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Rates up, so should you fix your mortgage now? · The Money Puzzle

0:10
Speaker 1: Hello and welcome to The Australian's Money Puzzle podcast. I'm
0:13
Speaker 1: James Kirkby. Welcome aboard everybody. Well, the RBA has raised
0:17
Speaker 1: interest rates for the second time this year and we're
0:19
Speaker 1: now looking at a cash rate of more than four percent.
0:23
Speaker 1: Pretty interesting for all investors, but particularly of course for
0:26
Speaker 1: property investors. Interesting too. I think if you take a
0:30
Speaker 1: close look at the vote, five of the board voted
0:33
Speaker 1: to increase, four voted against it. That's pretty close, you know,
0:36
Speaker 1: but they went ahead. Anyway. We'll take a look at this.
0:38
Speaker 1: We'll take a look at what it means should you
0:40
Speaker 1: fix your mortgage and a fascinating look at the changing
0:44
Speaker 1: demographics in Australia, which means for Manny, for one in
0:48
Speaker 1: three of Australian's the Great Escape older Australians, they're not
0:52
Speaker 1: going to be hit half as hard.
0:53
Speaker 2: Hi, Stuart, Happy, Saint Patrick's day, James.
0:57
Speaker 1: Thank you. I'm wearing my green jacket Acrose. Listeners can't
0:59
Speaker 1: see that, but believe me, folks, I am no shamrock actually,
1:03
Speaker 1: but it's a fairly becom same partis day being a Tuesday.
1:07
Speaker 1: We tend to prefer them to be at the end
1:08
Speaker 1: of the week, Thursday, Friday and the weekend. But yes,
1:11
Speaker 1: happy same partict day. Everybody law failer podrick, as they
1:14
Speaker 1: say in the Irish language. Just in case you didn't
1:17
Speaker 1: know that already. All right now, folks, upward pressure on
1:21
Speaker 1: interest rates. Gee, things are changing. And of course we
1:24
Speaker 1: didn't need it on our sort of finely balanced economy.
1:27
Speaker 1: We did not need a petrol shock, which is what
1:30
Speaker 1: we've got twenty percent increase at the bowser and that's
1:33
Speaker 1: sort of kicking right through and putting inflation pressure as
1:36
Speaker 1: we knew across the economy. I think people didn't quite
1:39
Speaker 1: know that we only had thirty six days worth of
1:41
Speaker 1: petrol in the country, and more than that that we
1:44
Speaker 1: had signed an international treaty to say we had ninety days,
1:47
Speaker 1: and we were the only country out of thirty two
1:49
Speaker 1: countries in that treaty with the international agency, International Energy
1:52
Speaker 1: Agency that broke that treaty and didn't fulfill our terms.
1:55
Speaker 1: That's really interesting and I think it explained some of
1:58
Speaker 1: the panic around the oil. I want to talk about
2:00
Speaker 1: the bigger picture to you, Stewart whims Upfrow solutions, and
2:05
Speaker 1: I want to talk particularly about what it means for
2:07
Speaker 1: investors and the first one. Obviously, the first cab off
2:10
Speaker 1: the rank is should we fix? Okay, because suddenly we
2:14
Speaker 1: are looking at fixed rates moving up around the six
2:18
Speaker 1: percent market and Z moved or ready to do that.
2:21
Speaker 1: One of the first is the big four banks to
2:23
Speaker 1: do so tell us the investor point of view at
2:27
Speaker 1: this level, when the rates start across commercial rates space,
2:31
Speaker 1: it's starting to cross, coming up towards six percent, is
2:33
Speaker 1: it time to fix?
2:36
Speaker 2: Look, it's really funny around the psychology of this, James.
2:39
Speaker 2: People tend to have very strong opinions about what interest
2:43
Speaker 2: rates might do in the future when contemplating fixed and variable.
2:48
Speaker 2: So by that, what I mean is if the fixed
2:50
Speaker 2: rate currently you know, for two, three, four, five years,
2:54
Speaker 2: whatever the term, is only marginally higher than the current
2:57
Speaker 2: variable rate, a lot of people might can include, well,
3:00
Speaker 2: we're definitely going to get three rate hikes, so I
3:03
Speaker 2: should fix for three years because that's going to protect me.
3:06
Speaker 2: And sure, I might pay a little bit of a
3:08
Speaker 2: margin for a little bit of time, but I'm probably
3:10
Speaker 2: going to be in the money for most of the time.
