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Failing to achieve goals? Try this out

Lifestyle Focus on identifying cues that will trigger the desired action, writes Amantha Imber.

Can you recall the last time you set a goal?

Maybe it was a New Year’s resolution, a plan to shed some kilos or to escape the hypnotic grip of social media.

If you’re a member of the mere mortal club like I am, it’s quite likely that you never achieved all those goals, despite the best of intentions.

A meta-analysis conducted by Thomas Webb and Paschal Sheeran from the University of Manchester analysed 47 studies on the relationship between goal intention and goal achievement.

They found a significant gap between intending to do something and actually achieving it.

A big reason for this gap is it can be hard to start or find the right opportunity to act.

When hitting a goal involves giving up something you love, such as the daily block of chocolate during your 3pm work slump, and replacing it with something less desirable – and let’s face it, most food is less desirable than chocolate – motivation can be hard to find.

The best of intentions often ends up with us failing to change our behaviour.

Implementation intentions

Psychologists have found that one of the most effective ways to bridge the gap between intentions and behaviour is by having a plan, or an ‘‘implementation intention’’.

Implementation intentions connect opportunities to act with a particular behavioural or cognitive response. In other words, an action is linked to a situation, so the desired behaviour becomes natural or automatic.

A goal is simply ‘I will achieve X’, whereas an implementation intention identifies the context or situation that will trigger the desired behaviour.

Implementation intentions are typically expressed as ‘‘if-then’’ statements. Some examples:

If I am feeling tempted to skip my workout, I will remind myself of my fitness goals and do the workout.

If I am struggling to finish a report and want to procrastinate by checking social media, I will set a timer for 10 minutes and push through on the report until the timer goes off.

If I come home from work and feel tempted to snack on junk food, I will eat a piece of fruit instead.

If I find myself sitting for more than an hour, I will stand up and take a short walk.

Identifying cues to act

When thinking about the first part of the statement, you need to specify an internal or an external cue.

An internal cue is a sensation or thought, such as feeling stressed. An external cue refers to something happening in your environment, such as opening the pantry and spying chips to snack on, or opening Instagram on your phone.

Cues can be related to good opportunities to act, such as when you are in an environment where it becomes easy to perform the desired behaviour. Alternatively, cues can focus on specific obstacles, such as a couch and a television.

To optimise the effectiveness of your implementation intention, research has found it will be more likely to work if you are as specific as possible with your cue and behaviour. Specify ‘‘eating an apple’’ as opposed to ‘‘eating something healthy’’.

Make sure you will actually encounter the cue. While this may sound obvious, don’t use the cue ‘‘when I get home from work’’ if you work from home most of the week.

And ensure the plan is viable. If your cue is ‘‘arriving home’’ and the behaviour is ‘‘eating fruit’’, make sure you have fruit in the house. Again, this may sound obvious, but ‘‘obvious’’ does not always equal ‘‘applied’’.

Making implementation

intentions work

Write down the behaviour you want to change. For example, you might want to stop sleeping in on the weekend so you can wake up at the same time every morning.

Think about a cue that would present a good opportunity to engage in the behaviour.

Your alarm going off is an ideal cue to change behaviour by getting up immediately rather than reaching for the phone.

Craft your implementation intention as an if-then statement: If my alarm goes off in the morning, I will remind myself of my goal to improve my sleep and get out of bed immediately and go for a walk in the morning sunlight.

Pin your implementation plan somewhere prominent in your home – so you are constantly reminded of it. Even better, pin up the plan where your cue occurs, such as the kitchen, the office, the bedroom.AFR

This article is an edited extract from the book The Health Habit.

Failing to achieve goals? Try this out2024-04-16T16:52:13+10:00

Nobel winner’s tips for investors

Behavioural economics Daniel Kahneman transformed our thinking, writes Tim Mackay.

Despite winning a Nobel Prize in economics, Daniel Kahneman was an unlikely economist. For one, he never undertook a single course in economics. For another, he was a psychologist. His body of research is vast and multifaceted, but at its core it challenged conventional wisdom on how we make investing decisions.

With Amos Tversky, Kahneman was the pioneer of behavioural economics and is well known for debunking the idea that people always make rational decisions in their own self-interest.

Kahneman died on March 27 at the age of 90 after transforming our understanding of investing. His research shows the intersection of personal finance and psychology is far more ‘‘personal’’ than it is financial. Here are some of his critical discoveries for investors.

Kahneman’s greatest insight was that investors make mistakes, which sounds obvious. But his groundbreaking realisation was that our mistakes are the norm, not the exception.

We rush to judgment using mental shortcuts (or heuristics), leading to persistent biases in our decisions. Even when evidence suggests we ought to rethink, we often cling to our initial judgments.

None of us like being wrong. But once you accept mistakes are inevitable, you can seek to understand them and become a better investor.

Kahneman found we hate losing money far more than we enjoy gaining it. Losing $100 hurts twice as much as the pleasure from gaining $100. It has been shown golfers play better when putting for par (fearing the ‘‘loss’’ of a bogie) than when putting for the ‘‘gain’’ of a birdie.

