Author: Defencewealth Advisory

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 16^th 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

RBA Cash Rate – Left on hold again at 2.5% for the month of August. As I’ve said previously I expect low rates to remain for at least the next 12-18 months. We’ve just seen Westpac, CBA and NAB move their 5-year fixed rates to below 5%! The big banks pay large sums of money to employ actuaries whose sole job is to research and predict the future cost of capital and hence maximise banking profits. Whenever you see fixed rates below variable – this is a sign that banks think rates will be going even lower.

The RBA (the King Bank) even had this to say last Tuesday:

  ‘Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.

‘In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.’

We’ve just seen national unemployment increase to 6.4% and the Aussie dollar still sitting high at around $0.93US – If that combined with the RBA’s last statement regarding inflation doesn’t mean interest rates are staying low for at least the next 18 months, then I don’t know what does.

Tax Time – I use the EOFY to also review my insurances (building and landlord), interest rates and PAYG Tax Variation. I’ve managed to source further interest rate discounts across all my current lending (including the NAB DHOAS loan) ranging from 0.06% to 0.4% bringing total discounts off the standard variable rate of between 0.85%-1.05%. This has freed up some decent cash flow which can then be reinvested. All it takes is a phone call to your lender – if you don’t ask, you don’t get. It’s also a good time to review your credit file which can be sourced for free from here.

Catherine Norris from CJB Property Group is currently working on an investors’ pack that will assist clients in your investment record-keeping requirements. I’ll keep you posted on its progress.

Toowoomba Market – Terry Ryder who I subscribe to for research purposes recently advocated again for the Toowoomba region. Attached is a spread out of The Chronicle in May detailing the latest on infrastructure spend.

Cairns Market – Although economic diversity lacks in Cairns and its primary industry is tourism, details of the proposed Aquis Casino development caught my attention this week. For want of a better phrase – this is fricking massive! It’s estimated to be an $8+ billion project over 10 years; 7,500 hotel rooms and a 20,000 strong workforce. An older colleague likens it to what was happening on the Gold Coast in the late 80’s early 90’s where massive property gains were made by those who got in early. The casino project is still undergoing EIS (Environmental Impact Study) and is far from being a sure thing – however if it goes ahead, the flow on effects to property (especially during the construction phase) will be significant. Be rest assured we’ll be watching this closely and will keep you posted. More details here.

Quote – ‘Land prices need to be high enough so that workers who saved to buy land of their own remained in the workforce long enough to avoid a labour shortage.’ Edward Wakefield -1829 in support of the South Australian Colonisation Act.

RBA Cash Rate – Was left unchanged again at the July Board meeting. Those in the industry believe this will be the case for at least the next twelve months. The two main reasons are the high Aussie dollar ($0.94 US Cents) and zero-bound (0.1% – 0.25%) interest rates in the US, Europe and Japan. Our 2.5% cash-rate is attractive to foreign capital combined with Australia’s reputation as a safe, stable and prosperous country. This in effect is what is keeping our dollar so high.

There may be another rate cut later in the year depending on what inflation is doing and how much more of a beating the manufacturing sector can take. I personally think we will have low rates for quite some time and that another cut is not off the mark. The fact the banks still have fixed rates below variable rates demonstrates belief there will be further movement downwards. For this reason I am keeping my portfolio leveraged at variable rates and interest-only whilst maximising use of my DHOAS offset account.

Toowoomba Economy – For those that haven’t seen it, the Courier Mail ran an article on the town’s infrastructure boom currently underway. Toowoomba is Australia’s second-largest inland city (Canberra’s the largest) with on average 50% of goods shipped through the Brisbane Port originating from the Toowoomba and western region. Massive growth in infrastructure (both public and private) is crucial for long-term capital growth. Congratulations to those that have recently acquired investment-grade lots up there! You can read the article here.

Asset Protection – Had a good question last week from a member who wanted to know whether buying in their own name was safe. In my view – yes it is. Purchasing in a Trust (whether it be a Family or Unit Trust) is complex and will cost on average between $2000-$6000 just to set up. Whilst ownership in a Trust means the assets are protected should anyone want to “have a go” at you, you have to weigh it up with what the likelihood is that someone would want to have a go. Most banks and lenders will also charge more for lending to a Trust as it is more complicated than just lending in your own name as there’s more hoops to jump through. You also can’t claim negative gearing in a Family Trust. For those contemplating purchasing in a Self Managed Super Fund (SMSF) – that’s a whole different kettle of fish although no one is in that boat yet.

Provided that you are not negligent in your duties as a landlord (professional property management) and carry the appropriate insurances (building and landlords) then you have adequately assessed and mitigated the risk. For the aircrew amongst us – process is no different to an RMP. Don’t forget you’ll also most likely be leveraged at around the 90% mark at this early stage of your investing career so if someone did mount a claim, there’d be bugger all to take anyway.

Once you start building some serious equity in your portfolio, there are ways and means to protect your wealth and also keep it in the bloodline for multiple generations after you pass on. I’ll probably talk more about that in a future SSS.