Hello, and welcome to The Australian's Money Puzzle podcast. I'm James Kirkby, the Wealth editor at the Australian. Welcome aboard everybody. If you're an investor, it's worth knowing that this week may well be a turning point on rates, which are so important, of course to investors. The big banks have been cutting their deposit rates that they offer retail customers.
Three of the big four have moved in the last few days, cutting their rates by about half a percent, roughly from a five percent or so to four and a half on the deposit. That means that the banks really do believe that rates are coming down. Cynically, of course, you might say they're moving well ahead of time and maybe moving ahead of any we even get. We'll talk about that in a moment. And we've also been talking
about how all year. If you've listened to various shows, I've had several guests saying that the units are going to go better than standalone houses on price, and that is exactly what's been happening in recent times. You'll see that reported. And one other I thought quite topical news worthy item is today the major report on childcare has come out from Victoria University and it gives the lie
of the landown childcare. Basically, it says that one in four Australians live in what they call it childcare desert, that is where there are three or more kids for each spot in the childcare center. There are regional towns and suburbs where those deats go off the deep end and there are six kids for every spot. And that's on the basis that you can even get into a childcare. My guest today is impeccably credential to talk about all this because a she's a economist at AMP B. She's
a regular guest on the show. And see she just very interesting what would you call it a social media video about childcare and she filmed herself going down to the childcare center and speaking as an economist but also someone dashing to childcare, which I've you've never done that, You'll never forget it and you know all about it. It's Diana and Mossina of amp.
How are you, Diana, Hi, James, I'm good. Thank you for having me on.
Great to have you on, Great to have you on the thing about child care and Coree Sink if you will. But the thing about child care is you're.
So interested in childcare, just remembering that I was on the board of the childcare center when we had kids at childcare, and I can remember actually being applying to for grants to renovate the place and all that sort of thing.
And you're so involved, and then your kids move on, and well, it's only human. You're you're not as intensely interested as you were. But we will do that in a moment, folks. But I want to talk to Diana first of all about some big picture of things, because it's news to me actually that the big banks have been cutting the rates the pay depositors, and that to me is them really moving now. It's beyond theory. Now they are of the belief that rates are going forward.
Do you think that tells us anything we didn't already know about where rates are going, Diana.
Well, the bank's price, they're fixed rates, and the deposit rates of what money market expectations tell us, and money markets are pricing in a rate cut by the end of the year in Australia. Here four rate cuts in the US and money market expectations in Australia are very much influenced by what happens globally, particularly in the US, So we may not get a rate cut by the end of the year, but clearly the market has moved and is signaling that there are going to be rate
cuts within the next twelve months. The market jumps around a lot. We can't necessarily take it to heart that this is exactly what's going to happen, but I think that's just what the banks are responding to, this change in money market expectations about where rates are going to go. The banks don't have any clue as to what the Reserve Bank is actually going to do because the Reserve
Bank hasn't met yet. They are the ones that decide the rates on that day, So I think it's just them responding to what the financial markets are saying right now.
How important are I thought that the depositor the depositors were very important to our local banks in terms of where they set their rates.
Well, absolutely they are. We've been in this period where deposit rates have been extremely high over the past twelve to eighteen months, so this is a normalization to the rates that we've had.
Are they high on what measure above inflation or historically or.
The high relative to the last five to ten year average, the deposit rates have basically moved in line with the rate hikes and the very interest rates. About eighty five percent of the rate hikes have been passed onto the average variable rate. I usually look at the one that's discounted, because most of the banks are still giving discounts to the headline rates. Usually in most rate cycles, we see about ninety percent passed through from changes to the cash
straight to the actual variable interest rates. So it's been a little bit less than normal.
Well, I must say, folks, if you are thinking of lucking in some money on term deposit and you were waiting for the top, but they say, no one rings a bell at the top. Right, But this is as close as you'll get to it. I think where they're just starting what could be the first of a sequence of cuts. Okay, Now, the other thing that I wanted to tell to you about briefly was that unemployment turned out to be stronger than people thought, that the numbers
behind the scenes were stronger. And I'm taking from that full employment to still here, and I'm taking from that that basically rental, the demand forens isn't going to change much because people will be able to pay them. There really is no sign up unemployment going the wrong way at the moment. I know the headline number moved ever so slightly. Oh, but could you explain what your interpretation of the unemployment numbers and recites.