As humans evolved, threats were always far more consequential than opportunities. If you spotted a deer, it could feed you for a few days. But if you spotted a lion, it could end everything.

Our objective as investors is to gain returns, but our behaviour is driven more by fear of loss. We tend to prematurely sell assets that are gaining value and retain assets that are losing money. We desperately want our losers to win. One solution is to accept you will win a few and lose a few, but it’s the overall portfolio performance that really matters.

Avoid looking at your portfolio too often. A ‘‘loss’’ each day for a week could still be a ‘‘gain’’ over a month. When you look more often, you trade more, and you lose more money.

A study revealed 74 per cent of professional fund managers think they are above average. The other 26 per cent thought they were average. Mathematically, this is impossible – half must be below average.

Kahneman believed this was our key bias. ‘‘What would I eliminate if I had a magic wand? Overconfidence,’’ he said.

The vast array of financial information available online creates the illusion of understanding. This leads to excessive trading, timing the market, under-diversification and risky investments.

When we research investments, we typically seek out and value more highly any information that supports our existing view. And we downplay information that calls it into doubt. .

Seek objective feedback, diverse and contrary opinions and stick to an objective re-balancing plan.

Kahneman and Tversky provided important insights into ‘‘anchoring bias’’ and the ‘‘endowment effect’’.

Anchoring bias describes the fact that investors rely too heavily on the initial opinion or piece of information they are given on any topic. Imagine you were told a widget sells for between $85 and $100 but is available for $75. You might view this as a good deal.

However, if you were simply told a widget costs $75, you’d be far more likely to ask: what is a widget? And you’d question its true value. The deliberate ‘‘anchor’’ placed first in the information you are given distorts your analysis and is a common pitfall in financial decision-making.

The endowment effect is a term coined by Richard Thaler, and in a 1991 study, Kahneman and colleagues proposed that it occurs, in part, due to loss aversion. When we own something – such as a BHP share – we give it more value than it might objectively hold. This leads to a paradox where we are more likely to keep a BHP share we own rather than acquiring one we don’t, despite the result being the same in both scenarios – ownership of the share.

This cognitive bias skews our perception, often preventing us from selling assets when it might be prudent to do so, as we overestimate their worth due to personal ownership. SI

Tim Mackay is an independent financial adviser at Quantum Financial.

Nobel winner’s tips for investors2024-04-16T16:50:42+10:00

Why Australia needs an institute for applied ethics

Capitalism depends on government to provide a trusted framework of rules around it. But when politics turns into reality TV, we must ask the ethical questions ourselves.

The capitalist model, detailed in Milton Friedman’s 1962 classic, Capitalism and Freedom, is often criticised by non-economists for celebrating the pursuit of self-interest.

Yet capitalism’s claims to moral legitimacy come not only from its promotion of liberty, but also from its impressive claims to aggregate economic efficiency. Specifically, capitalism claims to produce community outcomes that are Pareto optimal, meaning that no one person can be made better off without at least one other person being made worse off.

Except as required by the law of the land, individuals in a capitalist system are not obliged to attend to the interests of another. They are free to pursue persistently divergent interests, as workers, investors and consumers. And those who run businesses have no social responsibility beyond the pursuit of profit.

But while the capitalist model is founded on the pursuit of self-interest, it will not function in the absence of trust. Mutual confidence in the functioning of the capitalist system is critical to its claimed efficiency benefits. A lack of trust means a suboptimal number and size of transactions, and underinvestment in innovation, with significant implications for the level of aggregate economic activity, productivity and real income growth. Moreover, a sudden loss of trust can have catastrophic social consequences, as the global financial crisis of 2008-09 illustrates.

A recent report by Deloitte Access Economics, commissioned by The Ethics Centre, explains how large gains in economic activity can be achieved with modest improvements in levels of trust.

Readers of this newspaper have observed how trust in business has been undermined by apparent failures to meet community expectations in the treatment of customers in many sectors of the economy, including through impenetrable information disclosures, automated customer call centres and store closures. And, like all other Australians, they would be wondering about their capacity to cope with the many ways in which businesses and governments might make use of advances in AI and robotics.

In the capitalist system, businesses are not to concern themselves with meeting community expectations, except to the extent that doing so increases profit. Ensuring that business meets community expectations is the responsibility of government.

As Friedman puts it, capitalism relies upon a functioning democratic system that both enables and obliges its citizens to elect governments to ‘‘determine, arbitrate and enforce . . . a framework of law’’ to ensure ‘‘free and open competition’’ and protection from ‘‘fraud or deception’’. And Friedman goes on to explain, if somewhat grudgingly, that government also has responsibility for attending to negative externalities and making adequate provision of public goods.

Capitalism casts business and ‘‘the rest of us’’ (Friedman’s expression) as adversaries, and government as our protector.