3:12
Speaker 2: The problem with that approach is that interest rate expectations
3:17
Speaker 2: can change on a dime. Literally, we could wake up tomorrow,
3:21
Speaker 2: and the news could be different. You know, an energy
3:24
Speaker 2: price shock, could you know, depress the global economy, and
3:29
Speaker 2: all of a sudden we're looking at a recession and
3:31
Speaker 2: lower interest rates. That's entirely possible that would happen, maybe
3:34
Speaker 2: not overnight, but at least over the coming weeks. And
3:37
Speaker 2: then the other thing we've got to think about, and
3:39
Speaker 2: that you've got to really consider is that if you're
3:42
Speaker 2: contemplating a three year fixed term, what you're mostly interested
3:46
Speaker 2: is what will the average, the time weighted average rate
3:50
Speaker 2: be over that period. So, yes, we might get a
3:53
Speaker 2: few interest rate hikes this year, but it's entirely possible
3:57
Speaker 2: they could do their job by the time we get
3:59
Speaker 2: to the end of this calendar year, and we're looking
4:01
Speaker 2: at pretty extensive cuts next year, for instance. So these
4:06
Speaker 2: things are really hard to forecast out, and my view
4:09
Speaker 2: would be unless it's absolutely compelling. And remember, the data
4:13
Speaker 2: tells us I looked at twenty years worth of data,
4:15
Speaker 2: and it tells us that the probability of being better
4:18
Speaker 2: off is around about one third of the time, and
4:21
Speaker 2: we're worse off around two thirds of the time. History
4:24
Speaker 2: tells us. So what we're doing by fixing our rates.
4:27
Speaker 2: Is we're betting against the interest rate market, because the
4:29
Speaker 2: interest rate market is what sets what forward fixed rates
4:33
Speaker 2: look like. And I don't know if that's such a
4:35
Speaker 2: wise bet. And I would rather keep my flexibility, typically
4:39
Speaker 2: as an investor, because that means that I've got flexibility
4:42
Speaker 2: to access equity, to refinance, to go to a lender
4:45
Speaker 2: that's got better borrowing capacity over the next two or
4:48
Speaker 2: three years, Whereas if I fix, maybe I lose some
4:52
Speaker 2: of that flexibility.
4:53
Speaker 1: Oh so you're pretty skeptical about fixing it the best
4:56
Speaker 1: of times, and you're just as skeptical now, just even
4:59
Speaker 1: with red high. That doesn't change your view.
5:02
Speaker 2: Well, like I say, James, everyone's opinion or most people's
5:06
Speaker 2: opinion at the moment they're talking about will it be
5:09
Speaker 2: two or three interest rate hikes maybe four this year?
5:12
Speaker 2: That's what the commentary is all about. What I'm saying
5:15
Speaker 2: is that can change very quickly. There are some good
5:17
Speaker 2: reasons to fix, James. Of course, if your cash flow
5:21
Speaker 2: situation is such that if you did experience three or
5:25
Speaker 2: four rate hikes, you're going to be in a pressured situation,
5:29
Speaker 2: and you want to avoid being that situation. Of course,
5:33
Speaker 2: fixing might be the right approach, So you would fix
5:36
Speaker 2: because it's appropriate for your circumstances, rather than necessarily playing
5:41
Speaker 2: the interest rate market thinking that you're going to be
5:43
Speaker 2: better off. I think in that situation, play the probabilities
5:47
Speaker 2: and the evidence tells us we're probably not going to
5:49
Speaker 2: be better off. And whilst the commentary is pretty firm
5:53
Speaker 2: around a heightening interest rate cycle, rising interest rate cycle, again,
5:58
Speaker 2: that can change pretty quickly in the matter of months.
6:01
Speaker 1: So are you saying for most people most of the time,
6:03
Speaker 1: don't bother.
6:05
Speaker 2: I mean, except there's a few. There's only been a
6:07
Speaker 2: couple of occasions before the GFC. I guess if you're
6:10
Speaker 2: able to forecast the GFC, we're all smarter in hindsight.
6:14
Speaker 2: And of course, during twenty twenty and twenty one, when
6:16
Speaker 2: interest rates were you know, cash rates were virtually zero.
6:20
Speaker 2: So there are times in history where we go, yeah,
6:23
Speaker 2: it's compelling, it's a no brain up.
6:24
Speaker 1: But what about this time?
6:27
Speaker 2: No, No, I don't think it's compelling to my mind.
