G’day All,
Hope you had a great Christmas and festive New Year! To cap off 2022 and bring in 2023, some property investment-related topics and updates below:
Interest Rates
After eight consecutive increases, the overnight cash rate is now 3.1% (up from 0.1% in May) and is the biggest rate of increase since the early 90’s recession (most of us were likely in nappies or primary school). Standard variable rates are now around 6.6% with most discounted rates around 5.2%.
Although the RBA may raise again in February depending on Christmas inflation, consensus is they’ll pause and let the last eight increases work their way through the economy. A significant number of fixed, low-rate mortgages will also be expiring throughout 2023 and resetting onto much higher variable rates, so a lot of money and buying power will be sucked out of the economy over the next year and beyond.
To a question of whether we’d ever return to interest rates of 15%-17% as in the late 80’s-early 90’s, likelihood is assessed as very low as debt levels (both government and private) are now so much higher that the economy couldn’t support repaying at those rates without tanking. To curb future inflation, we’d probably see a balance of smaller interest rate increases, targeted price controls/caps (as happening now in energy) and tax-breaks for certain industry sectors to boost supply and bring down prices.
Inflation
Came in slightly lower in the September quarter, but still pretty high at around 7% (target band is 2%-3%). Good news is most economists expect it to trend lower as global oil prices and shipping costs have come down and China’s manufacturing sector reopens after covid closures. Provided wages don’t significantly increase from here (wage-price spiral), this should see the RBA take a breather on future rate hikes.
Historically, the best hedges against inflation have been property (land), gold/commodities and fine art.
Real-Estate Cycle
We’re now firmly in the second-half of the 18.6-year cycle. This is usually a commodities, resources and infrastructure boom period, so focus has largely shifted to Perth, Adelaide and Darwin. There are still plenty of opportunities elsewhere, however WA, NT and SA are starting from a much lower base and haven’t had the prolonged run-up in values as seen in NSW, VIC, TAS, ACT and parts of QLD.
Key industries over the next decade will be energy/renewables, space, resources (rare earths), defence, tourism and education.
Portfolio Performance
Since Defencewealth began in 2013, we’ve helped facilitate just over $11.2 million in property acquisitions, with an open-source current market valuation of $14.7 million.
Simple annual growth rates have ranged from 1.7% (worst case) to 19.5% (best case), with an average simple growth rate across the portfolio of 6.6% as at Jan 2023.
With an average purchase price of $450,000, most clients saw an initial 15% outlay (10% deposit + 5% costs) returned through capital growth within 4-5 years. There have been some exceptions, with worst case being almost 9 years to achieve $60,000 in growth. Best case was 21 months to achieve $202,000 in value increase. Current market rent is $702,000 per year, giving an average gross yield of 6.2% on initial purchase prices.
Overall, this provides a total gross average annual return (growth + rental yield) range of 6.0% worst case, to 25.7% best case.
Although we advocate property should always be held with a long-term view (minimum ten years) and to start as early as one can, we fully understand that some people will need to sell and exit earlier, sometimes at a loss.
As we enter our tenth year, we sincerely thank you for placing your trust in us in helping you on your property wealth journey. Our networks, knowledge and expertise have significantly deepened over the years, and we look forward to being of service over the next decade and beyond.
Strategy The Defencewealth strategy of TWO-50-TEN™ is based on acquiring a $2 million portfolio at 80-90% LVR over a 6-8 year timeframe. Once acquired we work to reduce the LVR to 50% over the next 4-7 years using a combination of capital growth, offset accounts and principal repayments. Once at 50% LVR, you will have some serious financial options but it will take time (min 10-15 years) to achieve. The new property packages we recommend are considered investment-grade based on experience and results and are selected for their balance in anticipated cash flow, capital growth and risk.
Defencewealth Australia 