So, it is something of a paradox that, year after year, surveys of ‘‘the rest of us’’ report that, among the principal institutions affecting our lives – businesses, not-for-profit entities, government and the media – it is government that enjoys the least trust.

Capitalism demands a lot from government. Mostly, our political leaders fall short. Instead of attending to frameworks of law and enforcement, many have preferred the role of business-bashing critic, pointing an accusatory finger at business executives, not themselves, for having failed the pub test or for failing to meet community expectations.

It may be the case that the 24/7 reality TV show, through which citizens get to observe the workings of modern politics, encourages this sort of spectacle.

Yet, no matter its explanation, it is corrosive of effective governance, which depends upon elected officials having some detachment from outrage and mania, not seeking energetic immersion in it.

We have a problem.

Following the global financial crisis, serious thinkers around the world began questioning whether the adversarial contest at the core of the capitalist system might not be its Achilles heel.

Capitalism proposes a system in which business is motivated by nothing other than profit, and its executives by nothing other than self-interest, and leaves it to the rest of us, also motivated by nothing other than self-interest, to elect politicians to protect us with laws that we cannot possibly comprehend and regulatory bodies with which we can have no meaningful contact. This is not an arrangement designed to build trust.

Recent global efforts to make more transparent the social and environmental impacts of business activity, and to have business leaders accept accountability to the community for these impacts, seem to me to be steps in the right direction.

But these will only take us so far. The big problem we have is that, as individuals and as a community, we confront a set of ethical questions that are just damned difficult. And we have not invested sufficiently in respected institutions that might help us think them through.

In all democracies, there is a compelling case for centres of expertise that facilitate sober reflection. This is why we fund universities, a professional public service and, within the public sector, institutions that enjoy a higher level of independence, such as the CSIRO and the Productivity Commission.

Yet, when you reflect on the recent and emerging causes of a loss of trust in democratic capitalist systems, and the economic and social gains that would come from addressing them, you have to think that something is missing. That is why I have come to the view that it is time for us, as a community, to invest in an Australian Institute for Applied Ethics. This is a modest investment, promising very large rewards.

Ken Henry is a former Treasury secretary, and one of 1600 signatories of an open letter calling for federal funding for an Australian Institute for Applied Ethics.

Why Australia needs an institute for applied ethics2024-03-08T16:36:12+11:00

MORTGAGE CLIFF LOOMS LARGE, BUT HOW STEEP COULD IT BE?

Home loans Fixed-rate borrowers have been insulated from 10 straight RBA interest rate increases. But with credit worth $350 billion close to expiring, the impact could be profound, writes Michael Read.

Up to 880,000 Australian households will need to find hundreds, or even thousands, of dollars more each month when their fixed-rate periods expire this year and the rock-bottom interest rates they’ve enjoyed since the start of the pandemic become a thing of the past.

Until now, these borrowers had been insulated against 10 back-to-back rate rises from the Reserve Bank of Australia that sent variable mortgage rates rocketing.

Households servicing a $550,000 mortgage – the average size of a loan issued between 2020 and 2022 – will face an $891 increase in monthly repayments, and highly indebted households are on the hook for an even larger increase. Someone with a $1 million mortgage would have to fork out an extra $1620 each month.

The ‘‘fixed rate mortgage cliff’’, as it has come to be known, is one of the big challenges for the Australian economy this year, and how these households cope will be critical to whether the country can avoid a sharp downturn.

At the height of the pandemic, interest rates fell to record lows as the RBA tried to prop up the economy amid forecasts of a once-in-a-generation recession.

As part of its policy response, it provided banks access to cheap three-year fixed rate credit, which they then offered borrowers in the form of ultra-cheap, fixed-rate home loans.

The low rates led to an explosion of fixed rate borrowing and refinancing, and many households locked in their rates for two to three years.

Some borrowers entering the property market also took comfort from assurances by RBA governor Philip Lowe that interest rates were unlikely to increase until 2024. The governor has since apologised for the guidance.

At their cheapest point in May 2021, the average new fixed rate loan for a term of three years or less was 1.95 per cent, compared with a new variable rate loan of 2.8 per cent, RBA data shows.

As a result, borrowers took a gamble that interest rates were unlikely to fall further by locking in the lower rate, and by mid-2021 about 45 per cent of new loans being written were fixed, compared with just 5 per cent today.

Over the course of 2020 and 2021, Australian banks lent $394 billion to borrowers in fixed mortgage commitments. Fast-forward to this year, and 880,000 fixed loans written at rock-bottom interest rates are set to switch to much higher variable rates.

According to the RBA, about $350 billion – or half of all fixed rate credit – mortgages will expire this year. This is what is sometimes referred to as the ‘‘mortgage cliff’’.

The remaining 38 per cent of fixed rate credit, which includes about 450,000 loan facilities, will expire next year and beyond.

The pain will be felt most acutely between now and September, when one-third of fixed-term credit will expire, and affected households will be forced to absorb the 350-basis point increase in the cash rate over the past year.