6:31
Speaker 2: Look the war, what happens to the war and energy
6:34
Speaker 2: shocks and inflation? You know, we'll talk about inflation in
6:38
Speaker 2: a moment, I'm sure, But what happens who knows, but
6:41
Speaker 2: I think, you know, I think that because the RBA
6:45
Speaker 2: was quite generous in giving us an interest rate cup
6:47
Speaker 2: before a federal election, I think they now look back
6:51
Speaker 2: and go, well, that was a mistake. I think to
6:52
Speaker 2: do that, U turn, it's going to have a pretty
6:55
Speaker 2: it's going to have a pretty significant impact on confidence
6:58
Speaker 2: and the property market. So I think they'll do what's
7:01
Speaker 2: necessary now. They'll break the back of inflation. I suspect
7:04
Speaker 2: relatively quickly, and I wouldn't be surprised then if we're
7:08
Speaker 2: looking at cuts next year, if those if they do
7:12
Speaker 2: aggressively raised interest rates this year.
7:14
Speaker 1: Just one scenario I want to put to you. What
7:16
Speaker 1: about the person who always fixes, who consistently fixes twenty
7:19
Speaker 1: year mortgage fixes every three years, back to back, unbroken.
7:25
Speaker 1: What about that situation where you're consistent? What do you
7:28
Speaker 1: how do you view that?
7:29
Speaker 2: By my data, you're at least a quarter of a
7:32
Speaker 2: percent worse off. Right, If that's all you've done for
7:35
Speaker 2: your entire life, You've overpaid. It's like insurance, James. It
7:39
Speaker 2: gives you certainty. And you know, if you have car
7:42
Speaker 2: insurance for your entire life and you never claim on
7:44
Speaker 2: the policy, hasn't been a waste of money. Well maybe,
7:46
Speaker 2: but you've had that certainty.
7:48
Speaker 1: Okay, so that's already there's a price in it you're seeing.
7:51
Speaker 1: I mean, it's not the price. There's some people who
7:53
Speaker 1: suit and the security and it's virtually insurance. But there's
7:56
Speaker 1: a price. Let just take compare for insurance. Okay, I
7:58
Speaker 1: want something really interesting we were talking about for the show, folks.
8:02
Speaker 1: This is something Short's drug up and it's very interesting.
8:04
Speaker 1: You probably the flip side of this, of course, is
8:07
Speaker 1: that cash becomes a bit more attractive. Okay, we can
8:10
Speaker 1: get term depossits now and the four and a half
8:13
Speaker 1: percent fairly handy out there are call and that it
8:17
Speaker 1: may go up from here again, tell us the change,
8:21
Speaker 1: Stewart about how Australian society is quite different and the
8:24
Speaker 1: number of people who actually benefit from interest rates has
8:28
Speaker 1: gone up and the number of people who are negatively
8:31
Speaker 1: affected by interstrate hikes have gone down.
8:34
Speaker 2: Explain that, well, you know, I've been thinking about why
8:37
Speaker 2: is inflation so persistent? Where's it really coming from? And
8:40
Speaker 2: we can talk about housing. So rents have risen, the
8:44
Speaker 2: cost to constructed dwelling has risen, electricity has risen, Insurance mediical.
8:49
Speaker 2: All these sorts of things have risen, but they're all
8:51
Speaker 2: non discretionary, right. We all we have to buy insurance.
8:54
Speaker 2: If it goes up ten percent, it is what it is.
8:57
Speaker 2: We take that higher cost. So interest rates aren't really
9:00
Speaker 2: going to move those non discreen discretionary expenses. So then
9:05
Speaker 2: why is services inflation so high? For example? And when
9:09
Speaker 2: you look at some of the data that's CBA publishers.
9:12
Speaker 2: Now you look at recreational culture and hotels and restaurants,
9:17
Speaker 2: the increase in spending is huge. So who is doing
9:20
Speaker 2: that spending? And that's what made me sort of dig
9:23
Speaker 2: down into the numbers and look at two cohorts thirty
9:27
Speaker 2: five to fifty five, which is probably, you know, you
9:30
Speaker 2: kind of peak mortgage situation. They're people that cohort's probably
9:34
Speaker 2: sensitive to interestrates. And then the plus sixty five cohort,
9:38
Speaker 2: which you can just call baby boomers, they're quite happy
9:42
Speaker 2: when interest rates arise. Of course, funded retirees they get
9:46
Speaker 2: more on turn deposits and so forth. So the difference
9:50
Speaker 2: over the last twenty years is that around six and
9:53
Speaker 2: a half percent of the entire population has become less
9:57
Speaker 2: sensitive to interest rates. So the proportion of thirty five
10:01
Speaker 2: to fifty five has contracted by about eight percent, and
10:05
Speaker 2: the proportion of Australians over sixty five has expanded by
10:10
Speaker 2: about thirty five percent, so there's a lot more of
10:12
Speaker 2: them and fewer mortgage holders.
