Category: Short, Sharp & Sweet Insights

RBA Cash rate:
Left on hold at 2% for the month of June. I still believe we will remain on hold until at least October/November before another potential cut. This will be heavily dependent on both inflation and unemployment data between now and then. The RBA also believes the Aussie dollar still needs to fall further from the current $0.77US mark to the low $0.70’s or high $0.60’s which may be assisted by another interest rate cut.

Tighter Bank Lending:
Banks all over have really begun tightening their lending activities to both investors and now owner-occupiers. Macquarie Bank have just recently announced 80% LVR caps on interest-only owner-occupier loans. This does surprise me but then again the lack of lending will reduce the amount of housing being built. This will in turn drive up rents which will in turn drive up capital growth which will then be the time the banks change their policies and begin mass-lending once again! We’ve been here before and this is a good thing if you can recognise it. This will take years to play out, but everything is occurring in accordance with the 18.6 year real-estate cycle.

RBA Cash rate

As expected, the RBA dropped the official cash rate from 2.25% to 2% this month. Most lenders have responded by dropping their rates but not by the full 0.25%. This signifies a couple of things; firstly that bank margins (profit) are now being squeezed and secondly, the banks foresee a period of stability in interest rates.

I personally think we will now hold at 2% until at least Oct-Nov this year, at which time the RBA will have two quarters of economic data to better gauge how the economy is going. Rate rises in the US are now not expected until the end of the year.

Investor Lending

Over the past week, major lenders have tightened their policies on investor lending. This is in response to APRA’s (Australian Prudential Regulation Authority) concerns about the rate of house price growth in Sydney and Melbourne. In essence, higher LVR loans (80% and above) are going to be harder to come by but not impossible. I think this will be a positive for us investors in the long term as it will serve to restrict the number of new homes being built. This will force rents up and in time capital growth as demand begins to further outweigh supply with the increase in population.

Simon Norris is completely swept up with the finance landscape and we both agree the timing right now for getting into the market couldn’t be any better!

Federal Budget

Highlights from the 2015/16 budget that may interest our members:

Families ​

Child Care Subsidy – The package will include a revamped Child Care Subsidy, which the government will seek to introduce from July 1, 2017. The subsidy will be on a sliding scale that depends on a household’s combined income. For households with incomes of up to approximately $65,000, the subsidy will be 85% per child of the actual child care fee or the benchmark price, whichever is lower. This will drop to 50% for incomes of approximately $170,000 and above, while those with incomes under $185,000 will no longer have a cap on the subsidy they can receive. The subsidy will mean families with combined household income of up to $165,000 will be around $30 better off a week, while those with combined household income about $170,000 will receive the same average level of support.

Defence and National Security

• $1.2 billion in new funding for national security
• Increase in Defence budget by $2.7 million to $31.8 billion per year
• $750 million for overseas military operations
• $382 million for Iraq mission
• Defence public servant numbers to drop by 2,000 over two years
• $10 million for extra case workers for modern veterans
• In March the government confirmed ADF members would receive a 2 per cent pay increase per year over the next three years, above the current inflation rate of 1.7 per cent.

Infrastructure 
A $5 billion loan facility has been announced to encourage infrastructure development across Western Australia, Northern Territory, and Queensland.

Northern Queensland is expected to be one of the major beneficiaries of the facilities, as funding is made available for ports, pipelines, electricity and water infrastructure.

Additional Federal Government spending on infrastructure includes the $500 million Bruce Highway project between Brisbane and Cairns, $102 Moreton Bay Rail Link and the $10 million Coomera upgrade – Exit 54. This Coomera upgrade has cleared one of the major stumbling blocks in the development of the multi-billion dollar Coomera Town Centre. 

In addition to the infrastructure facilities, the Townsville region will also benefit from its share in the announced $26.2 million investment in permanent border clearances for Townsville and Sunshine Coast Airports. This will establish both as more permanent international airports, rather than seasonal international destinations.

Tax Variations

The ATO are now accepting 2015-16 tax variation applications. A tax variation allows you to receive your expected tax refund every fortnight as part of your salary instead of waiting until the end of the financial year. For those that have recently built new investment properties, I highly encourage you take advantage of this for the cash flow benefits.

You can personally lodge your application online or through your accountant or tax agent. Alternatively we can refer you to our preferred accounting partner. See this link for more info.

