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Friday, May 29 2015

Reserve Bank deliberations suggest another interest rate cut may be coming in the months ahead.

The last minutes indicate the board had already decided ahead of this month’s meeting that it had to cut rates – the only question was whether to do so in May or June. Board members also discussed several other factors that suggest another rate cut might be coming, including a sluggish local economy.

Compared to earlier forecasts, growth and unemployment statistics are now likely to take longer to improve, according to the minutes.

At the same time, inflation is also expected to be slightly lower than previously forecast, giving the board scope to cut rates.

One argument against a third rate cut in 2015 would be the fear that this might foster imbalances in the housing market.

However, while board members expressed concern about “very strong” price growth in Sydney and “strong” growth in Melbourne, they saw “much more muted” trends in other capital cities.

They also noted the most recent data, which showed that there had been no increase in housing credit in recent months, either for investment or owner-occupancy purposes.

Posted by: Greg Carroll AT 11:21 pm   |  Permalink   |  Email
Friday, May 29 2015

Every investor likes the idea of being able to regularly increase rent but the reality is rental grwoth like price growth does not move up in a straight line. There may be periods where you can incraese rent regularly, periods where you need to keep rent the same and even times where you need to take a hair cut.

To be honest I find many investors often can't see the wood for the trees. They get very focused on the dollar value of the rent without looking at the bigger picture.

There are a range of factors that should be considered at each rent review. 

The inflation rate and cost of living
Inflation has been very low over the past 12 months and borrowing costs are at all-time lows, so the current ecoomic conditions do not necessarily warrant rent increases.   

Vacancies can quickly offset rental increases
If you increase rent on your property by, for example, $20 per week, that will add an extra $1,040 gross to your annual cash flow. However, if the property rents at $500 a week and is vacant for two weeks then you have lost this advantage within a very short vacancy period. If your property is vacant for longer then you are well behind.

The same rule applies in a tougher market. Sometimes you might have to drop the rent to meet the market. Again using our example is you dropped the rent by $20 a week then you would be given up $1,040 per annum but the drop in your cashflow will be stretched over the next 12 months. 

If instead you dug your heals in for $500 and the propery was vacant for 3 weeks you have already lost $1,500 in cash straight up. And if you do finally get a tenant at $500 it is going to take you 75 weeks to recover that loss.

As I keep saying to clients just get a tenant in and get it rented, there will opportunity down the track to increase rents when the cycle turns.

Research the competition
The best advice when considering increasing rent on your investment property is to discuss the current market with your managing agent and also research the competition. Ensure you compare like with like. What are similar properties renting for in the same area?

What is the current vacancy rate for the area. If it is low you will probably have scope for an increase. If it is high you might just have to take what you can get.

The time your property is avilable for rent may also be at the wrong time of year. Each market will generall have peaks and troughs throughout a year in terms of number of people looking to rent. 

The rent you are proposing needs to be in line with the competition. In some cases you may have added extras that tenants will value and can justify a slightly higher rent, for example an air-conditioning unit, a sunny aspect and great view, or an upgraded kitchen or bathroom.

Its' important to take on board your managers advice. Remember the higher your rent the more thay earn as well so they are going to be looking for increases where possible but you are not going to get $50 more than everything else in the street jsut because that's what you want.

Posted by: Greg Carroll AT 10:47 pm   |  Permalink   |  Email
Friday, May 29 2015

Moodys Analytics has found Queensland property is undervalued vy 4.3% based on rents, incomes and mortgage rates. It also believes the recent rate cut will contribute a 0.3% increase in values.

Victoria, ACT and NSW are over-valued by 8%, 6.2% and 2.9% respectively.

Posted by: Greg Carroll AT 10:38 pm   |  Permalink   |  Email
Friday, May 29 2015

I am often surprised hwo many property investors do not take out landlords insurance on their properties. 

A good policy will not just protect you against lost of rent or malicious damage, it will also cover things like tribunal costs, accidental damage, tax audit costs or public liability coverage.

A common misconception about public liability coverage is that an apartment in a strata building is covered by the strata plan/building insurance. Unfortunately this is not usually the case and the building insurance is only there to cover common space areas when it comes to public liability. This means any incident within your investment property would not be covered.