10:15
Speaker 1: It's the sort of news that isn't going to get aheadlined.
10:17
Speaker 1: Is it more people will be better off with higher
10:22
Speaker 1: cash deposits than the number of people who will be
10:27
Speaker 1: worse off with the higher loan race. That's a killer
10:30
Speaker 1: that is really interesting at demographic sort of hotspot there, folks. Okay,
10:34
Speaker 1: we'll take a short break. We'll be back in a moment. Hello,
10:44
Speaker 1: Welcome back to The Australian's Money Positive podcast. I'm James
10:47
Speaker 1: Kirby talking to Stuart Weims Wemyss, a regular on the
10:52
Speaker 1: show from the pro Solution Private Clients group. Stuart, I
10:57
Speaker 1: want to this. We'll have some terrific questions which I've
10:59
Speaker 1: kept you, but I want to just look at one
11:02
Speaker 1: particular item which is always of interest to our listeners,
11:06
Speaker 1: self managed super funds and the scene there and what's
11:10
Speaker 1: going on sort of mixing that's coming from that market
11:12
Speaker 1: in that it shrunk for some years and the banks
11:16
Speaker 1: pulled out of it. And many people who might have
11:20
Speaker 1: planned to be property investors through self managed super funds
11:24
Speaker 1: didn't have many places to go. There wasn't much competition
11:27
Speaker 1: in the market. They sort of pushed to the margins.
11:30
Speaker 1: AMP has more recently come into the frame, which signals
11:33
Speaker 1: to us, I think that market is here to stay,
11:36
Speaker 1: and the government admittedly of late, has basically met noises
11:40
Speaker 1: that they're going to leave it alone. But there was
11:43
Speaker 1: a couple of observations you wanted to make about that
11:45
Speaker 1: area in the context of rising rates and also the
11:49
Speaker 1: new super tax, that is, the very high tax for
11:53
Speaker 1: the very high amounts. What was it they wanted to
11:56
Speaker 1: tell us.
11:57
Speaker 2: Well, one of the attractions for most people to borrow
12:01
Speaker 2: to invest inside super into property is that they think, well,
12:06
Speaker 2: you know, when I enter into retirement face, I don't
12:08
Speaker 2: pay any capital gains tax, and we know that if
12:10
Speaker 2: we want to invest in property and we hold it
12:12
Speaker 2: for many decades, hopefully we make a really large capital gain.
12:16
Speaker 2: The downside though, with super is the negative gearing benefit
12:19
Speaker 2: is a lot lower. Of course, it's capped at fifteen percent,
12:21
Speaker 2: whereas outside super maybe we get forty seven percent, three
12:25
Speaker 2: times as much in terms of a tax break. Outside
12:29
Speaker 2: super So when you do those numbers, they negate each
12:32
Speaker 2: other pretty much. You know, you might be attracted to
12:35
Speaker 2: nil CGT, but what you're doing is foregoing in the
12:39
Speaker 2: interim some tax deductions, and in a higher interest rate environment,
12:43
Speaker 2: those tax actions are worth more. So I just caution
12:46
Speaker 2: people to really be careful about going into something, well
12:50
Speaker 2: anything really that is backed purely from taxation consequences. At
12:55
Speaker 2: the end of the day, there's got to be a
12:56
Speaker 2: lot of reasons why you do it, and maybe taxes
12:59
Speaker 2: or tax benefits is only one of them. And then,
13:02
Speaker 2: of course the new Div. Two nine six tax, which
13:05
Speaker 2: applies for accounts greater than three million dollars. I guess
13:09
Speaker 2: if someone is in their twenties or thirties and is
13:11
Speaker 2: going to hold a property for you know, thirty or
13:13
Speaker 2: forty years, they could be caught up in that. Now,
13:16
Speaker 2: I don't want to overemphasize it, because you know, it's
13:19
Speaker 2: only the amount in excessive three million dollars that attracts
13:22
Speaker 2: thirty percent in terms of tax. So it's still the
13:25
Speaker 2: blended tax rate is still pretty attractive. But I guess
13:28
Speaker 2: maybe that's something that the government's thinking in the back
13:31
Speaker 2: of their mind. Well, at least we've got this other
13:33
Speaker 2: tax and for those people, they're going to gear and
13:36
Speaker 2: build a lot of wealth. We're going to capture some
13:38
Speaker 2: of that tax revenue sort of down the track. But
13:41
Speaker 2: there's a lot more lenders.