Financial Planning Scandal

In case you’re not aware, the financial planning arms of the big banks (NAB, ANZ, Westpac and Macquarie) are getting smashed with allegations of poor advice and fraud over the years. In one case, Grazier and businessman Raymond “Curly” Tatnell is suing Westpac and Macquarie Group for investing his savings in structured products. He lost $3 million. The Westpac financial planner stood to make $543,000 in fees and commissions – despite losing $3 million of his client’s money.  http://www.smh.com.au/business/senate-banks-inquiry-may-not-fix-advice-malaise-20150420-1mo717

As the old saying goes – no one is going to look after you better than you. If you don’t understand what you’re investing in and why, then don’t do it. Our role is to help guide and facilitate your property investment journey as your success is also our success.  

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It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for – Robert Kiyosaki

RBA Cash Rate
Left on hold for April at 2.25%. This surprised many but national unemployment has dropped to 6.1% although inflation is still tracking in the low range of 2.0%. Aussie dollar is still considered high at around $0.76US. Many believe this should fall to mid $0.60US as we transition out of the mining economy and more into services such as tourism, education and agricultural exports.

For the first time in Australia’s history, Australian Government bond yields (where investors lend money to the Federal Government) went negative in April. This means that large investors were lending money at a negative interest rate. The main justification is that these large institutional investors (the big money) expect a further interest rate cut by the RBA to 2.0% very soon which would then turn their yields positive. We shall wait and see what the RBA does in May and June.

Uranium Exports

In case you missed it, our Foreign Minister Julie Bishop was in India recently to help foster an energy partnership agreement. ‘The Australian government and the Indian government are concluding the civil nuclear supply agreement. There’s also a parliamentary process to be concluded in Australia, which is a routine process. After that, uranium suppliers and buyers can negotiate.’

This is very promising for Olympic Dam in SA which contains high concentrations of premium grade uranium. It’s certainly something to watch and if there is an announcement, it will bode well for the SA economy and of course land values in Adelaide.

Adelaide price growth

Adelaide’s median house price has increased by 2% for the March quarter (8% annualised). This is according to the Domain Group so expect some local news reports this week. This is particularly promising for our FHBs that have recently secured land in Adelaide!

Negative Gearing
As expected it was taken off the table for review by Tony Abbott this week.

Overall Market
We’re still concentrating on the south-east Queensland market and Cairns. Here is a link to local media reporting on the area. This is backed up by Herron Todd White who are independent national valuers in their April report. There are also opportunities in South-west Sydney but at higher price points. All these will be discussed with Catherine once you are at the asset selection stage.

Quote – Know what you own, and know why you own it – Peter Lynch

RBA Cash Rate
Left on hold for March at 2.25%. Folks in the US are tipping a rate increase in the second half of this year as the US economy slowly improves. At the moment the Aussie dollar is still considered high at around $0.77US and inflation is still tracking on the low side with national unemployment higher at 6.4%. Based on that I personally think we’ll see another cut by June this year.

Europe is also printing €60 billion each month until September 2016 to help get their economies out of the doldrums so expect some of that cash to end up looking for a home here in Australia.

Negative Gearing
There’s whispers that negative gearing (ability to claim investment-related expenses against your annual salary) will be reviewed this year. I’ve mentioned in the past that I’m not particularly worried as our federal pollies between them own approx. $300 million in Aussie real-estate.

Overall Market
We’re still concentrating on the south-east Queensland market and Cairns. There is potential in pockets of south-east Melbourne (Officer and Packenham) as well as Sunshine out to the west. As always, Catherine will advise on what’s available when you get to the asset-selection stage as the stock list changes on an almost daily basis.

Economic Cycle
A mentor put me onto the following article: http://www.usatoday.com/story/money/personalfinance/2015/02/15/3-down-payments-lure-first-time-homebuyers/23424759/

It shows that there really is a cycle at play. Banks in the US are now granting 3% deposit loans to help homebuyers get into the market. The same thing was happening pre-GFC. Expect Australia will follow suit within two-three years. The effect will be higher property (land) prices as more people buy into the market.

Quote – Be greedy when others are fearful, and fearful when others are greedy – Warren Buffet

RBA Cash Rate

Again left at 2.5%. There’s been a lot of talk this week of expectations that interest rates will now be cut further. Only last month commentators and the media were all expecting rates to increase in early 2015. I still personally think they will remain low for quite some time (at least another 12-18 months) and that another cut is probable.

This is based on practically zero interest rates in the US, Europe and Japan and now China have cut their rate by 0.4% – their first cut since 2012. As long as Australia keeps sitting at 2.5% – you can expect the Aussie dollar to remain above $0.80US which many economists believe is still overvalued.

