managers offer offset accounts,
5:14
Speaker 2: just like we have outside of super But just be
5:17
Speaker 2: careful with that because they're not going to get the
5:19
Speaker 2: government guarantee because they're not a bank. So it's okay
5:23
Speaker 2: to borrow from these people, and most of them they're regulated,
5:25
Speaker 2: they're safe, but just don't put too much cash with them.
5:28
Speaker 1: You're saying you can borrow from them because they're not guaranteed,
5:32
Speaker 1: so they're in trouble if they go wonder. But if
5:35
Speaker 1: you put money in, you're in trouble. Is that what
5:38
Speaker 1: y you?
5:38
Speaker 2: A blinder? They'll sell their loan book, right, so you're
5:41
Speaker 2: not really at risk that that's not such a problem.
5:44
Speaker 2: It's really the cash side.
5:45
Speaker 1: But I know you say the banks might come back
5:48
Speaker 1: into the business if property starters lift, as many people
5:51
Speaker 1: expect it will, but isn't there something of a sword
5:53
Speaker 1: hanging over the whole thing anyway about the allowance to
5:57
Speaker 1: be like, for want of a better word, that you
5:59
Speaker 1: can borrow to buy property and super that you can that,
6:03
Speaker 1: because isn't there isn't there a question mark that never
6:06
Speaker 1: goes away. But whether the government will just close down
6:10
Speaker 1: the ability to use your super fund to borrow for property,
6:14
Speaker 1: it could do.
6:15
Speaker 2: But I don't think. I mean it changed in nine
6:19
Speaker 2: or was it? I said no, it was even before
6:21
Speaker 2: that was a Howard government thing, wasn't it. So it's
6:23
Speaker 2: been around for a long time. I don't think, you know,
6:26
Speaker 2: I don't think there's much evidence that it's really been misused.
6:29
Speaker 2: Of course, there's always going to be people on the
6:30
Speaker 2: fringe that overborrow and do something silly and lose money.
6:34
Speaker 2: But I think in the main, you look at the
6:35
Speaker 2: numbers that are published in terms of the assets that
6:39
Speaker 2: are associated with these borrowing arrangements and the debt the
6:42
Speaker 2: equity is substantial. You look at those numbers, you go, whow,
6:45
Speaker 2: it's been great for investors. So I don't think it's
6:49
Speaker 2: going to go away, James, unless it starts being misused.
6:52
Speaker 1: About the Greens in Parliament. The Greens, who will have
6:58
Speaker 1: the balance of power in this past said, as part
7:01
Speaker 1: of their support for the new supertax, which we'll do
7:05
Speaker 1: it's soon that they want this band the ability of
7:09
Speaker 1: super funds to borrow. They wanted banned SMSs to borrow.
7:14
Speaker 1: So isn't that a threat?
7:15
Speaker 2: Well, it could be, but what will happen to pre
7:18
Speaker 2: existing arrangements? So you used to be able to have
7:21
Speaker 2: a bit technical but it used to be able to
7:24
Speaker 2: lend money into your own super funds. You didn't have
7:27
Speaker 2: to have a borrow from a third party a bank,
7:31
Speaker 2: but they closed that down, you know, your ability to
7:34
Speaker 2: be able to do that many years ago. But the
7:36
Speaker 2: existing arrangements, if they're there, can remain in place. So
7:41
Speaker 2: I guess my feeling would be if they did ban it,
7:44
Speaker 2: it'd be as of today, we can't do that anymore.
7:47
Speaker 2: But anyone that has that pre existing arrangement, it's probably
7:50
Speaker 2: going to be quarantined or avoided from that, which I
7:54
Speaker 2: mean maybe then, you know, if people are contemplating it,
7:56
Speaker 2: maybe do it sooner rather than later if that's the case.
7:59
Speaker 2: But I don't think there's any reason to ban it.
8:01
Speaker 1: Okay, So what we've said so far. If you're listening
8:05
Speaker 1: and you're thinking of going using your superfund that's self
8:09
Speaker 1: managed super fund, that would be of course to invest
8:12
Speaker 1: in property. As Stuarts explain, there's a couple of issues.
