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If you want to survive and thrive in today’s world, you simply have to devote time to thinking about and preparing for change. Two hundred years ago, one could generally be sure that one’s life would be much like that of one’s parents, or grandparents. Very often the (male) workers would work in the same industry that their forefathers had mastered. They would live in the same town and attend the same schools for whatever period of education they were lucky enough to enjoy.

My how things have changed. For so many in the world, life is immeasurably better. Lifespans are longer, lives are more comfortable and more options and opportunities are open. But the cost for this has been a society manically focussed on innovation, change and improvement. Every minute of every day, highly intelligent minds are focussing on new problems, or new solutions to old problems. Simply to keep up, one has to stay flexible, open-minded and ready to change.

In this edition of Investment Enews, we focus on change through three very different lenses; changes in housing market trends, the banking Royal Commission and disruption in the retail industry.

Housing Market Update

We have now almost completed the first quarter of 2018 and some clear new trends are emerging in the Australian housing market. For the last five years or so, the strong growth in the Sydney and Melbourne housing markets has more than offset the sluggish markets seen elsewhere. This has seen solid (if geographically variable) average growth rates nation-wide.

However, the two largest markets have now entered negative territory. Sydney in particular has seen a softening, down by 2.4% over the quarter to end of February. Melbourne’s slow-down has been less pronounced, but it is certainly not growing at the rate seen 12 months ago. In fact, Hobart is the only capital city showing any signs of life, registering 3.2% price growth. For the first time in a number of years, the regions are outperforming the capital cities.

An interesting story emerges when house prices are considered from a different perspective. All (not just most) of the slow-down in house price growth has occurred at the higher end of the housing market. Indeed, if one were to remove the top two deciles, Australia’s house price growth would be continuing. The affordable and middle-range housing market continues to show solid and consistent growth. Statistically this outcome, of course, correlates with the slow-down in the two most expensive markets, but it is notable nevertheless.

A further confirmation of the slow-down in the housing market comes from transaction volumes. Notwithstanding seasonal factors and ongoing strong population growth, transactional volumes are down across the nation. Settled sales across the capital cities are at their lowest levels in five years.

So where to for Australia’s housing market following this slow down? Longer-term readers of Investment Enews will recall that we have been anticipating a slow-down in the Sydney and Melbourne markets and, indeed, expect this softness to persist through 2018. Frankly, both markets have experienced an extended period of strong annualised growth and our base case is that they will now experience an extended period of softness, including some periods of negative growth. However, and this is a point worth re-iterating, demand side factors such as record population growth, strong economic performance in our larger cities, low unemployment and household spending patterns tilting towards housing will all point to minimal risk of this slow down becoming a systemic issue of significance for the Australian economy.

The Banking Royal Commission

In recent weeks, there has been significant media coverage of the banking Royal Commission. Speaking strictly as observer, rather than as a participant, we make a number of observations.

Firstly, as is customary, the media will give far more attention to the allegations of wrong doing, rather than the actual findings of the Commission. Commission Hayne, a former Justice of the High Court of Australia has a tremendous reputation as a steady, rigorous thinker. Within the context of extremely short time frames and broad terms of reference, we have great confidence that his findings will be very carefully measured.

Secondly, the early days of the Commission have included a significant focus on unlicensed loan introducers – gym owners, tailors and the like. It appears that, in some cases, these unregulated third parties have been paid substantial commissions for referring loans to various lenders. This model is coming under significant scrutiny and, in our view, is unsustainable. By way of full disclosure, at La Trobe Financial we do not deal with unlicensed introducers, only licenced and accredited finance brokers.

As to broader claims around the broking industry generally, some may see parallels with the period of review and regulatory reform that affected the financial advice profession a few years ago. History now shows that, despite extreme claims by industry critics, advisers have managed to emerge stronger as a group than they were before and this is of benefit both to the profession and to its clients. At La Trobe Financial, we remain strong advocates of the importance of a healthy, professional and well-regulated broker market. Whilst any improper behaviour should, of course, be addressed, we believe that any such behaviour is an aberration at the fringes, rather than being widespread in the profession. We remain convinced that brokers will retain a substantial value proposition for residential and commercial borrowers for the foreseeable future.

Finally, the early evidence relating to the banks themselves has had a significant focus on errors that have arisen through automation of credit assessment. Whether that assessment has been for pre-approval or for a formal loan application, it does appear that there have been many instances where errors have been made. From the perspective of a lender which has kept what some have described as an ‘old fashioned’ focus on credit assessment by specialist analysts, this has been an interesting experience. Whilst we are big supporters of the value of automation of many business functions, we remain committed to the retention of trained and experienced credit analysts as the decision makers in any credit application.

How times change

Having said that, and as if to confirm our comments on the value of automation, the retail industry is experiencing its own, well-publicised time of trial. In Australia’s corporate history it is difficult to find a more significant brand than that of the Myer retail group. Founded by Sidney Myer in 1900 in Bendigo, it quickly became Australia’s largest chain of department stores. Through good times and bad – including multiple ownership structures - and despite changing fashions across the decades, Myer remained a cornerstone of Australian retail for over a century.

But then something changed. Shopping went online. Shoppers eschewed the department store in favour of the new retailers like Amazon. So far, Myer has been unable to adapt. Extraordinarily, by the end of 2017, Myer had been overtaken in value by Kogan.com, an online retailer established in 2006 by the then twenty four year old Ruslan Kogan. So what is the lesson from all of this? Whether you are talking about trends in the housing market, regulatory review of an industry or disruption of old business models by aggressive new entrants, change and uncertainty is accelerating. In such an environment, we continue to believe that there is a place in most portfolios for capital stable investments, delivering consistent monthly income. Now well into our 66th year of operation, we remain as committed to that philosophy as ever.

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La Trobe Financial Services Pty Limited ACN 006 479 527 Australian Credit Licence 392385
La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence 222213 Australian Credit Licence 222213 is the issuer and manager of the La Trobe Australian Credit Fund ARSN 088 178 321. It is important for you to consider the Product Disclosure Statement for the Credit Fund in deciding whether to invest, or to continue to invest, in the Credit Fund. You can read the PDS on our website latrobefinancial.com or ask for a copy by telephoning us on 1800 818 818. *Returns on our investments are variable and paid monthly. Past performance is not a reliable indicator of future performance. The rates of return from the Credit Fund are not guaranteed and are determined by the future revenue of the Credit Fund and may be lower than expected. Investors risk losing some or all of their principal investment. An investment in the Credit Fund is not a bank deposit. Withdrawal rights are subject to liquidity and may be delayed or suspended. Visit our website for further information.

Copyright 2018 La Trobe Financial Services Pty Limited ACN 006 479 527. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial.

This publication does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and a general overview on matters of interest and it is not intended to be comprehensive. You should seek your own financial or other professional advice before acting or relying on any of the content.