Bushfire tragedy highlights the dangers of living in 'the bush'

The recent heatwave in South-East Australia for the past week have brought more than 400 bushfires that have so far already burnt out 200,000 hectares of land, destroyed about 700 homes and left 84 people confirmed dead and several more fighting for life with critical burns. Sydney has been fortunate to escape major fires this time around, with temparatures only rising above 41C for the past few days, and a cool weather front expected later tonight.

The Prime Minister, Mr Rudd, announced a joint federal-state $10 million relief fund, and appealed to Australians to give generously. One or more of the big four Australian banks usually collects donations over the counter, or via EFT into an appeal account. I'll probably make a $10 tax-deductible donation (it will make me feel better, even if it doesn't do much for the victims of this disaster), but I wonder why the government doesn't just reduce the proposed $950 economic stimulus by a dollar? $1 per stimulus recipient would roughly double the size of the government relief fund, and would be more likely to be immediately spent by the relief recipients than the typical recipient of the stimulus payment. However, even $20 million relief is only equivalent to $30,000 per destroyed home, so I hope most of the affected survivors have home insurance with bushfire coverage.

My parents own two small (for Australia) farms in NSW. One is reasonably safe fron bush-fires, being sited on a small, gently sloping hill surrounded by many tens of acres of paddock with very few trees. Although the house design isn't very bushfire resistant (having lots of unshielded picture windows and an underfloor space that burning embers could get in and start spot fires) there is an inground swimming pool and plenty of bore water to help with fire fighting. And if a bushfire was close by it would be fairly quick and easy to use the tractor to clear a substantial fire break around the house.

However, my parent's other farm house is just as poorly designed for surviving a bush fire, and is unfortunately much more vunerable to bush fires as it is located on a small (25 acre) hobby farm that is mostly uncleared forest, and the farm backs directly onto a large state forest. That farm is also steeply sloping, so a fire front would travel rapidly from the state forest to the house once it crested the hill behind the house. Several years ago (before the house was built) a bush fire spread from the state forest onto the farm and burnt out most of the hillside and almost spread across the paddocks to the shed sitting next to the dam. Local volunteer rural fire fighters managed to save the shed on that occasion.

Since I might be inheriting that hobby farm one day, and in the meanwhile we hope to be able to use it for holiday stays with the kids (it needs some renovations first), I need to give some serious thought to making that farmhouse more fire-resistant and add a 'safe-haven' room. I'd like to add an a two-storey extension to the rear of the home to provide enough accomodation for my parents and us to all stay there at the same time during summer vacations. The top floor would be living space with a nice view over Lake Wallace, and the bottom level would be partly cut into the hill-side and provide storage space, a games room and a wine cellar. In light of the bush fire risk I think I'll get the lower level of the extension made from cement blocks (with no windows) on a concrete slab directly on the ground, and opt for a concrete slab roof. As the lower level would be partly earth-sheltered, it should provide a secure safe-haven room if a bush fire ever set the house on fire.

Unfortunately many families in the Australian bush live in timber framed houses that provide minimal protection once a fire reaches the house, so a timely evacuation is often preferable to staying and trying to defend the home. That's why the loss of 700 homes hasn't resulted in a much higher death toll, but there are thousands of people left with nothing but the clothes on their back.

Subscribe to Enough Wealth. Copyright 2006-2008

Net Worth Update: January 2009

My net worth as at 31 January decreased by another -$45,270 (-6.85%) during the month to $614,565 (AUD). This month the decline was due to further significant losses in my geared equity investments (down by -$25,825), another drop in the valuations of our real estate investments (down -$$12,494 or -1.62%) and a decrease in the value of my retirement savings (SMSF down $7,440 or -3.04%). The balance of my half of the mortgage was fairly constant at -$367,377. Further interest rate cuts have meant that soon we won't need to make any further redraws to meet the monthly interest charges on the loan. While DW works part-time (uat least ntil DS2 starts school in a couple of years) we are unlikely to pay off any of the investment property loan principal.

If the stock market continues trading sideways during the rest of February, this month might see a slight improvement in net worth due to a small rebound in house price sales data for our suburb, and the payment of three months (Oct-Dec '08) worth of 'salary sacrifice' and SGL superannuation payments by our employer last week. It would be nice to finally see a month with a positive change in my net worth - so far there have only been two positive months (Apr and Aug) since the GFC took hold in Nov 2007. During this period my net worth has declined by a massive -$557,862 or -47.58%!