The labor market's been quite interesting in Australia. What we've seen is employment growth being quite high actually, but the unemployment rate trending up and the two moving in line doesn't necessarily make a lot of sense. Usually you would expect that if employment growth was slowing, you would see
the unemployment rate go up. What's been happening in Australia is that we are seeing an increasing amount of people actually in the labor force, so people who are in the labor force either those who are working or looking for work, therefore technically unemployed. The participation rate in the labor force has gone up to a record high, so the number of people age of fifteen going into the labor force is at its highest level it's ever been
in Australia. That's a result of high immigration into the country forcing people into the workforce, but also that people are feeling confident enough to go and try and find a job, which is why employment growth is still holding up, but the unemployment rate is moving up, just quite slowly. I'd say it bottomed at three and a half percent.
It's now four point two percent. As you said, it's the unemployment rate is moving higher, but it's still not at a level where you've been becoming concerned about the
state of the consumer. I think obviously the consumer has weakened in the past eighteen months, and we've seen that through lower retail spending, particularly in volumes per capita retail spending, overall, very weak consumer confidence, negative real disposable income growth, but wh're not at the point where consumers are having to double down on their mortgages and are forced to sell. We haven't seen a huge increase in arrears or delinquency rates.
If the unemployment rate gets up a little bit higher, we think it will get to four and a half four point six percent. That's probably at a level where you might see some further awakening in consumer spending, but not enough where you're going to say levels of force selling and the property market.
So those numbers from an investor's point of view, and say a property investor point of view, talk about defaults or bargains in the market where people are defaulting on their mortgages, folks, there is no signal in results, particularly from banks, that is happening in any significant fashion whatsoever. However, Diana, what about if I'm trying to make a decision as an investor on rates and the RBA is out there
saying there's no rate till Christmas. The biggest bank in the country is out there cutting rates already because they well they can, but also of course caught it coming them for depositors that is, not borrowers. But the point I want to ask you is is the chance of a rate cut elevated then, and is it even worth waiting for.
If you're looking to get into the market and you want a variable interest right, then you do have to wait for it because variable interest rates aren't being cut yet. Some of the fixed rates have come off their highs, but that was already happening even six months ago, when as I said before, the fixed rate moves with money market expectations around around interest rates. So it depends what sort of stage or in terms of the investment cycle.
I think a rate cut is still worth waiting for in the sense that there is still the risk of a rate rise here. If you listen to what the Reserve Bank is saying, they still sound hawkish. If we get an upside surprise in inflation the next six months now, they could potentially lift interest rates again. If they're becoming concerned about inflation again.
That means those banks would never cut their borrowing rates and would just lift those deposit rates back up.
Well, that's usually how it works.
Okay, keep that in mind, folks. You might think that it's a natural line to draw that if they're cutting their deposit rates, well, the lending rates must be coming down. Not necessary sssarily sorry, but don't make that assumption because you would be running ahead of yourself and the banks can run ahead of themselves if they wish their banks they're operating in different set of dynamics and you and I. Hey, one other thing I wanted to ask you about before
we go to the break. A question in a while from O Mark really interesting about how that in his particular suburb, which must be in Melbourne, because the prices aren't going anywhere, the rates were going up at the same time councilor rates going up at the same time. I don't know if you look at this as an issue, but I do see a spot reports all the time about councils in funding, various funding crisis and emergencies with that.
Have you looked at that at all. Whether council rates may go up even in suburbs where prices aren't going.
Up, this is interesting. I think it probably reflects a lagged inflationary response from the council. So usually the council rights do have to respond to land values which have been going up alongside home prices. I mean, the home price index is basically a value of land and the cost of building, so land values are still going up across the nation. In Victoria and Melbourne in particular, it's been a different story. Melbourne price have been going down,
as you mentioned. I think the council rting increases are probably reflecting just the high inflation environment that we've been in, and those types of rates like evening, utilities, insurance, all those types of rates that we pay usually tend to lag the broader inflation cycle. I think it's probably only a matter of time before we see some softer inflation in some of those council rates, but probably not outright deflation. Unfortunately, that's not the way they operate.
