Finance expert David Koch is recommending Australians buy a property in a smaller capital city or invest in healthcare shares as rate rises stall the economy during a cost of living crisis.
The former Sunrise host, who is now Compare the Market’s economic director, told Daily Mail Australia it was still possible to score property capital gains despite the prospect of another rate hike early next year.
In a wide-ranging interview, he also defended baby boomers against accusations they had it easier than young people today when it came to getting into the property market.
Reviewing Australia’s economic performance this year, Koch noted the nation would currently be in recession without a net overseas immigration level approaching a record 500,000 new arrivals.
‘It’s certainly keeping the economy in positive territory,’ he said.
‘If we didn’t have migrants, we’d be in a recession, simple as that.
‘We’ve got 500,000 new customers in Australia and that’s keeping retail and shops more resilient, putting pressure on rents and house prices.’
Finance expert David Koch (pictured right with wife Libby) is recommending Australians buy a property in a smaller capital city or invest in healthcare shares as rate rises stall the economy during a cost of living crisis
When it came to real estate, Koch said the more affordable capital city markets of Brisbane, Adelaide and Perth would be better investments than Sydney or Melbourne in 2024.
Australia’s biggest cities receive the lion’s share of overseas immigration while other state capitals get more population growth from interstate migration.
But with Sydney having an expensive median house price of $1.397million, Koch suggested an investment property in Brisbane, Adelaide or Perth, where the mid-point house prices are more affordable at $870,526, $756,989 and $676,910, respectively, based on CoreLogic data.
‘Sydney and Melbourne look as though they’re trending down a bit – it’s a time to be careful,’ he said.
‘You can see auction clearance rates are starting to be a bit softer in Sydney as housing becomes unaffordable.’
But Koch said the smaller state capitals would be more likely to get capital growth in 2024 because they are more affordable, and were likely to see an increase in rental yields.
‘The rental yields in Sydney and Melbourne are still higher than those smaller capital cities but they’re catching up,’ he said.
This made them more attractive buys for an investor landlord, based on the prospect of stronger capital growth and higher rental income to service higher mortgage repayments.
Perth house prices have climbed by 13.9 per cent since January, making it by far Australia’s best performing capital city market despite the RBA’s aggressive rate hikes.
While inflation in October moderated to 4.9 per cent, he feared the Reserve Bank of Australia could raise rates again in February should the consumer price index for the December quarter remain on the high side.
‘That will determine interest rates for all of next year,’ he told Daily Mail Australia.
The Reserve Bank left interest rates on hold this week after last month raising them for the 13th time in 18 months, taking the cash rate to a 12-year high of 4.35 per cent.
The most aggressive rate hikes since 1989 are slowing economic activity, with the Reserve Bank expecting growth of just 1.5 per cent in 2023.
The 2.1 per cent annual growth pace in September was well below the long-term average of 3 per cent.
When it came to young people struggling to get into the property market, the 67-year-old media personality rejected popular claims baby boomers had a much easier path to ownership.
When it came to real estate, Koch said the more affordable capital city markets of Brisbane (auction at Coorparoo pictured), Adelaide and Perth would be better investments than Sydney or Melbourne in 2024
‘This intergenerational war doesn’t do anyone any favours,’ he said.
‘I know when I was younger, I was thinking exactly the same thing about my parents – “Why can’t I live their lifestyle now?” and my parents would be saying, “Well, you haven’t worked as long as we have”.’
But Koch admitted today’s variable mortgage rates approaching seven per cent are equivalent to the 17 per cent interest rates of the late 1980s, simply because house prices are much dearer compared with incomes.
‘You can make the point that today’s home buyers are doing it as tough, if not tougher, then when boomers were paying 17 per cent in the seventies and eighties purely because of the size of the loan.’
Melbourne’s median house price of $943,725 is now so dear a borrower with a 20 per cent mortgage deposit, 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 that is considered risky.
In 1983, when Melbourne’s median house price was at $52,500, an average-income borrower earning $18,288, in the same position, had a debt-to-income ratio of just 2.3.
For those looking to invest on the share market, Koch recommended healthcare stocks like sleep apnea group ResMed or vaccine maker CSL (pictured), because they are expected to rebound in 2024
For those looking to invest on the share market, Koch recommended healthcare stocks like sleep apnea group ResMed or vaccine maker CSL, because they are expected to rebound in 2024.
‘Not everything will go up all at once like has happened in previous years but there will be some sectors that will do better than others and particular companies that will do better than others,’ he said.
‘You’ve got ResMed, CSL – their shares have been battered this year and the analysts are saying healthcare may expect a bounce back next year.
‘These are global healthcare companies, the demand for good, world-class healthcare as Asia develops further, that all flows through into our Australian global healthcare.’
Investors after fixed returns can also choose government bonds.
Governments issue bonds when they borrow money and investors get an annual return, known as a yield, until the maturity date.
Yields on a 10-year Commonwealth government bond are now at 4.58 per cent, which is still well above the 4.35 per cent RBA cash rate.
With inflation moderating and the futures market expecting no more rate rises in 2024, Koch said now would be a good time to lock in a higher yield, before they fell.
‘Lock in higher yields now when there’s a forecast of interest rates falling into the future,’ he said.
‘It could be a good way to go because bonds, if you get a good yield and at the top of the interest rate market, you can make capital growth into the future so it’s worth looking at as part of a diversified portfolio.’
The January 31 release of December quarter inflation data is likely to have a major bearing on the bond market, with yields rising if the market expects even higher interest rates.
‘That December quarter inflation figure is just critical to everything,’ he said.
‘If it comes in below expectations, then bond yields will drop; if it comes above expectations, bond yields will rise.’
The Reserve Bank is expecting inflation to remain above its two to three per cent target until late 2025, which means interest rates could still rise.
Koch said Australians should reconsider not automatically renewing their insurance every year.
‘It is a time that 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 to be reliable.
‘It is a time that you ring your lender, financier on your home loan and say, “I want a discount and why haven’t you given me one up to now?”.’