It's important to review your policy to see what is and isn't covered rather than assume.

The cost of insurance is also tax deductible so after tax it can be a very minimal cost. 

Posted by: Greg Carroll AT 10:27 pm   |  Permalink   |  Email
Friday, May 29 2015

With the end of the financial year fast approaching it's important not only to ensure you don't overstate your deductions but equally ensure you are not missing out on legitimate claims. Here's some common mistakes.

Not using an accountant who understands property

Using the right accountant is extremely valuable. Using an accountant that full understand property investment is critical to ensure your complete structure is tax-efficient and you ae optimising your legitimate deductions. 

The reality is, you should actually be talking to your accountant before you invest in the first place, as the incorrect approach and structure can translate into the loss of thousands of dollars that you would have been able to access. 

Seeking advice after you have already purchased a property is really a bit late in the game. A good accountant will be able to identify all the things you did wrong but you are not really going to be able to fix it. At least not without significant expense.  

Paying down tax-deductible debt before non-deductible debt
Most experienced investors will know that it can be tax effective to pay down non-tax deductible debt before tax deductible, such as your home. Most investors will have their investment properties on an interest only arrangement until they have eliminated non-deductible debt.

No depreciation schedule
A depreciation schedule is the schedule of items that can be depreciated at a certain rate allowing you to claim a tax deduction against your taxable income. It is amazing how many people don’t even have one! It is wise to get your accountant to assist you with this as this can save you thousands.

Trying to claim expenses you can’t
There are certain types of property investing expenses that cannot be claimed as part of your tax return. For example property improvements must be claimed over several years as capital works deductions where repairs can be claimed in the same tax year. Also any conveyancing expenses that you incur during the purchase and selling process cannot be deducted. Instead, these costs make up part of the cost based for capital gains tax purposes.

Keeping the right records
Property investors must keep accurate records, regardless if they prepare their tax returns themselves or not. A record must be kept of the following:
• Rental income and deductible expenses  
• All documents relating to the ownership of the property including all purchasing and selling costs

By keeping all of these documents handy, it will be a lot easier to make accurate calculations and enlist the help of a tax professional.

Posted by: Greg Carroll AT 10:09 pm   |  Permalink   |  Email
Friday, May 29 2015

The risks I have discussed previoulsy with regard to off the plan purchases for units have fully emerged this week.

APRA has applied pressure to banks to restrict the growth in investing lending. As a result banks have tightened their policies and increased the pricing on investment lending. 

So if you have signed a contract to purchase off the plan what are the risks?

Firstly off the plan purchases involve unconditional contracts. Unconditional means once you sign the contract you have no outs.

If you can't obtain finance and can not settle on the property you will forfeit your deposit. The vedor could also take legal action against you to enforce the contract and compel you to settle which could be financially devastating. 

Secondly the loan you thought the bank was going to give you to fund the purchase may longer be available. In many cases your bank will now provide a lower loan amount and the interest rate on that loan will be higher.

This means to settle on the property you will need to provide additional cash or equity and your cost of funds will be higher. If the bank valuation on the property comes in lower than the contract (which is likely for many inner city units) this will be a double whammy as you will need to provide further cash or equity. 

Who is at risk? Any purchaser who does not have a written unconditional finance approval from their bank specifying the full details of their loan. Conditional, indicative, or verbal approvals are worthless and offer no protection.

NOTE It is only possible to have an unconditional approval form your bank if you have submitted a full loan application with all supporting documentation verifying your income, expenses, assets and liabilities.

What can you do? You need to get professional advice asap to assess your situation and get an understanding of your options.

Contact us to arrange a review

Posted by: Greg Carroll AT 04:29 am   |  Permalink   |  Email
Thursday, May 21 2015

Significant oversupply risks continue to build in the Brisbane inner city unit market.

The Inner Brisbane Apartment (IBA) market has experienced a surge in demand for off–the–plan apartments since 2013/14, according to research by economic forecaster BIS Shrapnel.