Does that mean that the rating pieces might not be as severe as they have been.
I think that they have to stop being as high. And we've basically already seen the peak in insurance premiums and insurance costs and finance costs as well. Those types of rates just tend to reflect what happened inflation a few months ago. And also, of course the specifics that go alongside that industry, like and insurance, they've had their own issues that have been going on that have led to high premiums and higher and these higher costs for consumers.
But obviously the broader inflation inflationary environment impacts a lot of those rate setting agencies.
Hey, I want to ask you one last thing. It came up once or twice on the show. In certain parts of the country and even in the big cities, the economics of property, particularly unit investments, was that the replacement cost of building apartment towers in some areas are as high, if not higher, than the cost of the
apartments inside existing towers. And that's a really fundamental economic thing, isn't it That if you can get something and it's actually a discount on its replacement cost, then you really have, from a textbook point of view, were barred. Then apparently have you come across it, are you aware of it? Could you explain to even this is what why that's significant?
I think that probably reflects the fact that the expectations for home values are still that they're going to go up in terms of the land value, but also that the cost of the materials the labor that go into building a potential new dwelling just continued to rise, and we've seen that in that new dwelling construction cost component
of the Consumer Price Index. We see that in rents and in labor costs as well, particularly around construction, because we've seen that the infrastructure construction space has basically been crowding out the residential construction space, leading to high wages in the residential construction sector. So that probably explains that dynamic as well as this expectation that home prices will continue to rise in Australia.
Yes, well, it's interesting. Certainly the numbers are there that in some parts that is the case. It may reflect that kind of inflation spike that reach hit builders for a while, and it may when you come across that if you can if you find a place that is where the existing stock is actually at a discount replacement value. Then you're really onto something. We take a short break, we're going to have a look at childcare. I expect that for most listeners. If you're involved with childcare, you're
going to find this really interesting. If childcare is coming down the line in your life, you're going to find it really interesting. If you've passed the childcare part of your life, you might skip the segment, except to say, folks that there is also a property dimension here, of course, with big childcare listed groups and what's going on there. So we will deal with that in a moment, and then we'll have some questions. Hello, Welcome back to The
Australian's Money Positive podcast. I'm James Kirby talking to Diana Mussina of AMP. Diana is an economist who's been on the show regularly. Now, I this wasn't my plan at all that but it's very useful that this major childcare report came out today from Victoria University. It's getting a lot of coverage around around the place. I see it was released exclusively to the ABC, which of course I would be very I know it about because I like these things to be released to everybody at the same time.
Just to point there Victoria University, and it's a major report, really is. It looks at Australian childcare issues, it looks at overseas issues, and it looks at the availability of places. A couple of broad points. This situation has improved ever so slightly in recent times. That's one thing in terms of the supply of centers. But then there are spots all over the country where there is what they call deserts.
Regional area is pretty obvious it wouldn't be a childcare center, but also lower associate economic areas and parts of the city where there's just bad luck, where there are less spots than there are children. So let's talk about macro first and then specifically your own experience here. Where are we on childcare? Do you think do you think it's improving broadly on a macro point of view in terms of a service locally.
There's actually been a huge amount of change in the childcare sector in the last few years. The Labor Government introduced some new policies last year that increased the childcare benefit to many families, broadened it out, also gave some additional funds to the preschool sector, which is different to childcare. I think a lot of people think of as basically from one year to three and a half or four,
but there's also this preschool sector. And Australia is quite strange in that we have some community funded preschools in some specific areas, but if you're lucky enough to live in that area, you get it. If you're not too bad, you have to pay one hundred and eight or two hundred dollars a day for continued childcare. So that and that's only something that I've discovered after becoming a parent myself.
I think we still have a long way to go to solve some of the issues that you say around the right provisions of the number of centers in specific areas. We've seen a huge boom in demand for centers in terms of where people are living, so in their local areas there are no spots for children. But in areas like the CBD for example, childcare centers have actually had to close because less people are working in the city.
