Financial expert David Koch is recommending Australians buy a property in a smaller capital city or invest in healthcare stocks as interest rate rises bring the economy to a standstill amid a cost-of-living crisis.
The former Sunrise host, who is now Compare the Market's economics director, told Ny Breaking Australia it was still possible to make property gains despite the prospect of another rate hike early next year.
In a wide-ranging interview, he also defended baby boomers against accusations that they had an easier time than today's youth when it came to accessing the real estate market.
When reviewing Australia's economic performance this year, Koch noted that the country would now be in recessiona net overseas immigration level approaching a record 500,000 new arrivals.
“It certainly keeps the economy in positive territory,” he said.
'If we didn't have migrants we would be in a recession, it's that simple.
“We have 500,000 new customers in Australia and that is keeping retail and retail more resilient, putting pressure on rents and house prices.”
Financial expert David Koch (pictured right with wife Libby) recommends Australians buy a property in a smaller capital city or invest in healthcare stocks as interest rate rises slow the economy amid a cost-of-living crisis
Property
When it comes to real estate, Koch said the more affordable metropolitan markets of Brisbane, Adelaide and Perth would be better investments than Sydney or Melbourne in 2024.
Australia's largest cities receive the lion's share of overseas immigration, while other state capitals see more population growth from interstate migration.
But given that Sydney has an expensive median house price of $1.397 million, Koch suggested an investment property in Brisbane, Adelaide or Perth, where median house prices are more affordable at $870,526, $756,989 and $676,910 respectively, based on CoreLogic data.
“Sydney and Melbourne look like they're on a bit of a decline – it's a time to be cautious,” he said.
“You're seeing auction rates in Sydney starting to soften a bit as homes become unaffordable.”
But Koch said smaller state capitals are more likely to see capital growth in 2024 because they are more affordable and likely to see an increase in rental yields.
“Rental yields in Sydney and Melbourne are still higher than smaller capitals, but they are catching up,” he said.
This made them more attractive to an investor as a landlord, based on the prospect of stronger capital growth and higher rental income to pay higher mortgage repayments.
Perth house prices have risen 13.9 per cent since January, making it by far Australia's best-performing capital market, despite aggressive rate hikes by the RBA.
While inflation fell to 4.9 percent in October, he feared the Reserve Bank of Australia could raise rates again in February if the consumer price index for the December quarter remains on the high side.
“That will determine interest rates for all of next year,” he said.
The Reserve Bank left interest rates unchanged this week after raising them last month for the thirteenth time in eighteen months, taking the cash rate to a twelve-year high of 4.35 percent.
The most aggressive rate hikes since 1989 are slowing economic activity, with the Reserve Bank expecting growth of just 1.5 percent in 2023.
The annual growth rate of 2.1 percent in September was well below the long-term average of 3 percent.
When it came to young people struggling to get into the real estate market, the 67-year-old media personality and grandfather rejected popular claims that baby boomers had a much easier path to ownership.
When it came to real estate, Koch said the more affordable capital markets of Brisbane (Coorparoo auction pictured), Adelaide and Perth would be better investments than Sydney or Melbourne in 2024.
“This intergenerational war is not doing anyone any favors,” he said.
'I know when I was younger I thought the exact same way about my parents: 'Why can't I live like this now?' and my parents would say, 'Well, you haven't worked as long as we have.'
But Koch admitted that today's variable mortgage interest rate of almost seven percent is the same as the seventeen percent interest rate of the late 1980s, simply because house prices are much more expensive compared to incomes.
“You can point out that today's homebuyers are having just as much of a hard time, if not even more difficult, than when boomers were paying 17 percent in the 1970s and 1980s, purely because of the size of the loan.”
Melbourne's average house price of $943,725 is now so expensive that a borrower with a 20 per cent mortgage deposit and earning an average full-time salary of $95,581 would have a dangerous debt-to-income ratio of 7.9.
This is well above the Australian Prudential Regulation Authority's 'six' threshold, which is considered risky.
In 1983, when the average house price in Melbourne was $52,500, a middle-income borrower in the same position earning $18,288 had a debt-to-income ratio of just 2.3.
For those looking to invest in the stock market, Koch recommended healthcare stocks such as sleep apnea group ResMed or vaccine maker CSL (pictured) as they are expected to rebound in 2024.
healthcare
For those looking to invest in the stock market, Koch recommended healthcare stocks such as sleep apnea group ResMed or vaccine maker CSL, as they are expected to rebound in 2024.
“Not everything will rise at once, as has happened in recent years, but there will be sectors that will do better than others and certain companies that will do better than others,” he said.
'You've got ResMed and CSL – their shares have been battered this year and the analysts say healthcare can expect a recovery next year.
“These are global healthcare companies, the demand for good, world-class healthcare as Asia continues to develop, all of which flows into our Australian global healthcare.”
Government bonds
Investors looking for fixed returns can also opt for government bonds.
Governments issue bonds when they borrow money and investors receive an annual return, also called a yield, until maturity.
The yield on ten-year Commonwealth government bonds is now at 4.58 per cent, which is still well above the RBA rate of 4.35 per cent.
With inflation declining and the futures market not expecting any more rate hikes in 2024, Koch says now would be a good time to lock in a higher interest rate before it falls.
“Set a higher interest rate now if there is a forecast that interest rates will fall in the future,” he said.
'It could be a good way because bonds, if you get good returns and are at the top of the interest rate market, you can achieve capital growth in the future, so it's worth looking at it as part of a diversified portfolio.'
The release of quarterly inflation data on December 31 is likely to have a major impact on the bond market, with yields rising as the market expects even higher interest rates.
“That December quarter inflation number is just critical to everything,” he said.
'If interest rates remain below expectations, bond yields will fall; if it exceeds expectations, bond yields will rise.”
The Reserve Bank expects inflation to remain above its target of two to three percent until the end of 2025, meaning interest rates could still rise.
Save money
Koch said Australians should reconsider not automatically renewing their insurance every year.
“It's a time when you don't automatically renew insurance policies, see if you can get a better deal,” he said.
Borrowers also had some power to negotiate a better rate if they had proven reliable.
“It's a moment when you call your lender, your home loan financier, and say, 'I want a discount and why haven't you given me one yet?'.”