Wednesday, 8 March 2023

Another monthly RBA meeting, another interest rate hike

The RBA decided to raise interest rates by another 0.25% on March 8. I had hoped (due to my vested interest in interest rates due to my mortgage) that declines in US inflation and energy prices (and some signs of inflation having 'peaked' in Australia) might make the RBA 'pause' for a month or two, rather than keeping hiking until the 'inflation dragon' is well and truly dead. A forlorn hope.

I can understand why the RBA wants to make sure inflation doesn't "get out of control" as the 1970s proved that once high inflation is built into employee expectations a cycle of wage rises (and the industrial action required to get them) can become entrenched. But higher household indebtedness levels probably make the Australian economy a lot more sensitive to relatively small interest rate rises than in previous decades, and there is little evidence of a break out in wage growth as yet (possibly due to much lower levels of union membership now compared to back in the 1970s, and legislative changes that have made many of the industrial actions that were used to pursue wage claims illegal).

What I don't understand is why the RBA has shown such a sustained reaction to inflation being above their 'target' range of 2%-3%, but showed practically no response at all for many years when inflation persisted to remain well below this target band.

There also seems to be a significant difference in how quickly the RBA will increase rates compared to have quickly it will lower them. Combined with the 'lag' of at least a quarter after a trend in CPI becomes evident before the RBA changes tack, and there seems a real risk that rates could be held "too high for too long" and push Australia into a recession.

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Wednesday, 1 March 2023

Commenced PhD candidature

After completing my MFinPlan degree at WSU (Western Sydney University) I had hoped to be able to do a PhD part-time at WSU, as the lecturer for the two 'research' courses I completed as part of the Masters degree was willing to be my supervisor. Unfortunately it turned out that WSU rejected my HDR application and suggested I first enrol in their MRes coursework degree instead. That would have taken four years part-time and cost around $35,000 in fees! No thanks.

So I then applied with ACU (Australian Catholic University) as they have a campus conveniently close to my workplace (if/when I return to working out of the office, rather than working from home). However they also rejected my application, this time on the basis that it wasn't in line with their 'strategic vision' and there wasn't a suitable supervisor available (I think they have basically stopped running any degrees in financial planning).

So I then applied in early January to UNE (University of New England) via an 'expression of interest' and was matched to a potential principle supervisor and a co-supervisor. A short (30 minute) meeting/interview via zoom ended with them agreeing to be my supervisors, so I then had to complete an official 'application' form with details of all my previous tertiary studies, qualifications, any research experience, publications etc. That was processed very quickly and I was accepted. Yay! So I then had to quickly fill in the online enrolment form last Monday, as put today (1 March) as the 'commencement date'. I received confirmation of my enrolment yesterday and started reading through the 'orientation' material and the various research policies etc. and setup my uni email account/login.

So I'm now official a part-time, off-site PhD candidate (subject to confirmation in six month's time) with a 'completion date' of 28 Feb 2029. On Monday I'll have to get in touch with the administrator who assisted with the zoom interview (he was on annual leave this week) as I think he mentioned a 'research methods' course I should enrol in this session that was due to start this week.

ps. As an Australian resident the HDR uni fees (around $12K pa) will be covered by a commonwealth government RTP (research training program) scholarship, so the only fees I'll have to pay are the $120 or so annual student association charge.

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Net worth: Feb 2023

My monthly NW estimate has been updated in NetWorthShare for the end of February. Chart is in the side-bar.

The purchase of my investment apartment settled on 24 Feb, and as part of the loan conditions the $1MM loan was used to pay the balance of the purchase price ($900K), the various fees and adjustments, plus pay off our remaining home loan balance and 'portfolio loans'. As my residential loan was used to pay off DW's portion of our home loan (around $8K) and her 'portfolio loan' (about $67K) I actually have a 'credit' in the form of an IOU from DW that I haven't included in Networthshare. So my NW will be understated by around $75K - assuming DW eventually pays me back ;)

I have removed the deposit and stamp duty payments from the 'stocks' figure, so the 'stocks' figure showed an artificial drop this month, but the reported figure now more accurately reflects what  I actually have invested in 'stocks' - some NAB shares, some cash sitting in my margin lending accounts, my Superhero US stock/ETF trading account, shares in my employer (a 'fortune 500' US company), my investment bond (which is invested in a mix of Vanguard and Dimensional index funds), and an investment in a MAM investment fund. Plus whatever cash is sitting in various bank accounts at the end of each month. The revised 'shares' figure for this month was $149,833.

The value of my 'Other Assets' category (gold and silver proof coin collection, valued at bullion value only, Perth Mint unallocated gold, silver and platinum holdings, and my small art investment via Masterworks) was down slightly during February, falling -$446 (-1.34%) to $32,917.

Our estimated house price for February (my half) fell another $5,182 (-0.49%) to  $1,062,356 with continued weakness in the Sydney real estate market due to rising interest rates. The RBA increased interest rates by another 0.25% in early Feb, which will increase the monthly interest payments on my residential investment loan by about $7 per day ($2,500 pa) -- so hopefully inflation will start to moderate soon and the RBA will stop raising interest rates!