A lot of them have actually emerged together in the CBDs as people have chosen to send their kids to more local centers. So this is the childcare dynamic is
really changing. And then we've had also some large wage gains that have gone to the childcare sector, which reflects the fact that the age care sector had these wage gains last year and that pushed people out of childcare into agecare, so there's not enough stuff going back into child Hopefully these wage gains can actually encourage more people into the sector, and I personally think that the wage gains were very much needed for.
That space and the services that are so important, and we just had run terribly behind in some of those services age childcare too. Now property perspective still with big picture, there was a time, perhaps there are still some believers out there that childcare could be a business. Not only could it be a business, successful business, but so successful that it could be listed on the stock market and
we could all be investors in successful childcare centers. This idea was tabusht by Yeah ABC childcare Centers, which spectacularly went off the rails. This is some years ago, but that I mentioned it because from the ashes of that, if you like Ken good Start, and there are now really three big childcare chains in Australia. Good Start, which is a nonprofit and was created from the wreckage if you like, of the ABC child Care Centers group and
it went under. Then there's Guardian, which is very big across the country and is currently for sale, owned by private equity group. And then there's G eight, which is a listed stock and is at least twenty or thirty percent lower now than it was five years ago. Not a successful stock, but was put forward to people as a property as much as a childcare business because they have property underneath them. I'm using this as a lead in to ask you, Dana, whether you think it's actually
not that it's legitimate. I'm not interested in the sort of philosophical part about this, but whether childcare as a business is a feasible investment for private industry, and whether anyone could ever really expect to make money as an investor shareholder in listed childcare centers. Have you ever looked at that?
To be honest, I think the answer is probably more no, because when I think about the long term drivers of a stock performance, I'm not a stock analyst, but when I think about generally what drives shares in the long term, it's profit growth, and I don't think fundamentally that childcare
is a profitable investment. It's very highly regulated, so it has a lot of public sector involvement and funding, and I find it difficult to imagine that the profit margins are high or that you could potentially expect to be running high profit growth in that type of very highly regulated area. So I feel childcare, while it is privately provided in Australia, it has so much public influence, and I think that personally it should have more public influence.
We should be going more down the path of some Scandinavian countries that are basically all regulated by the government, because the best examples of early childcare provision is one that is provided by the government, like our public primary schools.
Now, tell me your own experience. Did you say two hundred bucks a day? Is that what it is now?
It's a bit less than that, but in some for one child in some areas in Sydney, I've heard people paying two hundred dollars a day in areas like Paddington. Apparently that doesn't include any benefit that you get from the childcare rebate. A family income is now means tested up to about five hundred thousand dollars for a family, but it obviously steps down after a certain amount, so there
is some benefit involved there. I think the bigger issue, though, is that we just don't have enough provision of public preschools. I think I mentioned that briefly before. So if you're lucky enough to live in an area where there's public preschools, that's great, and you could pay fifty seventy dollars a day, much cheaper rates than childcare amounts. But if you don't live in the areas where those are provided, then you're stuck to just putting your children into childcare, which is
much more expensive. So again this government influence that's partly funded by state and local governments in terms of those preschools. So we really need to see more of that, I think, to solve some of the issues that we have in the childcare sector.
So are you paying hundreds of dollars a week for childcare?
Lucky I have some grandparents support and some childcare, so it's not five days of childcare.
Oh it's tough. I know. We didn't have anything like that at all, of course, And I remember there was a we lived about I worked about twenty kilometers from the childcare center, and every day my wife used to bring them over in the morning and I just go down and get them in the late afternoon and there was a fine view relate. Yeah, to drive down this highway every.
Day now two dollars a minute.