8:14
Speaker 1: Their rates are high. They are the highest you can
8:17
Speaker 1: find in the market for a variety of reasons, one
8:20
Speaker 1: of them being a lack of competition in the market
8:22
Speaker 1: because the big banks aren't in there. Also, then this
8:25
Speaker 1: whole issue of whether you're allowed to continue to use
8:29
Speaker 1: your superfund and have the super fund borrowed to buy property.
8:33
Speaker 1: It's been under question for a long time. There was
8:36
Speaker 1: a report a few years ago by David Murray which
8:38
Speaker 1: was very powerful that it should be banned. It didn't
8:40
Speaker 1: actually get happen, and interestingly, the AP has never said
8:44
Speaker 1: that they would, but the Greens are saying that they
8:48
Speaker 1: want it banned as part of their support for the
8:51
Speaker 1: new supertax. So this is what we know so far.
8:54
Speaker 1: But we also know, as you say, it's your people
8:56
Speaker 1: are very usefully profitably using super to invest in property,
9:02
Speaker 1: either business property what they call business real property, or
9:05
Speaker 1: residential property. Across the country. There's at least fifty billion
9:08
Speaker 1: out there in that category. The big question, folks, is
9:12
Speaker 1: whether now on top of these restraints that are there,
9:18
Speaker 1: the new supertax will really finish this off in terms
9:21
Speaker 1: of whether it's worth the effort. We're going to talk
9:22
Speaker 1: about that after the break. Hello and welcome back to
9:40
Speaker 1: the Australians Money Puzzled podcast. James Kerby here, but Stuart Wiims,
9:44
Speaker 1: regular contributor of course to the Wealth section in the Australian. Stuart,
9:49
Speaker 1: let's talk now, let's really examine whether property is still
9:53
Speaker 1: worth it in Super. And before we do, one thing
9:55
Speaker 1: we didn't mention in the first segment was I remember
9:59
Speaker 1: you saying on the a few weeks ago, and I'd
10:01
Speaker 1: like you to just run this through once more. I
10:04
Speaker 1: remember you saying, why would you have it in Super anyway?
10:06
Speaker 1: Because outside Super the negative gearing is so much better.
10:10
Speaker 1: Could you explain how that all works?
10:12
Speaker 2: Yeah, I mean one of the attractions I said, I
10:14
Speaker 2: think most people who attracted is to avoid paying capital
10:17
Speaker 2: gains tax in retirement, which is a great saving. But
10:20
Speaker 2: there's always another side to the coin. With most things
10:23
Speaker 2: when we make a financial decision, and the downside to
10:26
Speaker 2: gearing inside Super is that the tax rate is much lower.
10:30
Speaker 2: It's a flat fifteen percent as we know, whereas outside
10:34
Speaker 2: of Super, you know, going to pay somewhere between thirty
10:36
Speaker 2: and forty seven percent. It just means that the negative gearing,
10:40
Speaker 2: the tax benefit associated with holding that property is much
10:44
Speaker 2: higher outside Super. And that is really valuable because obviously
10:49
Speaker 2: a saving today is worth a lot more to me
10:51
Speaker 2: than a potential saving in twenty years time when I'm
10:54
Speaker 2: going to retire. So when you model this out, James,
10:57
Speaker 2: and compare the lower level of gearing inside Super, you
11:01
Speaker 2: know you can only borrow, so for seventy eighty percent,
11:03
Speaker 2: you've got to put some cash in together with the
11:05
Speaker 2: highest higher interest rates. Interest rates are about one to
11:08
Speaker 2: one and a half percent higher inside Super compared to outside,
11:12
Speaker 2: and then lower negative gearing. It offsets the capital gains
11:16
Speaker 2: tax savings. It's about neutral when you balance it all
11:20
Speaker 2: out compared to you know, investing property outside Super versus
11:23
Speaker 2: inside Super. So I think people need to be really
11:26
Speaker 2: careful about, you know, if that carrot is dangled in
11:29
Speaker 2: front of their eyes, say, look, you're not going to
11:30
Speaker 2: pay any capital gains tax, that's great, But what am
11:33
Speaker 2: I forgoing in order to achieve that outcome?
