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

SSS – January 2015

RBA Cash Rate – The Board doesn’t meet in January so remains on hold at 2.5%. When they meet again in February I expect it to remain unchanged with the prospect of another rate cut by the middle of the year. This is due to low inflation and therefore low interest rates in the US, Europe and Japan.

Remember, the banks borrow money from the Reserve Bank at the base rate, and then lend it to you and others at a slightly higher rate. The difference between the two rates is how they make their money.

Vacancies – Just a reminder that when it comes time to rent your new investment property, the months of Dec-Feb tend to be the ‘turmoil’ months as this is when the majority of people move house and leases terminate.

Depending on location and rental market conditions it is not uncommon for a property to remain vacant for around 4 weeks as people slowly settle and leases are taken up. Provided you’ve got a good property in a good area and at a reasonable rental price – it will be leased.

The financial buffers we advocate are there to protect you in these very circumstances as they buy you time during the search for a tenant.

Foreign Investor Demand – Hearing again more cries lately about foreign buyers (Chinese especially) driving up property prices. The majority of these foreign purchases are in CBD high-rise apartments. We don’t generally invest in such apartments due to minimal land content and high strata fees therefore it doesn’t affect our investment strategy or outcome. This old guy knows exactly what’s going on! You can watch his short interview here.

Economic Rent – A 25min video from the BBC on property prices in Gaza City. It goes to show that it doesn’t matter where in the world you are, wherever there is people, commerce and an economy – all of those gains (economic rent) will be captured by the land price and reflected in its rent. You can view it here: http://vimeo.com/101819495

QuoteAn investment in knowledge pays the best interest – Benjamin Franklin

SSS – December 2014

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.

Quote

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

SSS – November 2014

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.

Quote

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

SSS – October 2014

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

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

SSS – August 2014

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.

SSS – July 2014

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.