Yeah, Oh I remember driving on this highway every afternoon with this fine hanging over my head. Whether I'd make it or not. Oh God. It's a tough phase. And if you haven't done it yet, As I say, folks, you will find that the childcare you have intense interest in the issue when you have people in childcare, just like age care. I expect it's the very same. All Right, We'll be back in the moment with some very interesting questions. Hello,
Welcome back to the Australians Money Pozzlive podcast. Diane. I'm just going to read something first. There are some questions, but this was a comment and I'd like you if you have anything to say on this as well. So it's about the fire movement. I financial independence retire early. We did a special honor last week and we were skeptical not about it. I think some of the habits and principles of it are very good. I'm very interested
in the first part financial independence. I was skeptical about how the possibilities of retiring early, and I thought the movement perhaps made that seem a little bit too easy. In any event, needless to say, and entirely fairly the Fire Movement in Australia, the Brenda who represents them and speaks for them and runs meetings once a week in Melbourne, I believe has I'm just editing from her response, but
this is part of what she had to say. Right of reply, the media left to home in on the reduced spending to only live on rice and Bean's rhetoric and bit pick about being frugal and that we don't enjoy life as followers of the Fire movement. It's actually
the opposite. The Fire movement is about plugging holes where money just escape for most people and using that to build portfolios in and out of super I would say you are correct that many pursue fire using shares and ETFs, particularly perhaps a third of the Fire Movement followers in Australia. I use property investments as part of their strategy or
a combination of both. We advocate for things like comparing insurance, finding a better deal on bills, and yes, seeing where you can reduce spending, but only where it doesn't align with your values. Okay, thank you, Brenda. Have you come across the fire movement?
Well, a lot of the research that we do at AMP shows that about ninety percent of people die with the majority of their super still intact, and they're not drawing down their super because of fear that they're not going to have enough to live on. So it is a massive issue. You need to give retirees the confidence to retire.
Yes, do you think part of that is not so much fear but a determination to hand there to have an inheritance.
Well, based on the surveys that I've seen within AMP, that's not the major issue. The major issue is actually this concern that they're not going to have enough to live on. So I guess it's not knowing how much they're spending or how much they want to spend every year.
So not having a financial plan in place, perhaps not being concerned about the returns from their superb un worried that the returns are going to go down, that the actual value of their capital is going to fall, and leaving something for inheritance is probably the third or the fourth issue, but not the first.
Interesting and thanks BRender, and we will come back to a fire movement. I want to see what people think about it. I know it's very popular, particularly in the US, and I know there's popular here and I would like to know, folks what you think about it. And I we had some replies, but I thought we'd have more. So let us know what you think, all right, Julie, I read it the weekend units are our performing houses.
Is this a blip or something more important? Yes? I refer to that the preamble units are our performing houses, Diana, So are they a better investment?
Everything goes through cycles, right, So we've seen houses outperform now basically through most of that post COVID recovery. Again, it depends what capital city you're looking at. It's not a national uniform market. There are differences. There are different performances across the different capital cities and even across the regions. The regions did so well after the initial stage of the pandemic, and now we're seeing those areas. For Melbourne,
prices are declining. Unit values are getting some more demand because of high population growth. So a lot of the demand that's coming through is for units because a lot of the a lot of the immigration that's coming through is from students, and that's why we're seeing this increased demand for units, and also because houses outperformed before. So it's not to say that units are going to outperform forever. It's just at this current point in the cycle, this is what we're seeing.
Is it there a reversion to the mean? Are you coming through with that economic concept?
Well, a lot of the time, I think that everything does revert to its me. I guess the housing market is a little bit different because if it reverted to its mean, then we should have seen some bigger falls to home prices and we haven't. I think probably the better performance in units can continue for a little while longer because we've got this strong immigration coming through. The student numbers have declined and the government is clamping down on a lot of those visas, so we may see
some weakness coming through later next year. But we're also seeing that there's a lower number of people that are living per dwelling, so we're obviously needing some more demand for things like units. We don't have enough housing supply in Australia as a nation, and particularly in New South Wales and Queensland, so people will be attracted to the unit market to get into the housing market and just
to get their foot in the door. But I think eventually it's a difference between unit and house performance will probably revert to more normal.
The gap, yeah, and I think the gap used to be like ten percent, and now it's thirty percent something like that. It's blown out as a death ratio. I don't know how they measure that ratio, but that ratio that measures the gap between the units and the houses, it blew out to about thirty percent nationwide from about ten percent nationwide, higher in some cities, of course. And now you see that the prices, the price increases of units are running harder and higher and faster than houses.
