SSS – February 2015

RBA Cash Rate

The drop to 2.25% was expected. By global standards our rate is still pretty high when compared to other markets such as the US, UK, Europe and Japan. Canada (whose economy is very similar to Australia’s) have recently slashed their cash-rate to 0.75%.

You can probably expect at least one more cut before June this year. Inflation is trending lower and the powers that be will do whatever it takes to keep it within their target band of 2-3%. The drop in oil prices have been likened to a rate cut of 0.5% already so the RBA may wait to see how the economy and inflation responds before cutting again.

The key thing to remember is that inflation increases land values. As long as we have inflation-targeting policies, you can expect interest rates to remain low and bank lending to increase. This increased lending (credit) will eventually bury itself into property (land) prices somewhere. The key question now is where is this most likely to occur and when do you do something about it?

Another point worth mentioning – when inflation eventually starts picking up (which it will) and government tax revenues increase as a result – we can expect annual pay increases of greater than 1.5%. Such is the cycle.

New V’s Established

Had some good questions this month regarding this topic. After having invested in both, my preference is for new property with sufficient land content. The main reasons are:

· Reduced stamp-duty

· Significant depreciation benefits in first 3-5 years (money for jam)

· Building and manufacturer’s warranty periods remain intact

· Greater potential for higher rent and tenant appeal

· Generally no major maintenance required in first 10 years

· Although savings in stamp-duty are taken up by construction interest – this interest is instantly tax deductible – stamp-duty is not.

Off-the-plan (OTP) generally relates to apartments and townhouse constructions. This is where you generally pay 10% up front as a deposit and the balance at the dwelling’s completion which can be anywhere from 6 months to 5 years. Whilst OTP is viable in a rising market, there can be a massive premium factored in to the purchase price (the next 2-5 years of capital growth). This is where research, knowing your market and having a good team around you is crucial.

Established property definitely has merit especially if it has renovation and subdivision potential. This does take knowledge, time and skill to apply though but the potential returns can be significant.

Market News

RP Data reports that Cairns has 3 suburbs whose rental yields are in the top 10 for the country. Increasing rental yields and decreasing vacancy rates are a precursor to strong capital growth. Aquis Casino is also still on the cards – we’re just waiting on the dust to settle after the recent QLD elections.

A lot of reports recently about Toowoomba and its property market. There is a saying that ‘if it’s in the news, it’s in the price.’ The horse has now bolted in Toowoomba and unless you have already secured or reserved land there, then I believe it is too late.

Prospects for Pimpama and Coomera still remain strong and I believe we will see some good returns over the next 12-18 months especially.

Quote

Wealth is the ability to fully experience life – Henry David Thoreau

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