13:43
Speaker 1: Saf batch, superfund, property investment and the whole scene and
13:47
Speaker 1: the finance scene which is dormant for a while. Can
13:50
Speaker 1: we have more confidence now to do it if we
13:52
Speaker 1: want to? And is the market? Am I imagining things?
13:55
Speaker 1: It is the market actually coming back in live with
13:57
Speaker 1: the broader lift of participation in theirs, which have been
14:01
Speaker 1: growing at a fair clip in terms of commencements and performance.
14:06
Speaker 2: It's hard to forecast the future, of course, James, but
14:08
Speaker 2: I think as we stand here today, I'd have a
14:10
Speaker 2: high level of confidence that if you're going to get
14:12
Speaker 2: into this sort of arrangement, that you're going to be
14:15
Speaker 2: able to refinance if you need to and shop around
14:18
Speaker 2: in terms of interest rates, and that there should be
14:22
Speaker 2: more competition over the next decade than there was over
14:25
Speaker 2: the past decade. So I think we've got some confidence
14:28
Speaker 2: there if you want to do something like this, and
14:30
Speaker 2: even if you're dealing with lenders that are mortgage managers,
14:34
Speaker 2: you know, so they're not eighty i's, they're not banks.
14:36
Speaker 2: There's still a lot of them out there. A lot
14:38
Speaker 2: of them are reputable Pepper, Bluestone, Latrobe, they've been around
14:41
Speaker 2: for a long time and they're active in this space.
14:44
Speaker 2: So whilst there might not be household brands, you know,
14:47
Speaker 2: there's still very large entities that are that are safe
14:51
Speaker 2: to deal with.
14:51
Speaker 1: Okay, so that's clear. The are I think folks on
14:54
Speaker 1: super fund, So that's we're thinking about that. We had
14:56
Speaker 1: some guests on the show who just said, don't use it,
14:58
Speaker 1: don't use the self managed to fund as your way
15:00
Speaker 1: into property because what they're saying, because the tax benefits
15:03
Speaker 1: aren't as good as if you were outside. Then Stewart says,
15:06
Speaker 1: don't let the tax benefits drive you. Make up your
15:08
Speaker 1: own mind. I'm sure you will, all right. Now, I've
15:11
Speaker 1: kept some questions. I do one before the break, which
15:14
Speaker 1: is from peace having listened to your show with Hugh
15:17
Speaker 1: Robertson on the day Facto Inherrison's tax, which we have
15:21
Speaker 1: and super Okay, that's folks, if you recall the seventeen
15:24
Speaker 1: percent your estate will pay when you're super transfers to
15:30
Speaker 1: your inheritance. Most for most people most of the time,
15:34
Speaker 1: given this can be avoided by those who use an
15:37
Speaker 1: advisor or those who are unfortunate enough to get a
15:40
Speaker 1: terminal illness, says Peace. Should the government just get rid
15:43
Speaker 1: of this tax? As far as I can see, removing
15:45
Speaker 1: it would be a surefire vote winner.
15:47
Speaker 2: What do you think the sole purpose TESTE around when
15:50
Speaker 2: they drafted the legislation around super was to accumulate retirement
15:56
Speaker 2: savings for ourselves and our dependents. And so the taxation
16:02
Speaker 2: that applies to death benefits paid to non dependence just
16:07
Speaker 2: captures that higher rate of tax brings it up to
16:10
Speaker 2: around thirty percent, because it wasn't meant to provide a
16:13
Speaker 2: tax benefit to non beneficiaries. Are non dependence, I should
16:17
Speaker 2: say beneficiaries. So I think how the law is behaving
16:22
Speaker 2: is right. It's in line with how it was intended.
16:25
Speaker 2: Maybe what they need to do. I looked at some
16:28
Speaker 2: ASPHE data and they conclude that ninety percent of people
16:31
Speaker 2: that died older than eight eighty had no super Yes, right,
16:37
Speaker 2: So this clearly means that the people that are dying
16:41
Speaker 2: over eighty that still have some super then the minority.