That's the main point there, Okay, Omar, Well we did cover this, Omar. Do you know why all the data indicates is that how house prices in Meburn are going down, however, consul rates are going up. And I think Diana explained that usefully Omar. And by the way, none of this is the advice, of course, it's all information only. Henry. I wish you'd cover the need to remove incentives around homes and get back to houses as a place to live.
The thirty year trend of financialization of housing is really coming home to roost around the world. Should really be invested in companies which are productive, not houses. But I do concede it might be hard to reverse the trend.
About some strong tax dis incentives for second homes. Well, Henry, I don't know if you are familiar with the Victorian government, but they've been doing exactly that, exactly that, and guess what, As as we've already pointed out in the course of the show, it's the state where house prices our weakest. In fact, they're dropping and there is a direct correspondent.
It's not entirely explained by a whole pilot new taxes that can rolling down the line unexpectedly from the Victoria state government, but it is to some extent associated with it, because that's exactly what they did recently. They brought in the tax for second homes and holiday homes and all that sort of thing, and I think it's booked investors. I don't know where you come from that, Diana, what's your view.
I think the taxes in Victoria definitely having an impact as well as on some analysis that I've done, Victoria is actually in a state of oversupply. The other state, Melbourne, I think is probably not in a state of oversupply,
but maybe in some specific suburbs. But in Victoria overall, we've seen in the last two years a big increase in net outflow out of the state, so going into other states, particularly into Queensland, some into South Australia, and that's why we've seen areas like Adelaide and Brisbane outperform because they've seen this net positive migration into those states, whereas Victoria is now in a state of outflow, which really ramped up after the pandemic.
Issue of incentives in Henry. The incentives that really matter and housing our negative fearing and capital gains, tax discounts,
that is what everybody's into. Not to mention the fact that the house, the home is a secret cow inside the financial system, and not only do you not pay tax on its capital against tax, but it isn't measured or assessed in accessing the pension, which means you can have a four million dollar house and get the pension and the other person who has a four hundred thousand dollar house can also get the pension. And that is
the sort of incentives that are in there. Do you think I'm not going to ask you because everyone and the obvious thing is that I could throw that to you and you're going to see politicians will never go near it because it's dangerous. But let's move it on a bit and ask you, Diana, whether you think any of those particular incentives inside the housing market are vulnerable economically.
So it is really hard to see massive changes to those incentives. I think the only one that could potentially be touched in the next ten years or so would be around valuing the home in the pension test, or trying to provide more incentives for retirees to downsize and know that they've tried that in the last few budgets that hasn't really worked, or putting in place some sort of death tax, but it's just it would be so hard to do. That sort of seems to be the
area that we're going towards. Or potentially limiting negative gearing to one home or to new builds. That could also come up, but for now, I don't see anything changing the next few years. I think if we have a broader review on tax this could be something that might come up, particularly around testing the home in the pension or at least some sort of limit.
They could certainly they could capit that. Yeah, and again, if you come to a situation where you can sit back and say well whatever, people won't march in the streets about it. They won't march if if someone has a five million dollar house and they're not allowed to get the pension anymore. I think people won't march in the streets about that, just like they haven't marched in
the streets about the three million super tax. For all the trouble around it, it is in the broader community they just now their head and they say, well, three million seems to be a lot to happen super para capita. And that's an understandable point of view as well. Okay, hey, really interesting, Thank you for your time, Thanks for coming on the show.
Thanks James, it's been a pleasure, great.
To get if that was a wide ranging conversation, that's the probably as wide ranging and interview as you'll do for some time, I imagine. So thanks for putting you through your paces there. It was really good and I think it was great value for everybody who tuned in. That was Diana Mossina, economist, at amp folks and hopefully you can hear her video and see her video which which is out there on I saw it on LinkedIn. Lots of interesting comments and you see her going down
to childcare center. Keep the emails rolling the money puzzle at the Australian dot com dot u is our email. Do mention us to a friend. We'd like that if you would just mention us to one person about the show. If you like it, that's that's that's what It would be a great way to give us some support. And today's show was produced by Leah Samangalou. Talk to you soon,