In the latest edition of its Inner Brisbane Apartments Market Brief, BIS Shrapnel predicts that the surge will result in record new apartment supply in 2014/15, with completions set to escalate further in 2015/16 and 2016/17.

In particular, development in Inner Brisbane has been dominated by large scale and high rise development in the CBD/Spring Hill, Inner East, Inner North, West End, Toowong, Woolloongabba and Hamilton.

Inner Brisbane Apartment Area completions are on track to surpass their record level in 2014/15, increasing to 3,610 apartments in 2015/16 and peaking at 4,040 apartments in 2016/17 the report said.

Based on an average occupancy of 2.5 persons that transalates to 9,025 additaional rooms in 2015/15 and 10,100 additional rooms in 2016/17. Given that Brisbane's inner city population growth has historically averaged around 5,000 per annum that is a potential oversupply of 9,125 rooms over the next two years. In other words almost 2 years of over supply assuming no further units are built. 

If this plays out then our expectations would see a significant spike in vacancy levels and reductions in rent for both new and existing stock in followed by a fall in prices.

Our concern is many of these developments are being marketed to overseas and interstate buyers who do not have a full understanding of the market.

Posted by: Greg Carroll AT 06:19 pm   |  Permalink   |  Email
Tuesday, May 19 2015

Below are some extracts I read from an article today and thought the following pretty well sumed up the state of play at the moment and potential impact of changes occuring in the lender space. I will posting more about lender changes in the comings weeks.

(Source: Property Observer)

I may stand-alone here, but Sydney’s done – there I said it!

Normally, locations go flat when they become unaffordable or major infrastructure projects are abandoned but this time it may be at the hands of the banks, the governing bodies and the ATO.

Now making a statement like this is bold. Firstly, you need fundamental facts to back it up and these are the things I research – knowing where and when to invest, along with when to stop investing in an area. And lastly, we need an alternative place to invest. So, here we go:

The first sign for me that Sydney was on the cusp of a change was on April 23rd. A fundamental bank policy change that two major banks announced was the reason. This change stated that effective April 24th at 5pm, all Non-Resident lending Loan to Value Ratios (LVR) would be reduced from 80% of purchase price to 70%. Meaning borrowers must have another 10% cash to put towards the purchase.

One of those banks was the biggest lender to Chinese borrowers. The myth that the Chinese are all paying cash for houses is simply not true. The best Business Development Manager (BDM) that this bank employs has seen an immediate drop of 25% in mortgage volume since this change. Now that’s one BDM, for one bank, in one district of Sydney.

There is no question the overseas buyers are pushing our prices up but it’s not just the Chinese. They accounted for $27.7 billion in property transactions last year but the USA purchased $17 billion, Canada $15 billion and Malaysia $7.2 billion. The falling Aussie dollar has made our property much more attractive to them along with a buoyant property market.

But like usual, when there is money, there are Sharks looking for loopholes. So bringing sunshine to my eyes, are the ATO. Yeah, you won’t hear me say that too often. They are currently investigating 150 cases of unlawful purchases from overseas buyers. The loophole is done through trusts and companies. There appears to be a loophole in the FIRB’s (Foreign Investment Review Board) approval process for developers too. The great thing is that the ATO are a big enough player to bring this behavior to a halt and prosecute those offenders. Watch this space!

With the rate drop in May, one would think this would fuel more buyers to pay more. The funny part is that even though interest rates dropped, as a borrower your borrowing capacity hasn’t increased. wHy?

Banks are servicing your loan application at the 7% mark. This is a protection mechanism to safeguard you when interest rates rise in the future. This 7% mark hasn’t shifted in the last 3-5 interest rate drops. So no matter how much the rates still go down, your ability to service more debt will not increase unless your income does.

Banks must now also hold more funds in managed accounts per mortgage they approve. Meaning for every $300k mortgage the bank must hold $600k in managed funds. This has doubled in recent years. Hence we’ve seen Managed Funds increase to 3.05% in May when interest rates decreased. This was done to attract more consumers to invest their money. Consequently, this reduced the banks profits by another 0.25%. So it comes as no surprise that in mid May the interest rate war between the banks ended. One major bank no longer discounts interest rates for investment loans. The others will follow.