16:44
Speaker 1: Well, we wouldn't expect that to be the case. In
16:46
Speaker 1: thirty years time because those people SUC wasn't around right
16:50
Speaker 1: when they're well younger.
16:51
Speaker 2: Yeah, potentially, but you look at the average superbalance, it
16:54
Speaker 2: isn't huge even today, and it's going to take a
16:56
Speaker 2: little bit of time to get up there. So maybe
16:58
Speaker 2: what they need to do is close this loophole, this
17:01
Speaker 2: recontribution loophole, and they could probably do that by reducing
17:05
Speaker 2: the age, the contribution age, so you can make concessional
17:09
Speaker 2: contributions as long as you're seventy five or younger, well
17:13
Speaker 2: up to seventy five. Maybe if they make that, bring
17:16
Speaker 2: that down to seventy or sixty five, it leaves less
17:18
Speaker 2: of a gap to actually implement a recontribution strategy. And
17:22
Speaker 2: I guess the answer is that if you haven't got
17:24
Speaker 2: the money in super within a few years after you retire,
17:29
Speaker 2: then that probably deals with most people. And they're people
17:32
Speaker 2: that keep making non concessional contributions for a long time
17:36
Speaker 2: after they retire. They're the ones that are probably using
17:39
Speaker 2: the loophole. Now. I hope they don't change it because
17:41
Speaker 2: for people, it's for people that are able to do it.
17:43
Speaker 2: Of course, there's that a tax advantage there, and that's
17:46
Speaker 2: the law and then you can play the law to
17:47
Speaker 2: your advantage. But I don't think it's really benefit a
17:52
Speaker 2: large cohort. And I think keeping the tax so that
17:55
Speaker 2: it's not used as a way to sort of avoid
17:58
Speaker 2: paying tax or misuse to really accumulate wealth so that
18:02
Speaker 2: your independent adult children are better off, that's what super
18:06
Speaker 2: wasn't intended for that purpose. So I don't think that's right.
18:09
Speaker 1: Okay, well that is a common argument, yes, but it's
18:12
Speaker 1: a debate. Shall we say? All right, We'll be back
18:14
Speaker 1: in a moment. I have some really good questions from
18:16
Speaker 1: Eric and Kerry and more. Hello, Welcome back to The
18:22
Speaker 1: Australian's Money Puzzled podcast. I'm James Kirby and I'm talking
18:25
Speaker 1: to Stuart Weems, regular contributor to the wealth section of
18:29
Speaker 1: The Australian, which I'm sure you are familiar with, very
18:32
Speaker 1: richly populated. Just now, we have a new wealth calculator
18:36
Speaker 1: which we have released which is well worth a look at,
18:39
Speaker 1: called are You Rich? That's what's seeing folks. And we
18:42
Speaker 1: also have our rich lists, the Rich two fifty coming
18:45
Speaker 1: out this week and we're starting to issue elements of
18:48
Speaker 1: that all through the week. Some very really terrific stories
18:52
Speaker 1: in there as always. Okay, a question from Eric, longtime listener.
18:56
Speaker 1: Thank you, Eric, he says, thanks for all the work
18:58
Speaker 1: you do on financially to see. Thank you general advice
19:01
Speaker 1: of course, yes, this is never advised. This is information only.
19:05
Speaker 1: Eric says, I was wondering if you could please talk
19:07
Speaker 1: a bit about insurance. Most of the information online is
19:11
Speaker 1: written by insurers, who obviously say everyone needs to be insured.
19:14
Speaker 1: What are your thoughts on the key insurance areas disability, life,
19:18
Speaker 1: income protection? Does everyone need them? I also had a question, Stuart,
19:23
Speaker 1: because this reflects something we did talk about recently, but
19:26
Speaker 1: also had a question which maybe we'll do with f
19:28
Speaker 1: us when someone asked what does self insurance actually mean?
19:32
Speaker 1: We were sort of blithe about it on the show,
19:34
Speaker 1: and so that you could self insurre self insured just
19:36
Speaker 1: means you take the risk yourself. It's as simple as
19:38
Speaker 1: it sounds. You don't have insurance. Let's say you don't
19:42
Speaker 1: have life insurance, right, but you say to yourself, well,
19:44
Speaker 1: I own my house and I have so much in
19:46
Speaker 1: super and that will be enough for anyone that's in
19:51
Speaker 1: my world that will need money later. I forgot that
19:54
Speaker 1: more or less correct.