11:36
Speaker 1: It's like an opportunity cost. So you're saying, listen, yes
11:40
Speaker 1: you forget that property. If you had bought it as
11:42
Speaker 1: a present, you're paying forty seven percent tax. You've got
11:46
Speaker 1: no tax bricks. Your entire expenses come to two thousand dollars.
11:50
Speaker 1: If you had a property in there, you could add
11:52
Speaker 1: that could multiply by ten by twenty. Okay, So you're
11:56
Speaker 1: saying it's neutral. The perfect time to ask the question.
11:58
Speaker 1: It was. It was, it's noutral, it was beautifully balanced.
12:02
Speaker 1: And now here comes the new supertax. Okay, very briefly, folks,
12:06
Speaker 1: I'm sure you have got a grasp on it. But
12:08
Speaker 1: just to recap the new tax, which is du believe
12:13
Speaker 1: it or not, to effectively begin on July one, covering
12:18
Speaker 1: its first financial year to July one, twenty twenty six,
12:22
Speaker 1: when they start to collect on this tax, for people
12:26
Speaker 1: with amounts over three million and super, the tax will
12:29
Speaker 1: be imposed. It's a new tax. It's fifteen percent, and
12:34
Speaker 1: if you recall, there's already a tax of fifteen percent
12:38
Speaker 1: once it goes over once you have more than two
12:40
Speaker 1: million and super starting July one, under this new law,
12:43
Speaker 1: once you have over three million in super, there's an
12:45
Speaker 1: extra fifteen percent and it's based on realized gains. That
12:49
Speaker 1: means the paper value of the property that you had
12:53
Speaker 1: thought you were holding for twenty years inside your super account.
12:56
Speaker 1: You could get a bill to be paid by you
13:00
Speaker 1: each year on the paper notional theoretical gain of that property.
13:06
Speaker 1: And if the Greens have there ware, the threshold will
13:09
Speaker 1: drop from three millions two million. And if they don't indexit,
13:12
Speaker 1: which they don't plan to, many more people will be
13:16
Speaker 1: brought into the net every year. God feeling Stewart about
13:21
Speaker 1: let's assume that old's going to happen. Everything tells us
13:23
Speaker 1: it's going to happen. The government are in a very
13:25
Speaker 1: strong position. They don't have to really buckle for anything
13:28
Speaker 1: just now they've just been reelected. What do you think.
13:32
Speaker 2: The other thing too, James, is that you pay fifteen
13:35
Speaker 2: percent tax on the unrealized gain. But then when you
13:38
Speaker 2: come to sell that asset, you were taxed on the
13:41
Speaker 2: original cost base of the assets, so you'll pay ten percent,
13:44
Speaker 2: So essentially you'll end up paying twenty five percent.
13:48
Speaker 1: It can be clarify. That's if you sell it before
13:50
Speaker 1: you retire.
13:52
Speaker 2: That's well, that's if you sell it before you tire.
13:54
Speaker 2: Correct or you're over the transfer balance cap, so you
13:57
Speaker 2: have more than two, which is probably going to be
13:59
Speaker 2: the case, of course, because the tax kicks in at three.
14:02
Speaker 2: So you're going to pay somewhere between fifteen and twenty
14:05
Speaker 2: five percent in capital gains tax as a result of
14:08
Speaker 2: these tax which is look and look are you're going
14:12
Speaker 2: to I saw something over the weekend that the average
14:15
Speaker 2: top ten self managed super funds on average told four
14:19
Speaker 2: hundred and twenty million dollars or something like that in them.
14:21
Speaker 2: So I don't think anyone sitting here going, well, they
14:23
Speaker 2: shouldn't pay twenty.
14:25
Speaker 1: Five I mean, unfortunately, it's because of these people that
14:28
Speaker 1: the whole damn thing has been yet through and it's
14:31
Speaker 1: trying to get at this what we don't know but
14:34
Speaker 1: this tiny number of people with enormous amounts and super
14:37
Speaker 1: that are legally in there by the way, But of
14:39
Speaker 1: course no one can stand. No one's going to stand
14:41
Speaker 1: on a hill to defend them because it doesn't stack up.
14:43
Speaker 1: But here's the thing, it becomes the everyday tax situation
14:49
Speaker 1: for property and super So does it as it stand,
14:53
Speaker 1: really undermined the attractions of property and super Well.