The governing body for mortgages, APRA (Australian Prudential Regulation Authority), have also told the banks that if their investment portion of their portfolio has increased by over 10% this year, then they must hold another $500 million in managed funds. Meaning banks will now be reluctant to pass this level and reduce interest rate discounts on investment loans.

The Median house price in Sydney has topped $900k. Insane, I know. Now according to the ABS, the Median income is $80,048 per annum. So a couple with two children, who each earn $80k, have a maximum borrowing capacity of between $800k – $1 mill. They have reached their cap.

So to summerise:

  • The banks are slowing up lending to Non Residents
  • The ATO are stopping illegal overseas transactions, plus reversing illegal purchases
  • Interest rates have dropped, but you can’t borrow any extra funds
  • The banks are stopping interest rate discounts to investors
  • The Sydney property market has seen fantastic capital growth for over 2 years
  • Property prices are unaffordable

Now given that investment loans now account for 50% of all mortgages written, the above corrections will see a drastic decrease in investor activity. This decrease will significantly impact consumer confidence across the board. And the end of the Sydney property cycle will be here.

Think about it… You have been inspecting houses for the past 2 months and you’re used to a high volume of purchasers inspecting and turning up to auctions. Then, the next week the volume is halved. Would that get you thinking? Is there something going on that I don’t know about? Your consumer confidence has just been shot.

So, after all this doom and gloom, where and what do we invest in?

The key to investing, is buying in great locations in the low part of the property cycle. Where consumer confidence is at its lowest. where is this the case?

South East QLD is an emerging market where those who get in RIGHT now will benefit. If you wait until Christmas, you have missed the boat. 

Posted by: Greg Carroll AT 12:06 am   |  Permalink   |  Email
Tuesday, May 12 2015

The ABS has recently released figures on migration to and from Australian cities. It shows that Sydney is losing as many as 14,900 people every year, while Melbourne and Brisbane had significant gains.

Urban Task Force CEO Chris Johnson believes Sydney’s skyrocketing living costs could be behind the mass migration.

“It seems that Sydney’s rising housing costs are leading to a steady flow of people out of the city,” he said.

“Last financial year according to the ABS, Sydney had a nett loss through internal migration of 14,900 people while Melbourne gained 4,000 people and Brisbane gained 3,500 people.”

“There is a steady stream of people leaving Sydney with most of these people going to Melbourne or Brisbane. It is important that strategic planning for population growth in NSW understands the nett flow of internal migration. The recently released data from the ABS now gives planners more accurate data on internal migration,” Mr Johnson said.

Out of the total loss from Sydney, the ABS figures also include those moving interstate (6,900) as well as those only moving away from the Sydney metropolitan area (8,000).

Posted by: Greg Carroll AT 03:30 pm   |  Permalink   |  Email
Saturday, May 09 2015

Chinese buyers could pump as much as $60 billion into Australian housing over the next six years, with much of that investment going into new housing, according to a Credit Suisse report.

Strategist Hasan Tevfik and his team produced a landmark analysis last year revealing the scale of Chinese housing investment for the first time.

Now they have revised those original forecasts dramatically upwards in the wake of the latest foreign investment figures.

Over the next six years to 2020, Chinese spending on housing will more than double what it has been over the previous six years.

China has become Australia's biggest source of approved foreign investment for the first time after a $12.4 billion splurge on real estate in the last financial year.

Of that total around two-thirds, $8.7 billion, was spent by investors based in China or by new immigrants from China on residential real estate, according to the Credit Suisse analysis.

That represents an increase of 60 per cent on Chinese spending in the year. It is also equivalent to 15 per cent of the national housing supply.

"Purchases are concentrated in Sydney and Melbourne where Chinese demand is the equivalent of 23 per cent and 20 per cent of new supply, respectively," Mr Tevfik said in a client note this week.

"While new foreign investment proposals may make Australian real estate less attractive for Chinese buyers, we believe the potential erosion of demand will be marginal.

"After all, Australia is on the doorstep of the greatest wealth creation in three centuries. Despite moderating growth, we expect more Chinese wealth to be invested abroad."

