SSS – September 2014

RBA Cash Rate

No changes and still at 2.5%. Europe just lowered their cash-rate to 0.05% and the US is still at 0.25%. Glen Stevens is actually calling for more ‘animal spirits’ in the economy. When a highly educated and respected Reserve Bank Governor starts calling for animal spirits, that’s a sign to me that our powers-that-be aren’t too sure where we’re headed – and that means low interest rates for a long while yet.

Aussie dollar has slid slightly to around $0.91US which is most likely linked to the falling iron ore price. Speaking of falling iron ore, I am personally feeling the brunt of owning property in a mining town so heavily reliant on iron ore exports. The main employer for the town is a junior miner who has just mothballed the mine and gone from a 350-strong workforce to 10-man skeleton workforce. This has disrupted the town and is a perfect example of why it is important to ensure you only invest in locations where there are multiple employment industries. This particular township in the NT will rebound eventually as iron-ore is a resource so critical to the Asia-Pacific growth machine occurring to our north.

Don’t get me wrong, mining towns can be very lucrative – just look at Port Hedland in WA where 11years ago 3-bed, 1-bath homes were averaging $250K each. Today average price is $850K-$1million with rent returns between $1500-$2500 per week. The key take-away is that risk lies in everything we do as investors. As long as you have taken the time to assess and mitigate the risk, you should be confident in whatever purchase you make. In this case my LOC buffers will enable me to ride out this particular slump.

Aus-India Uranium Deal

Signed by Tony Abbott just recently, this will be interesting particularly for South Australia. The Olympic Dam mine up at Roxby holds an estimated 40% of the worlds highest grade uranium. If BHP decide that the time is approaching to kickstart the mine’s expansion then this will be a boon for the SA economy and in particular those with property in Adelaide. I won’t go into the detail why in this SSS, but it comes back to the Law of Economic-Rent. If you get bored then google economic-rent and let me know what you think!

Valuations

I’ve had a few questions recently regarding lower valuations on new build contracts. Here’s the gouge:

Valuations for new property are almost always expected to come in lower than contract price. Industry standard is between 5-8% (anything lower than 8% then someone is seriously price-gouging). Eg: You have a 4-bed, 2-bath contract at $400K but the valuation can be expected to come back at between $368K – $380K. The reason this occurs is because the house is still yet to be built, therefore there are added risks that need to be accounted for such as construction risk (the builder goes bankrupt before house complete) to economic risk (there is a sudden financial or economic shock that leaves the bank exposed).

Now you’re probably thinking that there’s building and insurance funds to protect against such risk and you would be correct. However, what many people don’t realise is that the valuer is always the last line of defence. If something awry were to occur to that property either during construction or post-construction where you defaulted on your loan and it became a mortgagee-in-possession, if the bank is unable to fire-sell and clear its losses within 30-days, they or the mortgage insurer then go after the valuer for the rest. So when it comes to bank valuations, the valuer will always err on the side of caution to prevent any future claims or redress.

Established property valuations almost always match sale price as the building already exists removing a lot of risk. The downside from an investor’s perspective is that you now pay much higher stamp-duty and miss out on maximum depreciation on the new build (money for jam) just when your portfolio and cash-flow probably needs it the most! This is why it is crucial you have a mortgage expert who understands investment finance and the need for cash/LOC buffers to absorb this potentiality.

There are hundreds of cases where people have been genuinely ripped off and lost big, especially in off-the-plan high-rise apartments. This is why you must conduct your own due-diligence and research and not just blindly accept what your property sales or investment adviser is telling you. This includes me! Knowledge and education really is power.

MSBS

For those in SA, Commonwealth Super will be at RAAF Edinburgh next week on 16th Sept at the Monash Centre. I highly encourage anyone who doesn’t fully understand MSBS or their entitlements to attend if you can. This is something I believe every member should have skunned whilst they’re young.

Quote

The problem with Socialism is that eventually you run out of other people’s money – Margaret Thatcher

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