14:57
Speaker 2: I did some financial modeling using a scenario that I
15:01
Speaker 2: think is really realistic. So if you have a couple
15:05
Speaker 2: that they're in their mid thirties, have one hundred and
15:08
Speaker 2: sixty thousand dollars of super each, so three hundred and
15:12
Speaker 2: twenty all up, they go and buy a million dollar property,
15:15
Speaker 2: borrow seventy percent in a self managed superfund, it should
15:19
Speaker 2: work out okay for them. That is that their balance
15:22
Speaker 2: should be only the north of about three million dollars
15:26
Speaker 2: by the time that they get into their sixties, which
15:28
Speaker 2: will give them some flexibility to withdraw any excess amounts
15:32
Speaker 2: if they needed to. But the key assumption here is
15:36
Speaker 2: that the both spouses have equal superbalances, which means they
15:41
Speaker 2: own fifty percent of the self managed superfund throughout their
15:45
Speaker 2: entire working career. Unfortunately, that assumption is unlikely, very unlikely.
15:50
Speaker 2: Normally we see in where we have a couple, Normally
15:54
Speaker 2: one of those couples will have a lot more super
15:56
Speaker 2: than the other, either because they've got different incomes, of course,
15:59
Speaker 2: or because of matern leave, all these sorts of things.
16:02
Speaker 2: So for the average person in their thirties, they're thinking, hey,
16:05
Speaker 2: I've got a really long runway twenty years, I should
16:08
Speaker 2: just go on gear into property. They need to be
16:11
Speaker 2: really careful because I think in many situations they'll be
16:14
Speaker 2: caught by this three million dollar tax. And one of
16:17
Speaker 2: the downsides to gearing into property is illiquidity. You know,
16:22
Speaker 2: So if I have a big bill or a big
16:24
Speaker 2: tax bill that need to pay, how am I going
16:26
Speaker 2: to pay that without selling the asset? So I think
16:29
Speaker 2: people need to be very careful with this. And I
16:32
Speaker 2: think if you overlay what we spoke about in terms
16:35
Speaker 2: of you know, lower negative gearing, higher interest rates, lower
16:38
Speaker 2: overall gearing inside super this is just another element to
16:43
Speaker 2: I think make it look less attractive for the average
16:46
Speaker 2: average Australian.
16:47
Speaker 1: Yes, and the couple you mentioned, what they'd have to
16:50
Speaker 1: do was contribute bayond equal each year as well to
16:56
Speaker 1: try and manage the two portfolios basically individual portfolios, to
17:02
Speaker 1: watch the caps which are looming.
17:05
Speaker 2: Yep, that's right, because if one's contributing a lot more
17:08
Speaker 2: than the other, of course, then they're going to own
17:10
Speaker 2: they'll have a greater share in terms of member balance
17:12
Speaker 2: of that self managed super fund. So it's difficult. You
17:15
Speaker 2: could start off when you buy this asset thirty five
17:19
Speaker 2: you do have very equal incomes, but what happens in
17:22
Speaker 2: ten years time. When you don't, it's going to be
17:24
Speaker 2: too easy to fall foul of this cap, particularly since
17:27
Speaker 2: it's not indexed exactly.
17:29
Speaker 1: So you could have a couple where they've been together
17:32
Speaker 1: for all their lives and one person contributed more so
17:37
Speaker 1: that person goes over the individual cap. The other person
17:42
Speaker 1: isn't anywhere remotely near that cap, but the couple at
17:46
Speaker 1: such their household get hit with the tax. That's, as
17:49
Speaker 1: you say, and one of the kind of planks that
17:51
Speaker 1: make property less attractive now and super on the basis
17:54
Speaker 1: that this tax comes through in the way that it
17:57
Speaker 1: is planned. Okay, yeah, difficult got time, difficult time for people.