Overall the RBA has one job – to control the flow and velocity of money (by setting the price of money) to keep unemployment low and inflation between 2-3%. National unemployment has just increased to 6.25% (expected to peak at 6.75%) and inflation is tracking at the lower end at 2.3%. To increase rates now would be silly, but then again anything’s possible.

At the end of the day you and I shouldn’t be too concerned with what interest rates do because we’ve risk mitigated by maintaining an adequate liquidity buffer and/or employed a fixed-rate strategy. I still prefer to remain on variable rates mainly because of the flexibility it gives me to manipulate the portfolio, but each one of us has differing circumstances and attitudes to risk which are discussed in depth during your finance phase with Simon.

Toowoomba (Wellcamp) Airport

The Brisbane West Wellcamp Airport officially opened a couple of weeks ago. Just today news was released that an airline training academy will be setting up in Toowoomba – details here. This is another employment industry that will feed into the local Toowoomba economy which in turn will ultimately feed into local land values.

Property that I would consider investment grade in Toowoomba is now becoming much harder to find – mainly because developers have jacked up their land prices to capture more profit (economic rent). If you are still thinking about Toowoomba then we need to jump on it now to really capitalise on the market’s movement.

Pimpama/Coomera

This area halfway between Brisbane and the Gold Coast in my view has some very serious potential. This in effect will become Queensland’s newest city with schools, medical centres, shopping precincts and golf courses all to be constructed. The Yatala Business Park is expanding nearby and housing stock will be required to shelter its workforce. Most developments are in their early stages (stage 1-3) so now is the time to get in and ride the market higher.

Cairns (Aquis Casino)

Bit of a road-bump last week as the Hong Kong developer wasn’t successful in acquiring the existing Reef Hotel Casino in Cairns. Before stumping up $8 billion to build a casino, I too would want monopoly ownership of the casino market in Cairns. Whether the project is downsized or cancelled altogether is anyone’s guess. I’ll keep you posted.

Overall in Cairns the vacancy rate is tight (1.7%) and holding steady with strong rental demand for houses, less so for apartments. Michael Matusik who is a property market commentator that I subscribe to thinks house rents will continue to lift across Cairns over the next 12 months. Experience shows that increased rents usually always translate to higher property (land) prices.

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Possess yourself of the soil and you are secure – Edward Wakefield – 1831 during the colonisation of South Australia.

RBA Cash Rate

Again left at 2.5%. I expect this to remain the case for a while yet. National unemployment is now 6.2% (11-year high) and the Aussie dollar is still ‘uncomfortably’ high. Most economists believe fair value lies around the $0.75US mark. We’re currently at around $0.85US.

Of note the US have ended their money printing program (QE) only to have Japan boost theirs. The BoJ (similar to our RBA) will now ‘print’ around $58 billion a month and add it to its money supply.

Because interest rates are practically 0% in Japan, we can expect some of that cheap money to find its way here in Australia chasing our higher 2.5% returns. This chase should keep our dollar high and therefore inflation and local interest rates low.

Europe (ECB) are now also talking about starting a money printing program.

Chinese money is also making its way here but is predominately being parked in CBD high-rise apartments in Sydney and Melbourne. We’re now starting to see an increased uptake of Brisbane CBD apartments from foreign buyers.

Macro-prudential Policy

You may have heard this term lately in the news. It’s mostly about stopping banks from lending to high-risk borrowers and at high loan ratios particularly in real-estate. Its broad aim is to prevent a large lo-doc or sub-prime mortgage market manifesting here in Australia as it did in the US back in 2008.

Nothing is in concrete yet but there is talk that banks may be forced to increase interest rates as any new ‘mac-p’ policy has the potential to impact their record banking profits.

If banks do increase rates independent of the RBA, then expect the second-tier and non-bank lenders to step up and become more competitive.

Bank Valuations

You might recall that it is typical for bank valuations to come back between 5-8% below contract price – particularly for un-tested markets where there are no established home sales in the area.

It’s being noticed that some valuations recently have been coming back between 10-20% below contract! This is obviously not feasible or acceptable and could be part of a ‘plan’ to reign in investor activity.

If you find yourself in this position there are a few options available from contesting the valuation (success unlikely though for new builds) to negotiating with the builder/developer for a reduced price. Sometimes the best option is to just walk away and find a better deal elsewhere. Each circumstance and deal is different and needs individual assessment.

At the end of the day it really is all about the numbers and building your asset base responsibly in amongst all the noise.