Just how much extra they will need to fork out will depend on what their fixed rate was and whether they roll on to a competitive variable rate.

But regardless of the scenario, they are looking at a 3 percentage point to 4 percentage point increase in their home loan rate, and borrowers who took out mortgages larger than $615,000 will cop a monthly repayment increase of more than $1000.

A household with a $750,000 loan will have to find an extra $1215 per month – or $280 per week – when their loan switches to a variable rate.

This assumes they had locked in a 2.48 per cent interest rate for three years, which is the average, outstanding fixed rate, and refinance to a competitive 5.58 per cent variable rate upon maturity.

Borrowers who took on a $1 million mortgage – not uncommon for new borrowers in Sydney or Melbourne – will cop a $1620 increase in their monthly repayments, or $374 per week, based on these assumptions.

Homeowners servicing a $500,000 mortgage will see their repayments increase by $810 per month, or $187 per week.

Overall, the RBA estimates that 90 per cent of the fixed rate loans rolling off this year or next will have to wear mortgage repayment increases of at least 30 per cent.

After the switch happens, about 25 per cent of fixed rate borrowers will spend more than 30 per cent of their income on their mortgage, the central bank says.

Economists are divided whether the looming, fixed-rate mortgage cliff will mark the start of a sharp economic slowdown or represent a blip on the radar.

Because of the magnitude of the shock, the RBA said in its October Financial Stability Review that it expected an increase in home loan arrears in the period ahead as some borrowers struggled to meet higher repayments.

Westpac CEO Peter King warned in February that almost half of the bank’s $471 billion in outstanding home loans were likely to breach their original serviceability assessments, which tested customers’ capacity to deal with a 3 percentage point rate rise.

The roll-off comes as households are already under pressure. Consumer prices have been increasing at their fastest pace since the early 1990s (although there are signs that these pressures have now peaked) and real wages are at their lowest level in a decade.

The RBA estimates that two in five borrowers with small mortgage buffers (ie less than three months of payments) have fixed rates or are investors with loans in place before 2021.

But a range of factors suggests that households are well placed to manage the roll-off.

The RBA says it is possible fixed rate borrowers kept liquid savings elsewhere, meaning they are less vulnerable than they appear.

The household sector has also accumulated $300 billion in excess savings since the onset of the pandemic, which should at least partly cushion the blow, though these savings mainly sit with wealthy, older people.

Borrowers are also more likely to be in work than at any time in recent history, thanks to Australia’s stellar labour market and near-50 year low jobless rate of 3.5 per cent. Fixed rate borrowers have also had more time than variable rate borrowers to restructure their household budget in anticipation of higher repayments, and also time to build up a savings buffer. However, borrowers with split loans would have already experienced higher repayments on the variable portion of their mortgages.

For their part, the banks say they are ready to help customers struggling to meet repayments.

Westpac’s chief executive said there were tools that banks could use to nurse customers through hardship, including restructuring repayments, and putting borrowers on to interest-only loans.

Banks are also experimenting with extended loan terms that make it easier for customers to repay loans as interest rates climb further, as well as to borrow more upfront.

National Australia Bank’s subsidiary, Ubank, has said it would extend a 35-year mortgage previously offered only to new buyers to those looking to refinance. This would reduce monthly repayments, but end up costing customers much more over the life of the loan.

The federal government’s MoneySmart service says borrowers experiencing hardship should contact their bank as early as possible. Banks must respond to a hardship request within 21 days, and MoneySmart says borrowers should consider selling their home if their circumstances are unlikely to improve.AFR

MORTGAGE CLIFF LOOMS LARGE, BUT HOW STEEP COULD IT BE?2023-04-05T11:27:14+10:00

Rental shortfall forces property investors to sell

Residential property More than one in four landlords are considering selling their investment properties and quitting the rental market, writes Duncan Hughes.

Sam Collis is debating whether to keep struggling with three mortgages for two investment properties and his home, or to sell a property and ease the financial stress from interest rates rising faster than rental income.

It is a question asked by increasing numbers of property investors struggling to make ends meet after buying investment properties when rates were at record lows and rental payments easily covered costs.

‘‘I could be heading towards selling if it gets much worse,’’ says Collis, a Victoria-based father of three children aged 10 to 15, who has had his properties valued ahead of a possible sale.

‘‘I sometimes walk into the supermarket and wonder whether I can afford a packet of chips. But the problem of selling now is that it would be a knee-jerk reaction that I’d probably regret in five years when markets improve,’’ he says.

The number of investment properties on the market across private treaty and auctions has jumped from about 20 per cent – 25 per cent of the monthly total to more than 30 per cent, says CoreLogic, which monitors property markets.

It peaked at 35 per cent in 2021, which was a bumper year for property sales because of record-low interest rates.

One hundred per cent of suburbs with house rental markets and more than 97 per cent of suburbs with unit markets in Melbourne and Sydney are cashflow negative, which means there is more cash leaving the property in higher costs than being received in rents, CoreLogic research shows.