18:02
Speaker 1: It's really a pity that this has been restrained in
18:05
Speaker 1: so many ways and is met so complicated and in
18:09
Speaker 1: many ways people may think they need to pay big
18:12
Speaker 1: fees to even understand what the rules are. But I
18:14
Speaker 1: think if you track it, folks, we are covering it
18:17
Speaker 1: very carefully, and if you do tune in to this
18:21
Speaker 1: podcast and some others we have done both on the
18:23
Speaker 1: tax and on property, I think you can make your
18:26
Speaker 1: own mind up. Which is a very good time to
18:27
Speaker 1: tell you that we are going to do especial on
18:29
Speaker 1: the new Supertax on Thursday this coming Thursday with Hugh Robertson. Okay,
18:34
Speaker 1: now I have some really good questions, very good questions
18:37
Speaker 1: that I want to let you know about some clarification,
18:40
Speaker 1: useful news about the solar and batteries program which everyone
18:47
Speaker 1: was so interested in a couple of weeks ago, with
18:49
Speaker 1: James Gerard's an update on that. Okay, back in a moment, Hello,
18:59
Speaker 1: Welcome back to The Australian's Money Puzzle podcast. James Kirby
19:02
Speaker 1: here with Stuart Whims of the pro Solution Private Clients
19:06
Speaker 1: Group and the Investoppaly podcast. You weren't involved in this,
19:10
Speaker 1: Stuart Williams, but James Gerard was, who's regularly on the show,
19:14
Speaker 1: and he's something of he's very interested. He's a financial
19:17
Speaker 1: advisor like you are. But I don't know if you're
19:20
Speaker 1: as interested in cars and batteries and all that sort
19:24
Speaker 1: of thing as James is. And we did a special
19:27
Speaker 1: on what's available to anybody basically under the new government
19:32
Speaker 1: scheme there's for renewables and encouraging incentives in this area.
19:37
Speaker 1: The incentives were on the home battery and on the
19:40
Speaker 1: electric cars. The electric cars is ovated lya see one
19:42
Speaker 1: hundred percent deductible the batteries. Basically, many people one in
19:47
Speaker 1: three households have a solar panel in Australia, thanks mostly
19:53
Speaker 1: to incentives in the past, but only three percent of
19:57
Speaker 1: them have battery. So the new scheme for the government
20:00
Speaker 1: is basically cuts the cost of a battery in half.
20:03
Speaker 1: It's a federal scheme and James basically round the numbers
20:08
Speaker 1: and in whatever state you're in, if you couple what
20:10
Speaker 1: the government is offering along with your local state offering,
20:13
Speaker 1: you'll get your battery cost cut in half. But we
20:16
Speaker 1: weren't really clear still when it started, so for what
20:20
Speaker 1: it's worth, the federal government solar battery scheme goes live
20:23
Speaker 1: on July one. I just thought i'd let you know
20:26
Speaker 1: about that that actually comes. I just come into me
20:29
Speaker 1: this morning from one of the industry players there. Okay,
20:32
Speaker 1: now question Liam. You want to read Liam's question? Yeah?
20:35
Speaker 2: Sure, Liam writes, I love the show, wondering if you
20:38
Speaker 2: or your guests have any views on the approach for
20:40
Speaker 2: people who just bought a house. I'm in a position
20:43
Speaker 2: of being able to pay an extra eight hundred dollars
20:45
Speaker 2: per month into my mortgage offset, which is doable until
20:49
Speaker 2: I have kids. Given the high interest rates, I would
20:53
Speaker 2: have thought that's best to do. It doesn't make sense
20:55
Speaker 2: to split the extra.
20:56
Speaker 1: Dollars, Okay, I never advice here Liam, of course, on
20:59
Speaker 1: the information. Does it make sense to less paying into
21:04
Speaker 1: the mortgage off set? What do you think?
21:06
Speaker 2: I think what Liam say is maybe split it towards
21:09
Speaker 2: something else. I'm not really sure, but really the mortgage
21:12
Speaker 2: offset is really the best place to park any spare
21:15
Speaker 2: cash because if you think about it, for two reasons. Firstly,
21:18
Speaker 2: it's a risk free return. Like if you invest in
21:21
Speaker 2: the share market or put it somewhere else, you know
21:25
Speaker 2: you're going to take some risk you're not really certain
21:27
Speaker 2: what the return will be. But in a mortgage offset account,
21:30
Speaker 2: you're definitely going to save six percent to whatever your
21:32
Speaker 2: interest rate is. Secondly, it's not taxable, so you know,
21:36
Speaker 2: if you're paying an average tax rate of thirty percent,
21:39
Speaker 2: for example, to earn a six percent return after tax,
21:43
Speaker 2: you need to earn eight and a half percent, and
21:46
Speaker 2: you need to earn eight and a half percent on
21:47
Speaker 2: a risk free basis, it's just not going to happen.