19:56
Speaker 2: Yeah, that's right, And I guess the question is can
19:58
Speaker 2: you self insurer that? The next question do I have
20:01
Speaker 2: the appetite to wear that risk? And if the risk eventuated,
20:05
Speaker 2: what would happen? What would I do about it? And
20:08
Speaker 2: because I think what you want to do is just
20:10
Speaker 2: avoid regrets, so you might make a decision go, I
20:12
Speaker 2: don't I'm quite happy with no insurance, and then if
20:15
Speaker 2: something was to happen, you go, well, you know I
20:17
Speaker 2: made that decision. But the problem occurs when people don't
20:20
Speaker 2: really think about it.
20:21
Speaker 1: But I'm just wondering, do you agree with their ex
20:24
Speaker 1: basic contention that the coverage of insurance that we get
20:28
Speaker 1: is driven by insurance who tell us we must ensure everything,
20:31
Speaker 1: and maybe we could be a bit more skeptical.
20:34
Speaker 2: I think of the twenty years that I've been in
20:37
Speaker 2: the industry, typically when I see someone that's received advice
20:42
Speaker 2: from an advisor or an insurance specialist, I would say
20:47
Speaker 2: probably ninety ninety five percent of the time, in my view,
20:51
Speaker 2: they've got too much cover. Yeah, so it goes too
20:53
Speaker 2: far the other way, but I think so I definitely
20:56
Speaker 2: agree with that. And of course, you know they're in
21:00
Speaker 2: a device to sell more insurance because they get paid more.
21:02
Speaker 2: But I don't think that then necessarily means that insurance
21:05
Speaker 2: is a complete waste of money and we shouldn't have any,
21:08
Speaker 2: you know. I think that we've got to think really
21:10
Speaker 2: carefully about it. And you know, one of the key
21:12
Speaker 2: assumptions in any or most financial strategies is that I'm
21:16
Speaker 2: going to be able to get out of bed and
21:17
Speaker 2: go to work tomorrow and do that for the next
21:19
Speaker 2: twenty years and make a contribution to my living expenses
21:23
Speaker 2: for my dependence and then also make a contribution towards
21:26
Speaker 2: saving for retirement. And so therefore, if I can't get
21:30
Speaker 2: out of bed and go to work tomorrow, you know
21:32
Speaker 2: what's going to happen. And if it's short term in capacity,
21:35
Speaker 2: not a big deal. You've got, you know, savings, and
21:38
Speaker 2: you'll leave sick leave, you'll get through it. But if
21:40
Speaker 2: it's a longer period of time, maybe one or two years,
21:44
Speaker 2: you know, that could really leave a big dint, put
21:47
Speaker 2: dependence at risk, and put your whole retirement at risk.
21:50
Speaker 2: So one answer to that situation is go and get
21:53
Speaker 2: yourself some insurance. And I would say James, that the
21:57
Speaker 2: more the less insurance you have, the law or the
22:00
Speaker 2: cost of course, and the more you have to invest,
22:02
Speaker 2: so there is a bit of tension here. Of course,
22:05
Speaker 2: the more you invest in, the stronger asset base, the
22:07
Speaker 2: less you need insurance you need so yeah, So, really,
22:10
Speaker 2: in your twenties and thirties, when insurance is relatively cheap,
22:14
Speaker 2: and it is relatively cheap because you're ensuring the next
22:16
Speaker 2: thirty years of income, you should probably have it. But
22:20
Speaker 2: then you should be probably working at making sure you
22:24
Speaker 2: get yourself into a position where you need less and
22:26
Speaker 2: less of it as you get closer into your forties
22:29
Speaker 2: and fifties, and hopefully at some point in your fifties
22:31
Speaker 2: you have none, and that's when it becomes expensive.
22:35
Speaker 1: Okay, So if you manage it right, you ensure when
22:37
Speaker 1: you're younger many people don't, and then when you're older,
22:41
Speaker 1: where many people find themselves paying exorbitant amounts of insurance,
22:44
Speaker 1: you actually have managed your first point that you need
22:46
Speaker 1: is less obviously individual circumstances every time, Eric, But I
22:51
Speaker 1: think you're on the right track that the amount of
22:53
Speaker 1: insurance we need is overestimated regularly because the amount we
22:57
Speaker 1: read about are from calculators, which creative insurance companies who
23:00
Speaker 1: are selling it and we're not actually selling anything. I'm
23:03
Speaker 1: just sure that's why we can talk like this, Okay, Kerry, Kay,
23:06
Speaker 1: or Ry. We've had all this talk over the last
23:09
Speaker 1: few years that the IRBA would look through things like
23:12
Speaker 1: the electricity rebits and its impact on inflation. Wherever the
23:16
Speaker 1: largest contributor to the last quarter CPI was housing twenty
23:20
Speaker 1: four percent increase in electricity costs? Am I missing something here?