‘‘Landlords have been pushing rents higher to offset the rising cost of debt, but there is a limit to what the market can absorb, and we are close to that now,’’ says Tim Lawless, research director of CoreLogic. ‘‘Rental price growth is slowing.’’

A Sydney property investor with a $1.2 million house for rent and $960,000 loan is spending about $30,000 a year more in costs than received in rents, forcing increasing numbers to sell their properties.

Rent rises of about 9 per cent a year to a median monthly value of $3200 are failing to offset the 15 per cent fall in the property’s value and rising interest rates, which are around 30 to 44 basis points higher than for an owner-occupier, analysis by CoreLogic, which monitors markets, shows.

A basic variable rate for owner-occupiers is 5.39 per cent and 5.69 per cent for investors, a difference of 0.30 per cent, says RateCity, which monitors interest rates.

The gap expands to 0.44 per cent for discounted variable. In Melbourne, the annual shortfall for a median investment property worth about $900,000 is $22,000 as prices fall 11 per cent and rents rise by about 8 per cent, analysis shows.

‘‘Increased compliance costs, reduced landlord rights and ability to manage their properties, increasing interest rates and falling property prices means landlords are leaving the market,’’ says Andrew Kent, president of the Australian Landlords Association.

Negative gearing, which allows a tax deduction if expenses exceed income, can only be claimed once a year, adds Lawless.

Tenants are responding to rising prices and falling supply by increasing numbers sharing rental properties, a reversal of what happened during COVID-19, and choosing units, which are usually cheaper.

There are more than 2 million property investors in Australia, which is about 8 per cent of the population, the Australian Taxation Office says. About 70 per cent of investors own a single property.

Investors are bailing out of the market despite national residential property rental vacancies remaining about 1 per cent with capital weekly asking rents around 21 per cent over the past 12 months, says SQM Research, which also monitors property markets.

Tight markets are under increasing pressure from a surge in demand from rising immigration, the return of foreign students and more people moving back to the cities after COVID-19.

More than one in four NSW landlords are considering selling their investment properties and quitting the rental market, according to a survey by the Real Estate Institute of NSW (REINSW).

‘‘Changes to tenancy laws and lack of consideration for landlords’ rights are overwhelmingly cited as the reason investors are leaving in favour of other investment opportunities,’’ says Tim McKibbin, REINSW chief executive.

Louis Christopher, SQM’s managing director, says there are signs the rental crisis is easing in Canberra, Darwin and Hobart.

Christopher asks: ‘‘Could we be seeing some light at the end of the tunnel for our national rental crisis?

‘‘Perhaps for some cities and regions. But we still remain very concerned for the situation in Melbourne, Sydney and Brisbane where most international arrivals land first,’’ he added.

Cate Bakos, a buyers’ agent, adds many older investors are deciding ‘‘it’s time to cash up and retire’’ amid concerns landlords could be hit with caps on rent rises and restrictions on negative gearing,

But Nerida Conisbee, chief economist for Ray White Real Estate, says the proportion of investors selling at its auctions has fallen from a peak of 28 per cent to 21 per cent in the seven months to February.

‘‘The number of investors selling at auction was far higher in the months prior to when the downturn began and in the months following than it has been in the past six months,’’ says Conisbee.

‘‘Fewer are selling now given that prices have come back, but also because rents have risen so much, thereby providing a buffer for higher mortgage costs,’’ she says.

There might be an increase in sales of investment properties no longer providing enough of a return, she says.

‘‘If so, given that fewer investors are buying, it will result in even more pressure on rents,’’ she says.SI

Rental shortfall forces property investors to sell2023-03-21T09:13:17+11:00

Apartment rents up $11,000 in a year

Apartment rents have surged over the past year, delivering income windfalls of up to $11,000 for investors across suburbs gaining the most.

The sharp rental increases – with 57 suburbs rising more than 20 per cent – have come as vacancies hit a new low of 0.9 per cent across the combined capital cities during February, CoreLogic data shows.

They also reflect rising demand for the cheaper, high-density sector as renters trade space for affordability, said Corelogic research director Tim Lawless.

‘‘Rental affordability pressures may be forcing a transition of demand towards higher-density rental options, where costs tend to be lower,’’ he said.

‘‘Additionally, the strong rebound in foreign student and international migrant arrivals would be adding to rental demand, particularly in inner-city precincts as well as areas close to universities and transport hubs.’’

Suburbs in Sydney’s inner south, eastern suburbs and inner west dominated the list of the top 10 biggest gainers, led by the Sydney-Haymarket-The Rocks area, where unit rents climbed 27.8 per cent or $211 a week to $969 – a $10,972 annual rental gain.

Meanwhile, apartment rents in the Waterloo-Beaconsfield, Kingsford, Redfern-Chippendale and Arncliffe-Bardwell Valley areas rose more than 27 per cent, or $171 a week on average.

Melbourne topped the areas with the fastest rate of rent rises for apartments over the year, climbing 38 per cent and adding $168 to a $612-a-week rental.