Australian housing-related stocks – developers, building material companies and property websites – will be beneficiaries of the boom.

But the surge of the Chinese money is taking its toll on prices, especially in Sydney, where prices lifted 13 per cent last year, and in Melbourne, where prices were up 5 per cent.

"If Chinese buyers are on the verge of snapping-up the equivalent of a quarter of new supply, we can see why house prices in both cities have outpaced income growth," Mr Tevfik said.

"Without a structural increase in supply to match the structural increase in Chinese demand, there will unfortunately be strong property price inflation for many years to come."

Housing supply needs to increase by 4 per cent annually to accommodate the strength of Chinese demand.

Approvals of new houses and apartments hit a record level in March, pushed higher by a jump in Queensland apartment approvals.In the year to March, more than 210,000 houses and apartments had been approved nationally. 

The Credit Suisse analysis said new application fees – of $5000 or more – on foreign property buyers, introduced by the federal government would do little to stem demand. However new fees in Victoria may have a greater impact on foreign demand. 

In this week's state budget, Victoria announced surprise new taxes on foreign buyers of residential real estate, including a 3 per cent stamp duty surcharge.

"We imagine the potential increase in fees to buy a Melbourne property would drive the marginal buyer to other Australian cities like Sydney where charges are lower," Mr Tevfik said in the client note.

"A tax in Victoria could make Sydney house prices even more expensive."

Posted by: Greg Carroll AT 01:29 pm   |  Permalink   |  Email
Sunday, May 03 2015

(Source: AFR)
Investing surplus cash into superannuation, borrowing to invest and paying off the family home are the top strategies from advisers on how to hit the magic $1 million savings target for retirement.

But as to whether $1 million is enough depends on life expectancy and whether you are planning on a champagne or rainwater lifestyle.

"There is no 'average' when it comes to living expectation," says Stuart Wemyss, a director of ProSolution Private Clients, a financial advisory group. "$50,000 a year might be enough for some people whereas others will need $150,000 a year. For most people, it's going to be somewhere in that range."

The debate about the $1 million target for super savings was sparked by the former head of the federal government's super review, Jeremy Cooper, warning $1 million "won't necessarily guarantee a comfortable retirement". Many argue that $1 million is still the magic figure – each. So rather than a couple relying on $1 million, many advisers say $2 million is more realistic.


But for the "average" super saver, getting anywhere near the $1 million target will be a prodigious feat of savings, investment and risk-taking over coming decades, according to government statistics.

For example, according to recent figures the average balance at the time of retirement was about $197,000 and only $105,000 for women, which means recent retirees will need to rely on the age pension in their retirement.

The average Australian 40-year-old male can expect to live for another 40 years, according to life expectancy tables.



The magnitude of change that can happen during that period is reflected by looking back 40 years when the average house price in Sydney was $34,000, Gough Whitlam was prime minister and the Australian Securities Exchange was trading under 300 points.

The average house price in Sydney is now more than $600,000 and the stock market is touching 6000.

John Woodley, chief executive of Fitzpatricks Private Wealth, warns that for older investors, say in their 50s, it could mean increasing risk when this should be reduced because of the difficulty in recovering lost ground if there is another market crash, such as the global financial crisis.

Woodley encourages a lifestyle review involving reduced discretionary spending, pushing back retirement, partial retirement or reallocating assets, such as downsizing.


David Bryant, head of investments for Australian Unity, says the traditional strategy involving real estate, bank shares and term deposits that has worked "so well for so long" is approaching its end.

"Investors need to consider introducing other options such as unlisted commercial property and investing offshore. Get prepared now for where you will end up. Get familiar with how and what to invest in, and increase your exposure over time," he adds.

Claire Mackay, a financial planner and accountant with Quantum Financial, recommends topping up super with regular salary-sacrifice and personal contributions for any free cash.

For example, a 55-year-old can make an annual maximum contribution – 9.5 per cent superannuation guarantee and salary sacrificing – of $35,000.

Posted by: Greg Carroll AT 05:29 pm   |  Permalink   |  Email