21:50
Speaker 2: Why so, for anyone that has any spare cash and savings,
21:54
Speaker 2: it put parking in a mortgage off set is really
21:57
Speaker 2: the best way to go unless you're willing to, you know,
22:00
Speaker 2: take a very long term timerize and of course and say, look,
22:03
Speaker 2: I want to put that money into equities or property
22:05
Speaker 2: or whatever it might be.
22:06
Speaker 1: Okay, terrific assuming that you have spare cash, and good
22:09
Speaker 1: for you, Liam you're thinking ahead. I remember the mortgage
22:12
Speaker 1: off set, so I remember thinking they sounds so good
22:14
Speaker 1: if I only had spare cash to put into them
22:18
Speaker 1: back in the day. Okay. Question from John J O
22:21
Speaker 1: N John So he says, I'm feeling tightly squeezed on
22:24
Speaker 1: my variable home nun with A and Z and as
22:28
Speaker 1: a fresh first home buyer, it's eating sixty two percent
22:31
Speaker 1: of my income. I met recently to ask for a
22:33
Speaker 1: better deal, and I was told no chance, no discussion.
22:36
Speaker 1: I stated that currently three of the big banks are
22:39
Speaker 1: offering a five point eight four percent variable rate, significantly
22:43
Speaker 1: lower than my one. So what the response was? A
22:46
Speaker 1: and Z wants to move customers and new clients onto apps. Okay,
22:51
Speaker 1: so John says, given the resistance of the banks to
22:54
Speaker 1: adopt work from home arrangements themselves due to them being
22:58
Speaker 1: considered impractical, isn't it a bit rich to force customers
23:02
Speaker 1: effectively to move to work from face to face interactions
23:05
Speaker 1: with the bank to virtual coaches bolstering their other worldly profits.
23:11
Speaker 1: By that, he means very big. I suppose. Yes. Okay,
23:15
Speaker 1: Look I'll take all that on board. John. I think Stuart,
23:19
Speaker 1: you've always said that that people should rock up to
23:22
Speaker 1: the banks. And I do not need to pick one
23:24
Speaker 1: bank here over another because it's one person in one bank.
23:27
Speaker 1: There's millions of these transactions. But you are firmly you
23:30
Speaker 1: told me, and I did this and it worked that
23:33
Speaker 1: if you go to a bank and you ask for
23:34
Speaker 1: a better offer, they will, but you must use certain
23:39
Speaker 1: magic words. What were the magic words again?
23:43
Speaker 2: Yeah, that's right, you ring them up, and so what
23:45
Speaker 2: I if I was, John, I'll ring them up and say,
23:48
Speaker 2: I'm just about to sign my discharge authority because my movie.
23:52
Speaker 1: That's the magic word.
23:53
Speaker 2: Yes, is going to refinance me to ing you're putting
23:57
Speaker 2: IMNG because I typically have They've got a really low
23:59
Speaker 2: sort of ASIC variable rate. So I'm about to refinance
24:02
Speaker 2: to IOD. But I just wanted to check if you
24:03
Speaker 2: could give me a better rate. But here's the additional tip, James,
24:08
Speaker 2: that I didn't previously discuss with you. It's really strange
24:12
Speaker 2: that bank pricing so when they'll have a pricing tool
24:16
Speaker 2: and they'll work out whether they can match the rate
24:18
Speaker 2: and say yes or no, but they can change from
24:21
Speaker 2: week to week. So, given John's repayments about sixty two
24:26
Speaker 2: percent of his income, I'm going to take a guess
24:28
Speaker 2: to say he's probably trapped today and Z he probably
24:30
Speaker 2: can't refinance elsewhere because he's got too much dead or
24:33
Speaker 2: not enough income, etc. But the people that you call,
24:37
Speaker 2: which is the retention team, don't know that. They're not
24:40
Speaker 2: going to be wise enough to know that you can't refinance.