Things would have been a lot different if I'd reduced my level of margin loan gearing during 2007 (Plan B, with capital gains draw-implications), or actually followed through with keeping enough Index Put options in place to "insure" against a sever bear market (Plan A). Looking back it's hard to believe that I didn't make enough effort to buy new Put options in Dec '08 when my previous ones (bought around Mar '07) expired (a quick online search didn't find a suitable option on offer at the Index level I wanted for Sep 08 - I should have called my Comsec options broker to get some help). At the time it didn't seem urgent as the market was still testing new highs, and the sub-prime crisis in the US in June didn't seem to have had any impact on the "real economy", especially globally. I let the fact that the expired options had cost me around $8,000 and that most market pundits were predicting a flat market in 2008 (or single digit returns) after three years of 20%+ gains, lull my into a false sense of security. The slight dip in the second half of 2007 appeared to have been the limit of the impact of the US sub-prime fiasco, whereas in reality it was just the first ripple warning of the coming financial Tsunami.

Lesson from all this: if you make a financial plan (I my case to sell Index put options rather than sell physical stocks to reduce my gearing) you have to FOLLOW THROUGH with it!

Subscribe to Enough Wealth. Copyright 2006-2008

A whiff of panic in the air

Today the Australian government announced a second economic stimulus package of A$42 billion on the same day that the Reserve Bank slashed official interest rates by another 100 basis points (1%) to a 50-year low of 3.25%. It appears that the full impact of the GFC on our local economy is finally being admitted by the government, with an element of panic as a technical recession seems unavoidable and the steps taken in 2009 woefully ineffective. The series of interest rate cuts in the past six months is unprecedented. Most charts though underplay just how dramatic the fall has been, choosing to use simple bar charts showing the series of rises and cuts as if they were evenly spaced:



In reality, plotting the changes against time shows that the controversial interest rate rise during the last election campaign was "one too many", and after making jsut one unusually large cut in March 2008, the RBA held fire for a long while, probably expecting the single cut would be enough "shock therapy" to insulate Australia from the impacts of the sub-prime crisis. It was only in Sep/Oct last year that the magnitude of the GFC became apparent, with the drop in economic growth rate in China showing that Australia couldn't hope to avoid being affected.



So far I've tried to keep my stock portfolio as intact as possible, only selling the minimum necessary to avoid getting a margin call. But looking at the stock market and interest rates over the past 5 or 10 years it doesn't look like we're going to see a recovery any time soon. However, I'm too stubborn to give up on my long-term "buy and hold" strategy and high-risk asset allocation. So I think I'll still hang in there in the expectation that the Australian economy does start to recover in the second half of 2009, and that the stock market recovery leads the economy by the usual 6 months or so. However, if the stock market continue to fall I'll be forced to sell off stocks fairly rapidly to settle my margin loans. In the worst case I could end up with no direct stock investments, no margin loans, but a $250,000 HELOC debt (my St George "portfolio loan") offset by only $50,000 or so value in unlisted funds (such as Ord Minett OM-IP) and agribusiness investments. Those investments don't mature for several more years, and the unlisted funds only have a price guarantee if held to maturity. If that happened I probably wouldn't be in a position to reinvest in stocks when the market eventually recovers, so I'd be unable to recover my losses even in the market reached new highs at some time in the future. C'est la vie.

Subscribe to Enough Wealth. Copyright 2006-2008

Bills, bills, bills

For some reason I've always liked getting mail, even though it's 99% financial statements and bills. Today was a 100% bill day - $289.30 due for the quarterly council rates on our home, another rate notice for $293.50 due on our investment property, and the dreaded annual state government land tax assessment on the two properties. Even though our home is exempt from land tax, the rental property value had leapt up from $436,000 in 2007 to $540,000 in 2008, and it was given the same valuation for 2009. The percentage rise in land valuation seems excessive - properties sold in our area only increased by around 10% in 2007, declined by about 5% in 2008 and are still heading downwards in 2009. It will be interesting to see if the valuation is lowered in 2010 - if not, the supposed land value will soon be more than we could sell the house and land for!

The increased valuation has an even bigger impact on our land tax liability, due to the $368,000 land tax threshold. Only the value above the threshold is taxed (at 1.6%), plus $100. Our land tax bill has doubled since last year to now be $2,262.80

I'm having a bit of a cash flow crisis at the moment - I only have a couple of thousand cash sitting in my credit union savings account, having poured all my spare cash into my margin loan accounts in the past few months as the stock market crash threatened to generate margin calls. This month my CC bill is higher than normal due to the recent purchase of the swing set for the kids, and next month it will be bigger again due to the purchase of the DIY pool fencing to replace the existing safety fence that is on it's last legs. I also have to pay $806 uni fee for this semester that's due next week...

I can't complain too much, as the cash shortage is largely a result of my decision to salary sacrifice around half my salary into retirement savings. But it sure would be nice to have an extra $10,000 sitting around in a savings account right now.

The only bright note is that the land tax bill only gets a small ($35) discount for paying the entire amount "up front". If I elect to pay the bill in three monthly installments I may just have enough dividend income coming in during March and April to get by. I just hope we don't have any unexpected expenses this year (like when the tree fell on our rental property and we had to cut the rent by half for six months).

Subscribe to Enough Wealth. Copyright 2006-2008