Ross Greenwood Newsletter -14 April 2017
“Imagine this scenario – Imagine, as of this exact moment, your house price is down 9 per cent…
What if the share market drops by 17 per cent? What would that do to your super?
Imagine the Australian dollar drops from US75c to US60c.
Imagine if the Australian unemployment rate goes through the roof…more than half a million more people do not have a job.
So what does this do to property prices? Well, I’ve already told you that”
Do you want to know how hard it is to do the Federal Budget which is due in less than four weeks?
The Treasury’s office in Canberra must have steam coming out of it right now, with all the different scenarios and possibilities.
Well, here is just one way to prove how hard it is – and this is a big one.
Iron Ore Prices.
The Iron Ore prices, over the past year, has shifted dramatical with the low point being in May last year at $48 a tonne.
The high point was at nearly $95 a tonne on February 21 this year. That was a jump of 98 per cent in just 10 months.
Now, back at Treasury, the problem is the wild swing in Iron Ore is that with every $10 rise or fall in price per tonne, it represents $2.5 billion a year in tax revenue
So the move from $48 to $95 per tonne, is $11.75 billion.
To put it into perspective, that $11.75 billion is around half the cost of running the public service sector or about a third of what the government spends on education.
So you see, guessing the price of Iron Ore is a major issue for the Treasury right now.
However, and heres where we start to see the problems – since the peak in February, the price of Iron Ore per tonne has fallen.
Overnight, it dropped 8.5 per cent, or in other words, $6.34 to $68.04 per tonne – that represents $1.5 billion in tax revenue and that’s just overnight.
The total fall from the peak on February 21 is worth $6.75 billion…in just eight weeks!
That is all money lost from the budget.
Now, to be fair, the government and Treasury don’t ride the tips and troughs of the Iron Ore price. The generally pick a conservative number – last year it was around $45 a tonne – and then they budget from there.
This is an improvement on previous years where they assumed high figures for Iron Ore and spent accordingly and that is largely why we are in the financial mess we’re in today.
The iron ore boom stopped but the spending kept on going.
And this is not all that happened this week – Housing affordability was a hot topic again.
As you one of those people that bemoans Chinese investment in Australia? Do you grumble about people with Asian faces, even if they are Aussie, bidding at auctions and pushing up property prices?
Now, if you’re one of those, hope like hell that China keeps investing.
Because if they stop, then we’re in big big trouble.
A report released during the week by Australia’s leading economist, Deloitte’s Dr Chris Richardson, gave some very startling look into one possibility of the future.
He observed that if China’s economy slows, our own unemployment rate will soar, house prices across the board will drop by 9 per cent, and it will wipe out almost a trillion dollars worth of wealth – most of it in property prices.
To put it into perspective, it’s around half the total in superannuation funds right now.
That’s how much, according to Dr Richardson, we do not want China to slow down.
Now, if the Dow turns bad, Richardson says that the federal budget and government debt will blow out by $40 billion in just two years.
Considering the Government already has $330 billion debt, if it rises rapidly, it wont’s stop.
However, Richardson is not saying China will fall anytime soon – Far from it!
But he is warning that Australian’s are living in a fantasy land by allowing Governments not to cut the budget.
He says “we are out of ammunition to withstand a downturn caused by China”.
Why? Because Government debts has risen so fast and Australian’s households are now the second most indebted in the developed world.
That means many of us are not well-equipped if rates suddenly rise, if unemployment takes a turn or if the national economy falters because of China.
So if you’re at an auction, and suspect an Asian buyer, or any buyer for that matter, paying above the odds for a property – let them go!
If things turn bad, the property most likely will end up on the market again at a cheaper price.
Remember the old saying – “buy in gloom, sell in boom”
It’s as true today as ever before.