Five other inner-city areas also notched up more than 21 per cent annual rental gain, including South-bank, Carlton, Docklands, North Melbourne and South Melbourne.

In Brisbane, the Margate-Woody Point area north of the central business district, and four other inner-city areas including Kangaroo Point, West End, Spring Hill and Fortitude Valley all recorded more than 20 per cent rental increases in the past year.

However, rental growth for houses has slowed as worsening affordability and the higher cost of living weighs on tenants’ budgets.

‘‘We have already seen some evidence that rental growth is topping out, especially in the more expensive low density sector, where rental growth was much stronger through the pandemic,’’ said Mr Lawless. ‘‘This easing in rental growth has nothing to do with a supply response or less overall demand – it probably has more to do with renters reaching a ceiling on what they are able or willing to pay.

‘‘With rental growth substantially outstripping incomes over the past few years, it is likely more renters will be looking for alternatives to ease their rental payments.’’

Canberra posted the sharpest slowdown in house rents, easing from a 10.5 per cent annual increase at the height of the pandemic to just 0.8 per cent over the year to February.

In Sydney, house rents stabilised at 8.9 per cent annual growth during the past three months, slower than the pandemic high of 10.2 per cent. All the other capitals except Melbourne posted slower gains for houses in recent months.

But with vacancy rates staying around record lows, rents were likely to continue to rise at least through the rest of the year, Mr Lawless said.

‘‘Over the short to medium term, the rental supply outlook is looking pretty glum,’’ he said. ‘‘From a new dwelling perspective, approvals are at their lowest level in more than a decade.’’

Private-sector investment, another indicator of rental supply, was also still going backwards, as investment home loan numbers had been declining since early last year, Mr Lawless said.

‘‘Against this scenario of limited new rental supply, demand looks set to rise further, based on the influx of overseas arrivals,’’ he said.

Kent Lardner, founder of data provider Suburbtrends, said vacancies were likely to fall further as rental demand continued to outpace supply.

‘‘The rental supply in the near to medium term is alarming. Building approvals are well below population growth rates,’’ he said.

‘‘Based on my analysis of building approvals over the last five years and comparing those to population growth, around 95 per cent of suburbs nationally will have inadequate rental supply in the coming years.’’

Apartment rents up $11,000 in a year2023-03-15T10:51:12+11:00

The key to unlocking your mortgage prison

Fixed rate loans If you’re at risk of negative equity or being turned down when your mortgage term ends, it may be worth refinancing now, writes Lucy Dean.

Fixed rate borrowers whose terms are ending within the next 12 months have been urged to assess whether they will be able to refinance at the end of their term or be better off renegotiating their loan today.

Borrowers face their bank’s revert rate when their fixed term ends, but this rate is ‘‘often horribly uncompetitive’’, says RateCity research director Sally Tindall.

Borrowers with less than 20 per cent in equity may also have to pay lenders’ mortgage insurance to refinance, while those in negative equity may be unable to refinance, she warns.

Another challenge is that lenders are required to stress test borrowers’ capacity to pay off their mortgages with an added 3 percentage points, meaning borrowers need to prove they can handle an effective 9 per cent interest rate if they want to refinance.

RateCity analysis finds an average buyer who bought a house in Sydney in July 2021 for $1.3 million with a 20 per cent deposit would have 17 per cent in equity today, with the median price having fallen to $1.2 million. But if the median price falls to $1.1 million in December this year, as per ANZ’s forecasts, they’d have only 11 per cent. The same buyer in Melbourne, purchasing in July 2021 for $957,000, would have 17 per cent equity today, and 12 per cent by December.

But if the Sydney buyer had a 10 per cent deposit in July 2021, they’d have only 6 per cent equity, falling to negative 1 per cent by December. In Melbourne, they’d have 7 per cent today and 1 per cent in December.

‘‘Falling property prices and soaring mortgage rates mean some people could find they can’t refinance when their fixed term wraps up because they’re in mortgage prison,’’ says Tindall.

”If you are on a fixed rate and think you might end up in mortgage prison, do a quick health check on your finances to make sure you’re on solid ground.’’

She says borrowers who owe more than 80 per cent of the value of their property could be in hot water.

Those who owe less than 80 per cent, but are brushing up against that threshold, should ask whether they’d be better off breaking their fixed term early to access the current fixed rates before projected RBA increases push rates higher, or property price falls nudge borrowers into that equity danger zone.

‘‘Owning less than 20 per cent of your property isn’t an automatic sentence to mortgage prison. It just means your new bank might charge you lenders’ mortgage insurance,’’ says Tindall.

‘‘That might be something you’re happy to pay to refinance, particularly if you’re only just a fraction under the required deposit.

‘‘That said, if your equity is close to zero, or in negative territory, you’ll be hard-pressed to find a bank willing to take you on at all.’’

Brendan Dixon, managing director at Pure Finance says it’s a tough time for borrowers, but proactive mortgage-holders can still find decent home loan products via a rate review with their current lender, or refinancing with another institution. This goes for both variable rate and fixed interest borrowers.