23:25
Speaker 1: Of what the RBA has to look through and shouldn't
23:27
Speaker 1: look through is pretty tricky stuff, Kerry, And to some extent,
23:31
Speaker 1: some of that argument has been overtaken by the fact that, oh,
23:33
Speaker 1: it's gone up twenty percent in the blink of an
23:35
Speaker 1: eye and we haven't seen anything like that for a
23:37
Speaker 1: long time. But what did you think of Carry's question.
23:40
Speaker 2: Stuart, Well, they look at the trim mains, they do
23:43
Speaker 2: look at through energy rebates, but energy still rose about
23:47
Speaker 2: four and a half percent, so it's still contributed to
23:50
Speaker 2: a higher rate and rents and construction are really housing
23:54
Speaker 2: what makes up housing. Probably no surprises forgetting that Melbourne
23:58
Speaker 2: has the fastest grow rents according to SQM, and that
24:03
Speaker 2: would probably just be a response because there's probably fewer
24:07
Speaker 2: or at least fewer new investors coming into the Melbourne market,
24:10
Speaker 2: so that obviously puts pressure on rents. And so when
24:13
Speaker 2: you're tightened tendency laws and increase taxes. You only need
24:18
Speaker 2: to look to the UK as an example of how
24:20
Speaker 2: that just increases rents. Last year they had twenty applicants
24:24
Speaker 2: for every rental property in the UK last year. And
24:28
Speaker 2: if you have that sort of dynamics, that sort of
24:31
Speaker 2: shortage of excessive demand and shortage of supply, you're going
24:34
Speaker 2: to get rising rents. But this is the problem I
24:37
Speaker 2: think with monetary policy. It's a very blunt instrument. And
24:40
Speaker 2: essentially what they need to do is they need to
24:42
Speaker 2: create disinflation in discretionary categories. So they absolutely need to
24:47
Speaker 2: smash restaurants and domestic travel, these sorts of things in
24:52
Speaker 2: order to offset the rising cost of nondiscretionary items like
24:57
Speaker 2: rents and fuel and and interstrates.
25:00
Speaker 1: Of course, is just so blunt, it doesn't do that.
25:03
Speaker 2: It's terrible. Yeah, it's going to force the cohort into
25:06
Speaker 2: a lot of pain for them to be able to
25:08
Speaker 2: achieve their aim. Of course, the other side of the
25:11
Speaker 2: coin is we've got a very tight labor market and
25:14
Speaker 2: so the government can help the RBA and help Australians
25:18
Speaker 2: by stopping by reducing their spending and employment growth, but
25:22
Speaker 2: there doesn't seem many signs that are happening. If anything,
25:25
Speaker 2: they're just going to raise more tax revenues so they
25:28
Speaker 2: can keep spending. So unfortunately they're working against really what
25:32
Speaker 2: the RBA is doing. And I guess the picture at
25:35
Speaker 2: this stage, James, is probably a really challenging twenty twenty
25:39
Speaker 2: six for a lot of people.
25:40
Speaker 1: I think so, and I think property place estimates are
25:43
Speaker 1: probably looking a bit bullish and market share market returns
25:47
Speaker 1: are looking a bit bullish. But we'll be back on
25:50
Speaker 1: this and we will cover this very carefully as we
25:52
Speaker 1: go forward. Hey, Stuart Williams, thank you very much for
25:54
Speaker 1: being on the show today. Great to have you, my
25:56
Speaker 1: pleasure and great to see our YouTube videos going off. Folks.
26:00
Speaker 1: Have a look at them on YouTube. The Money Puzzle
26:02
Speaker 1: channel is up now. When the first couple of videos
26:05
Speaker 1: are off there if you'd like to see us all,
26:07
Speaker 1: and we'll have more as we go. We'll be putting
26:09
Speaker 1: them out on a regular basis. Today's show was produced
26:12
Speaker 1: by Leah Samma Glue and do keep those emails and
26:15
Speaker 1: questions running the really interesting ones today the money puzzle
26:18
Speaker 1: at the Australian dot com dot au. Talk to you soon.