The value of my retirement savings decreased to $1,468,798 (down -$12,908 or -0.87%) during February. I have ceased making any salary sacrifice into super, as I will need the extra cashflow to fund the residential loan interest payments (and the negatively geared property make the tax benefit of salary sacrifice negligible). I may submit a PAYG tax variation with the ATO in July, so I have less income tax withheld from each bi-monthly pay, rather than just get a huge tax refund after the end of the financial year. I should have a better idea of the rent income and actual expenses (and have a depreciation schedule) by June.

As I now own the residential apartment (well, it is mortgaged 100% to the bank) I will track the 'estimated value' each month of both the residential apartment and the 'lake house' (hobby farm). As part of the residential loan approval process the bank obtained valuations for both our home (which is being used as collateral) and the residential apartment. Our home valuation was almost exactly what my monthly estimate predicted. The residential apartment on the other hand received a very low valuation (only $750K) which I think was based purely on 'similar' one bedroom apartment sales in the suburb (which has a lot of older, low-rise apartments that are not really comparable to the high-rise 'luxury' development my apartment is in). However, the purchase price was $1MM (back in October 2019) and prices have risen considerably since then. Also, the same residential apartment (but a few floors higher up) was recently sold for $1.35MM, so I'll be sticking with my 'estimate' (which is currently $1,181,330) as I think it is a better guestimate of the actual market value for my residential apartment.

Overall, my estimated NW for the end of February is $3,779,984. It can't really be compared to previous months due to incorporating current market value estimates for the residential apartment and my weekender/lake house. It is probably a reasonable "ball park' figure of what my NW currently is.

ps. For the loan application I had received a 'rent estimate' of $700-$750, but when I collected the keys the agent said the rent should be in the range of $750-$800 (due to the apartments being in high demand). It then turned out that some overseas students (funded by their parents) want to rent the apartment and will pay $850 per week (the extra being due to having a small dog - and many investors are unwilling to rent to tenants that have pets).

pps. Labor announced plans to increase the tax rate on superannuation in accumulation accounts from 15% to 30% for the amount over $3MM. It won't affect me (I'm unlikely to exceed the $1.9MM transfer balance cap by the time I retire), but I think it isn't good for governments to legislate for tax changes they didn't announce during the recent election campaign. It also isn't a great idea to have tax changes apply retrospectively (although it will be future income that is taxed at 30%, the money was invested years ago under the prevailing tax arrangements -- and it is especially dodgy to change tax retrospectively on an investment that can't legally be accessed/withdrawn until retirement age). The whole 'foregone tax' argument also seems a bit spurious to me -- after all, superannuation income is deferred income (for up to 40+ years) NOT current income, so there really isn't any reason to compare the superannuation tax rates to the income tax rates. Also, if taxing superannuation at 15% is a 'cost' to the budget compared to the maximum personal income tax rate of 45% that 'should' apply, then the 'cost' of the progressive tax system itself should also be publicised -- just imagine the huge 'cost' to the budget of having an $18K tax free threshold, and the bottom marginal tax rate being 18% rather than the 45% income tax rate that apparently Labor thinks "should" be applied to all income (unless you are in Labor's voting demographic). Anyhow, I don't think capping the amount that can be held in the accumulation account is a bad idea (it is already effectively capped due to the limits on concessional and non-concessional contributions), but they are trying a blatant 'tax grab' by looking at a relatively small number of high value accounts that were accumulated into super years ago under the tax rules applicable at that time. Perhaps a fairer change would be to limit the total amount that can be held within superannuation to 2x the TBC ie. $3.8MM once the TCB increased to $1.9MM on 1 July. Any amount about 2x TBC at the end of each FY would have to be withdrawn from super (same as now applies to any excess contributions).

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Sunday, 26 February 2023

Million dollar mortgage

The purchase of my off-the-plan investment unit finally settled last Friday. I had paid $100,000 deposit back in 2019, plus $41,000 stamp duty, so the balance of $900,000 was due upon settlement. However, the residential mortgage approval required I pay off and close down some of my existing credit cards and lines of credit, plus our existing $37,000 home mortgage had to be paid off and also the $90,000 or so owing on 'portfolio loans' against our home equity. The balance of the investment unit purchase price and our remaining home loan and most of the portfolio loan were paid off using the new $1 million residential mortgage, and I also had to transfer $40,000 into the bank account that will be used for the monthly mortgage payment direct debits and which was also used to pay off any part of the portfolio loan balance that couldn't be covered by the new residential mortgage. Around $31,000 was taken from that account for settlement, which probably also included a few thousand in bank loan fees, valuation fees, title transfer fees, adjustments relating to pre-paid or owing rates, land taxes, insurances etc.

The opening balance of my 'million dollar mortgage' is shown below - quite an impressive round number in terms of debt IMHO. Next step is to collect the 'settlement box' which will contain the unit keys etc. on Monday morning, do a quick check of the apartment (I think the balcony railing needed a final wipe over), and then I'll hand the apartment keys to the managing agent to show the unit to prospective tenants. Hopefully it won't take too long to find a tenant, and the rental ends up being somewhere in the estimated $700-$750 per week range ($3,000 per month). Given that the monthly mortgage payment is $4,705 and that there will be other outgoings deducted from the rent income, I hope the unit doesn't have extended period of vacancy.

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