Dixon gives the example of a borrower with a fixed rate of 2.5 per cent, with the fixed term ending in June 2023.

The lender currently offers a variable rate of 5.54 per cent for existing customers, as well as a 5.59 per cent three-year fixed rate.

But if the Reserve Bank of Australia were to raise interest rates another three times, that borrower could expect this variable rate to reach 6.29 per cent by the time their fixed loan ends.

So, the borrower has a choice. Keep the existing 2.5 per cent interest rate and revert to a 6.29 per cent variable interest rate, or break their current fixed rate to lock in the 5.59 per cent fixed rate the lender has on offer.

Assuming this borrower has a $750,000 loan, they’d incur $5700 in interest charges by breaking the fixed rate three months early.

But by locking in that 5.59 per cent fixed rate now, rather than potentially 6.29 per cent in June, they’d be paying 0.7 per cent less in interest, and saving $5250 per year.

‘‘This is approximately $15,000 in interest savings over the three years, minus the added interest paid to break the fixed rate early of $5700, meaning a net benefit of $9300,’’ says Dixon.

He’s had a few clients choosing to break their low fixed rate product earlier to fix rates at the current offer, rather than risk a higher rate down the track. ‘‘This was based on perceived longer-term savings.’’

For example, clients Jonathan and Sophia broke their three-year fixed rate of 2.49 per cent in January, before it was due to expire in April. Then, they refixed with the same lender at 4.74 per cent for one year.

They paid additional 2.25 per cent interest from January at a cost of $4286 over three months. However, by fixing at 4.74 per cent rather than 5.45 per cent, they’re saving $5410 over the year, or $1124 after accounting for the $4286 in extra interest.

‘‘All the [interest rate] predictions have changed since January, and in hindsight, maybe they should have fixed longer,’’ says Dixon.

He says borrowers approaching the end of their fixed term should start looking at their options, whether that involves using a mortgage broker or comparison website.

Then they need to start collecting all the information available, including variable and fixed rates at their lender and other rivals, as well the ramifications of breaking their fixed term.

‘‘It’s not quite as easy to work out, but [look at] the cost of re-fixing at today’s fixed rate, versus fixing in say three, four or five months when your fixed rate expires, and working out whether it’s cheaper to lock in a higher interest rate now,’’ he says. SI

The key to unlocking your mortgage prison2023-03-14T09:31:15+11:00

Tug of war between heart and finances

Downsizing Clinging on to the family home even though your finances are tight? This is what you should consider, writes Michael Hutton.

You own the family home, are enjoying retirement and your children moved out years ago. But your home is showing signs of wear and tear, and you are struggling physically and financially to maintain it. Perhaps now is the time to consider downsizing to a smaller property and rearranging your finances.

You’ve long resisted the urge to move to another property – whether that be downsizing to a smaller home or moving into an aged care facility. Spending your twilight years in the family home has been the goal. It’s not just a property you own – it’s your home, full of family memories and a haven for spending quality time with children and grandchildren in the years to come.

Unfortunately, the sentimentality of the family home may conflict with financial reality.

You are not alone. There are many older people across the country who are living alone or with their partner in valuable, equity-rich family homes. While they may be living in a property worth millions of dollars, they are living frugally – the classic asset-rich, cash-poor dilemma.

Another scenario may be that you also have minimal investment income and are perhaps relying on the government age pension to finance your daily life. You’ve realised that properties don’t remain pristine on their own. You need to spend time, money and effort on upkeep, otherwise it can become poorly maintained or, in some cases, dilapidated.

If you can relate to all or even part of this scenario, you could probably live a more comfortable life by downsizing.

Should you decide to put sentimentality aside to sell the property and move into a smaller but more manageable and lifestyle-appropriate property, you might have a large sum of money left over to invest in other things.

If that’s the case, you may be able to contribute up to $300,000 for each partner into super as part of the downsizer contributions scheme, while the remaining balance could be invested in a personal investment portfolio.

If you are under 75, you might be able to put a further $330,000 (indexed) each of non-concessional contributions into super.

Your financial situation will then be much more liquid, meaning you’re better able to spend your hard-earned money living out your preferred lifestyle rather than having it tied up in a single property.

With the recent increase in income thresholds to $90,000 for singles and $144,000 for couples for the Commonwealth Seniors Health Card, you may still qualify for this valuable concession. Admittedly, though, you may end up missing out on the age pension because of the assets test and your new investment position.

Consider a widow living in a run-down, four-bedroom Sydney house worth $4 million. She might consider selling the house and buying a pristine $2 million apartment instead.

Of the remaining $2 million, perhaps $300,000 or more could be placed into super and the remaining $1.7 million or so invested into a personal investment portfolio of liquid investments such as shares and managed funds. If she drew from the portfolios at 5 per cent per annum, that would equate to $100,000 a year to spend.

In this scenario, minimal personal tax will likely be incurred after franking credits and capital gains discounts are taken into account.