24:43
Speaker 2: So that's why I say to John, say, you know,
24:46
Speaker 2: I'm going to refinance to ID even if that's not possible.
24:50
Speaker 2: But if you're not successful today, ring back in two
24:52
Speaker 2: or three weeks time, because it might be a no today,
24:55
Speaker 2: but it could be a yes just in next week
24:58
Speaker 2: or the week after or whatever. So be persistent with it.
25:01
Speaker 1: Depending on the team's targets inside the bank, then what's
25:05
Speaker 1: happening in the bigger, wider world. And of course that's
25:09
Speaker 1: not for an individual John, that's for all the John's
25:11
Speaker 1: in the world out there. It's a very general observation
25:14
Speaker 1: that stet is making. Okay, have a look at the
25:17
Speaker 1: final question from Jeff if.
25:20
Speaker 2: You would, yes, Jeff, right, So, I'm interested in how
25:23
Speaker 2: portfolios are balanced by giving weight to property and infrastructure.
25:27
Speaker 2: My understanding is this asset class is supposed to bring
25:30
Speaker 2: a more conservative diversification into a portfolio. But is it
25:35
Speaker 2: actually the case when it's most commonly achieved by investing
25:39
Speaker 2: in funds comprising of listed property investment companies. If so,
25:44
Speaker 2: is it fair to say then that this asset class
25:46
Speaker 2: would be more categorized, more correctly categorized as equities, and
25:51
Speaker 2: as such would remain exposed to equity market fluctuations.
25:55
Speaker 1: Yeah, it's a great question, Jeff, it really is. I mean,
25:58
Speaker 1: you would think if if we talk regularly on property,
26:02
Speaker 1: especially on the Tuesday show, why don't we talk about reads,
26:06
Speaker 1: why don't we talk about property funds? Well, this is
26:10
Speaker 1: the thing. Direct property is direct property. We started at
26:13
Speaker 1: the start of the show talking about why you might
26:16
Speaker 1: have a property. By that, I mean bricks and mortar
26:21
Speaker 1: number twenty two railway cuttings that you own in your fund,
26:24
Speaker 1: as opposed to a share or a holding in a
26:30
Speaker 1: variety of listed property shares, And if you look at
26:34
Speaker 1: the big super funds, industry funds and retail funds, their
26:37
Speaker 1: property is direct property. They own, you know, the office
26:41
Speaker 1: block down town. They don't own that. The value of
26:45
Speaker 1: that block in shares in a listed company. And if
26:48
Speaker 1: there is a crash or a serious market reversal, the
26:51
Speaker 1: fact that they are property in underpinned by real asseense
26:54
Speaker 1: does not make much of a difference. They fall just
26:56
Speaker 1: like everything else. So I think the JEF is I
26:58
Speaker 1: think basically what Jeff saying is correct that as an
27:01
Speaker 1: asset class, if it's listed, it's it's listed, So it's
27:06
Speaker 1: the listed security. So it's a share even if it's
27:08
Speaker 1: underpinned by property. What do you think maybe okay, yeah, yeah, okay,
27:15
Speaker 1: the other put up the other.
27:17
Speaker 2: So let's decide if it should be defensive or in
27:21
Speaker 2: the growth part of the portfolio. So to be a
27:24
Speaker 2: rate a real estate investment trust, you need to earn
27:28
Speaker 2: seventy five percent of your income from rental income, or
27:32
Speaker 2: in Australia, eighty percent of assets on the balance sheet
27:35
Speaker 2: are from real property, and that must distribute ninety percent
27:39
Speaker 2: of that income each year. So really, what we're actually
27:42
Speaker 2: investing in is something that is very much property heavy
27:47
Speaker 2: in these sorts of investments, and now, of course they're
27:50
Speaker 2: traded every day. But the idea behind reads and infrastructure,
27:55
Speaker 2: property and infrastructure is that you will get most of
27:58
Speaker 2: your return in income. With a little bit of capital growth.
28:01
Speaker 2: Maybe the capital will keep up with inflation, but most
28:04
Speaker 2: of your return is income. And when you look at
28:06
Speaker 2: the index a Vanguard's Austraining Property Fund, eighty percent of
28:10
Speaker 2: your return over ten years has been income. So it's
28:13
Speaker 2: done what it should do. It's done what it says
28:15
Speaker 2: on the team.