Our team are obviously here to assist you in that process.

Over-heated Market?

Below straight from RP Data:

Across the individual capital cities, real changes in home values between December 2008 and September 2014 have been recorded at: 31.6% in Sydney, 26.1% in Melbourne, -8.0% in Brisbane, -3.7% in Adelaide, -0.6% in Perth, -14.7% in Hobart, 11.0% in Canberra and 5.1% in Darwin.

The next time you hear someone talk of the booming national housing market remember these statistics.

Yes combined capital city home values are rising and this is due to the influence of the Sydney and Melbourne housing markets where values are rising.

Real home values in Brisbane, Adelaide, Perth and Hobart are still lower than they were before the financial crisis and have seen no real growth in more than six years.

Perhaps the recent growth seen in Sydney and Melbourne are about to spread to the other capitals, Brisbane and south-east QLD in particular.

Cairns Market

The Queensland Government is making available funding that will pave the way for the construction of 18,500 new homes at Mount Peter, south of Cairns.

The co-investment will enable the construction of trunk water and sewer infrastructure for residential development to begin on the first 1000 lots in the Mount Peter master-planned area. Covering more than 3300 hectares in total, Mount Peter will ultimately provide an estimated 18,500 homes for 40,000 residents.

This is all in preparation for the expected $8 billion Aquis Casino Development. Approval is still not confirmed but we’ll keep you posted.

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There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.  – John Adams 1735-1826

RBA Cash Rate

Not surprised that it again was left on hold at 2.5%. The US is actually now talking about possibly lifting their rates as their economy slowly strengthens. Rates will definitely rise but I really doubt we will see anything here in Australia until around mid-next year.

Of note the US Federal Government is currently in deficit to the tune of $18 trillion (yep..$18,000 billion). Any increase in interest rates now will be a problem as American tax revenue won’t be enough to cover the interest liability thus putting the country further into debt.

The Aussie dollar is now around $0.87US. This could be a double-edged sword in that we should see a drop in unemployment as exports increase – BUT an increase in inflation as we now have to pay more for our imported Sony TV’s, Japanese cars, Apple i-Phones and Arabica coffee beans at Trashies. On the flip-side, any increases to inflation and employment always translates to higher land prices. (Keep that one in the back pocket for the next Sunday BBQ.)

Interest Rates

If you are currently paying more than 5.1% variable on any residential lending then get in touch with your lender and ask for a reduction. NAB DHOAS loans should come down to 5.08%.

Property Bubble

This is where I genuinely can say – ‘Whatever Trevor.’ Are parts of Sydney and Melbourne overheated at the moment? You bet they are! But so were bananas when cyclone Larry and Yasi swept through a few years back. In reality even though we’ve seen 16%+ gains in Sydney this last year, its average annual growth rate over the last 10 years has only been 3.8%. (Source: RP Data). This is simple market forces at play and of course the economic-rent being monetised by the banks and extracted by the land owners. Of course the media are going to exaggerate it – if it bleeds, it leads.

Call it Déjà vu for some, but attached here are a couple of newspaper articles from 1971 and 1989 about property prices. Does any of this sound familiar to today?

Property Markets

We’re still keeping a close eye on investment opportunities particularly in Queensland and the northern corridors of Melbourne where population and infrastructure is projected to increase. There’s also been some large infrastructure announcements in regional Victoria including Ballarat, Bendigo and Shepparton.

Queensland (Brisbane) still dominates though for capital growth potential. Pimpama/Coomera, Logan, Eastern Ipswich, Springfield, Northlakes, Cairns and Marsden infill sites are areas we are also keeping a close eye on. Dual-occupancy dwellings also represent terrific yield potential but come at slightly higher price points.

Developers in Toowoomba have now increased their land prices in response to increased demand. This is obviously a great sign for those that secured lots up there earlier this year.

For our members up north, Bellamack have just dropped land prices in their latest release. I personally feel this is worthwhile investigating particularly for the ‘granny-flat’ designs but the price-points are much higher circa $720K with yields of around 6%. Let me know if you or someone you know wants to look into this.

Credit File

Just a reminder that your credit file is your reputation. Without preserving and maintaining its integrity, you run the risk of restricting the amount of credit you can safely access and therefore invest with. Always aim to pay all bills on time, and if you must go overdue then ensure you contact your creditor and make other arrangements. This is particularly important for those deploying soon. The ADF Financial Services Consumer Council has more info which is also covered as part of Force Prep.

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They know what will happen in the future because they have studied the past – Sir Winston Churchill

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.

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