Additionally, there will be much more cash to live on than relying on the government age pension of about $26,000 per annum for singles and $40,000 per annum for couples. This would also remove her from the government system and the need to routinely provide information. Stringent Centrelink gifting restrictions would no longer be applicable.

Not only that, but she might find herself living in a property that is much more pleasant and manageable in terms of upkeep. In this example, wealth has been rearranged from 100 per cent lifestyle (and illiquid) to 50 per cent lifestyle and 50 per cent investment (and liquid). This is a much better ratio.

Through downsizing, you’re more effectively able to address both financial and lifestyle considerations.

While you might be saying goodbye to the home in which so many meaningful memories have been made, you are also freeing up the property for a young family for whom it might now be better suited.SI

Michael Hutton is wealth management partner at HLB Mann Judd Sydney.

Tug of war between heart and finances2023-03-14T09:21:22+11:00

Banks look to adopt ChatGPT as an aid for customers: Microsoft

Customers calling up their bank may soon have inquiries answered with the help of ChatGPT.

Lenders in Australia and the US are preparing to deploy the groundbreaking technology to prompt call centre workers on what questions to ask, and the appropriate letter to dispatch to the customer when the conversation is done.

The chatbot will help employee decision-making by creating background materials to make conversations with business customers more productive. Investment banks could use it to construct pitch books based on conversations recorded on Microsoft Teams.

In January, it was reported that Microsoft had invested $US10 billion in OpenAI, the start-up behind ChatGPT. ChatGPT has more than 100 million users, making it the fastest-growing software application of all time.

This has set the tech world abuzz about ‘‘generative AI’’, which uses ‘‘foundation’’ data models – which draw on a vast quantity of uncategorised data – to allow the chatbots to answer questions in detail in a way that is easy to access.

The Australian Financial Review

explored the initial use cases in banks for ChatGPT’s artificial intelligence (which is being integrated into Microsoft’s Bing search platform and a range of services provided to corporate clients) with Microsoft corporate vice president of worldwide financial services Bill Borden.

He met banks and superannuation funds in Melbourne and Sydney last week, when a major topic of conversation was ChatGPT.

‘‘That is where people are getting really excited, around experience interfacing with frontline workers or the customer service area,’’ Mr Borden said. ‘‘When you think about the response, you can start creating off the dialogue and engagement [with customers]. You can start thinking about modelling activities, and what the approach or response should be. You can solve a problem – and create materials to actually follow up.

‘‘That is where OpenAI and ChatGPT can start to augment the processes.’’

Together with its Azure cloud and popular desktop software, which is used by all the major banks, Microsoft is developing ‘‘outcomes-based AI’’ to enhance consumer experiences and improve productivity.

This time last year it bought Nuance, a developer of conversational AI and ambient intelligence, which allows call centre workers to use biometrics to identify customers and prompt conversations.

Mr Borden points to a relationship banker using Teams or Office talking to a client. New chatbots can give the banker direction on actions, after analysing the customer mood, he says. They will also deliver insights to corporate bankers providing a full view of the company they are about to call and a list of actions to ensure the call is proactive.

It will be up to banks to work out thorny questions on disclosure and ethical application of the AI technology.

As it develops ‘‘industry clouds’’ tailoring its AI services to specific industries, Mr Borden says security, compliance and controls are important in financial services, and banks can access Microsoft’s in-house ethicists to advise on use cases in the market.

‘‘It has to be part of it. We are very focused on responsible AI,’’ he said.

‘‘We have policies and procedures, including on openness and inclusiveness and transparency, built into the products. As we deliver them, we have conversations about how we built it and how we think they should deploy it.’’

As ChatGPT also raises questions about the accuracy of material used to generate answers, including its limited understanding of Australian political history, banks will have to determine what source material is drawn upon and whether customers should be informed.

‘‘That is the learning journey we are on,’’ Mr Borden said. ‘‘Machine learning has been used in decision-making, from thinking about credit decisioning and other [applications]. It is not new.

‘‘Now it is a question of what more you can do, and what will be the approach around policies and governance to ensure it is open, inclusive and understands bias. These are all conversations we have with customers around how to think about using the technology.’’

Microsoft’s ‘‘intelligent cloud’’ division, which includes Azure, generated $US21.5 billion in revenue over the quarter ending December 31, up 18 per cent. The area makes up 40 per cent of revenue.

Asked whether some banks would be willing to pay more in data centre costs to access the models, Mr Borden said cost savings always depended on a bank’s overall tech strategy.

‘‘Will there be savings? Sometimes yes or no, depending on what your strategy is around applications,’’ he said. ‘‘Are you retiring applications, or are you just moving them? And how are you phasing in optimisation?’’

Westpac has a broad contract with Microsoft for a range of cloud services. Other majors banks use it to varying degrees, often part of hybrid cloud strategies that also include Amazon Web Services and Google.

Banks look to adopt ChatGPT as an aid for customers: Microsoft2023-03-14T09:18:52+11:00