Over the long term | Are we better or worse off? / by Adam Howard

I want to start 2015 with a change to the Update.  After much navel gazing, as well as listening to a bit of booze-fueled feedback, each weekly Update will now be a bit shorter.

Some say this is catering to demand, others say it is catering to a shorter attention span…so read on, my friendly goldfish!

So, the end of one year and start of another always brings the endless summaries of last year and predictions for the year ahead.  I both hate and love this.

Hate it because the predictions are delivered with such confidence by a long line of tools.  I find this annoying.

Love it because of the tools themselves, and their absolute confidence in predictions which are almost always wrong.

Before I go on I have to say I had a quick read of Alan Kohler’s year end Eureka Report a week or so ago. 

For a finance industry expert he seems to have a pretty good grasp of his own fallibility and talks about his “expertness” with tongue firmly planted in his cheek.  In his 2014 summary he:

  • Admitted he got almost all his predictions for 2014 wrong;
  • failed to see the massive drop in the oil price; and
  • acknowledges the only certainty is uncertainty.

So, to start 2015 I thought some pretty graphs showing long term movements in a few popular variables would be cool.

I have also included the average for these variables and their current level.  Given how I feel about predictions I will absolutely NOT be providing any.

What I WILL do is provide a small table showing what the difference between the average current status means.  You know, what it’s going to cost you to buy that back catalogue of Gossip Girl DVDs from the States today, compared with the long term average.

And then I will provide a verdict; are we better off or worse off than the long term average, because there are a lot of commentators talking doom and gloom.  Might be useful to see where we’re at.

The variables are:

  • the AUD/USD cross rates;
  • Australian unemployment;
  • Australian inflation rate;
  • The RBA cash rate (vs the US Fed cash rate); and
  • The standard variable home loan rate.

Australian Dollar 30 Year Chart

So, the one that seems to get the most attention, but for strange reasons. It doesn’t really affect the average bloke on the street that much.  Generally a cheaper, or lower, Aussie dollar is better as it means our exports are cheaper, which means generally we can potentially sell more than we buy.


But, the feeling on the street seems to be that higher is better, just because bigger is better.

Anyway, here are the averages:

25 yr average:                    $1 AUD = 76.7c US

Current Rate:                     $1 AUD = 80.9c US

Good news as the Aussie is a lot closer to “normal” than it’s been for a few years.  IN fact, the last time the AUD was close to the long term average was 2006.

What the above means is if you were planning on going to the US on holiday and you had $5,000 AUD in spending money, then at today’s rate your $5k would be worth $4,045.

At the long term average it would be worth $3,834.

So, today’s rate gets you one extra night’s stay at the Crowne Plaza Times Square Manhattan hotel.

Verdict:  Slightly worse off.

Unemployment Rate

Next, unemployment. 

This is a tricky one as Australia’s population has changed a lot over the past 40 years, so our labour force has as well.

Our current potential labour force is just over 12 million, with an unemployment rate of 6.3%.  This means there are 778,000 unemployed people in the country.

The 25 year average for unemployment in Australia is 6.91%, meaning we are 75,330 workers below the long term average.

Have a look at the data in this link:

Australia - Industry sector of employment

It shows where Australian’s REALLY work.  Losing that many workers from a single sector would mean, for instance, a 43% drop in mining sector employment, but only a 7% drop in retail sector employment.

Verdict:  Slightly better off.

Inflation Rate %PA Australia

Inflation Rate %PA Australia

Long term inflation.  I mean, who cares?  Really…. 

Well, you might care if it was 23%, which was the highest on record, because as inflation measures the rate at which prices are rising it shows how much LESS your hard earned dollars can buy.

That said, the long term 50 year average is 5.2%, and we are currently at 2.3%.  Well within the RBA’s comfort band of 2 – 3%.

“Inflation” as its termed, is really an index calculated based on the prices of a “basket” of goods, and as far as the Australian Bureau of Statistics is concerned, this basket includes:

… food, alcohol and tobacco, clothing and footwear, housing, household contents and services, health, transportation, communication, recreation, education and financial and insurance services…

Verdict:  Much better off.

Standard Variable Home Loan Rate

Right, the interesting one.  Most people have a home loan, or a business loan, or some type of debt, and how much the lifestyle that debt allows is something people care about.

The 25 year average for the RBA cash rate is 5.24%, and the current rate is 2.5%.  Now, the cash rate has questionable relevance these days as the banks obtain most of their funds from the wholesale money market.

All the banks offer a Standard Variable Rate (SVR) for home loans which is a better indicator of the cost of debt.  The above chart only shows rates until Feb 2011 with continued downwards movement since then.

The current SVR averaged across the banks is 5.51%, against the 25 year average of 8.3%....yes, 8.3%.

If we use $500,000 as an average home loan limit and compare interest bills we end up with the following:

$500,000 @ 8.31% = $41,550 pa or $799 per week.

$500,000 @ 5.51% = $27,550 or $530 per week.

In summary, $269 per week or $14k pa better off.

Verdict:  Much better off.

So, are we better or worse off right now, compared to the long term average?

Exchange Rate:             Slightly worse off.

Unemployment:             Slightly better off.

Inflation:                         Much better off.

Interest Rates:                Much better off.

You make the call.

Food for thought….