28:15
Speaker 1: You're buying a rent rule, You're buying a.
28:17
Speaker 2: Rent role, and that's why it's more it's considered in
28:20
Speaker 2: more of a defensive asset rather than a growth asset.
28:23
Speaker 2: But if you have a look at the performance, the
28:26
Speaker 2: best indicator was when interest rates surprisingly. I say surprisingly
28:30
Speaker 2: because the RBA said they weren't going to move it,
28:31
Speaker 2: but surprisingly moved in twenty two and sort of spook
28:35
Speaker 2: the market. What you saw then is the Vanguard Index
28:39
Speaker 2: fund dropped about twenty three percent in that twenty two
28:42
Speaker 2: calendar year. You look at the unlisted funds, most of
28:46
Speaker 2: the values hadn't changed yet. Now the Vanguard Index Fund
28:50
Speaker 2: has actually recovered. It's almost back to where it was
28:53
Speaker 2: before interstrates dropped, whereas unlisted property trusts haven't yet recovered.
28:58
Speaker 2: They probably will over the next twelve months. They lag,
29:01
Speaker 2: they lag. So what the listed companies will tell you
29:04
Speaker 2: is what's going to happen to these the prices of
29:07
Speaker 2: these assets, even though it hasn't yet happened. But you
29:11
Speaker 2: still do get that look through exposure into that market,
29:14
Speaker 2: albeit more in a real time basis as opposed to
29:18
Speaker 2: if you had unlisted assets.
29:19
Speaker 1: Okay, that's a really good answer. Yes, so yes, it
29:21
Speaker 1: does give you access to property. It is underpinned by property.
29:24
Speaker 1: They never actually knew that there was such strict sort
29:28
Speaker 1: of legal constraints around reads for property trust to call
29:31
Speaker 1: themselves such. And then as you make the point that
29:35
Speaker 1: so you're getting that exposure, it really is property exposure.
29:38
Speaker 1: The difference between the block in Martinplace that's in a
29:44
Speaker 1: listed fund and the block that's in an unlisted fund
29:47
Speaker 1: is that the listed fund, its share price will move
29:50
Speaker 1: faster and it will react faster instantly, probably to what's
29:54
Speaker 1: going on in the world, while the unlisted one will
29:56
Speaker 1: react eventually. So once a pointer to the other.
30:00
Speaker 2: Yeah, and I think that price discovery from an investor
30:03
Speaker 2: is a really valuable thing, right because if I've got
30:05
Speaker 2: an unlisted asset, I'm really relying on the manager and
30:09
Speaker 2: the value and the auditor of that fund to make
30:11
Speaker 2: sure they're representing what's actually happening. But if I'm investing
30:15
Speaker 2: in something that's a listed asset, that price discovery that's
30:19
Speaker 2: happening each day when they're buying and selling chairs gives
30:22
Speaker 2: me a lot of comfort that it's really reflecting its
30:24
Speaker 2: current value.
30:26
Speaker 1: Okay, very good, very interesting, Thank you very much, Stuart
30:29
Speaker 1: Wiims a pro Solution Private Line Group. Loveing to have
30:32
Speaker 1: you on the show. My pleasure, always good to have
30:35
Speaker 1: you on the show. Stewart, terrific. All right, now, folks,
30:37
Speaker 1: stand by for a Thursday's show where we will have
30:40
Speaker 1: a few Robertson who is on the Baron's top one
30:43
Speaker 1: to fifty financial advisors, but he is. We're going to
30:46
Speaker 1: do a special on the new Supertax. We have to
30:49
Speaker 1: the correspondence has just mushroomed. Is that the right world
30:53
Speaker 1: flourished on the back of this? So many questions people
30:56
Speaker 1: have asked, I think what I'm going to do? Actually,
30:57
Speaker 1: the whole show will just be your questions about it
31:00
Speaker 1: and in that way hopefully we will really get a
31:03
Speaker 1: clear understanding of what it's all about. Okay, keep the
31:06
Speaker 1: emails coming, the money puzzle at the Australian dot com
31:10
Speaker 1: dot au. Ok soon