Friday, August 07 2015
If you are an off the plan unit buyer Contact us to discuss your finance options
(SOURCE: AFR)
Property investors caught with off-the-plan apartments delivering lower rents and capital growth than predicted at purchase need to shop around for the best rates to meet bigger repayments.
Real estate agents and developers are warning that many investors with off-the-plan apartments coming up to completion could face shortfalls of more than 20 per cent in both rental income and valuations.
"The investment lending landscape is rapidly changing," says Chris Foster-Ramsay, managing director of Capital Home Loans. "The banks are capping loan-to-value ratios to 80 per cent, increasing interest rates for investment lending and/or interest-only loans by up to 25 basis points [and some are] completely pulling out of the investment lending market."
The good news is that competition for the owner-occupier market is expected to intensify, particularly principal and interest loans.
"Those who make additional principal and interest repayments over and above the minimum required by the bank and can present a history to their lender will benefit by potentially being able to negotiate better discounts, essentially because they are lower risk," adds Foster-Ramsay.
Mortgage brokers estimate there are 90,000 apartments being constructed in Australia that have been sold off the plan but not yet settled. The purchasers of about 20 per cent of these, or 18,000, have paid a deposit of just 10 per cent of the full purchase price, according to analysis of investor statistics from CoreLogic.
As little as 10 per cent of the purchase price has been required to secure an apartment and buyers typically arrange finance ahead of settlement as the apartment nears completion – often years later.
HOT WATER
Many investors are finding loans are becoming more expensive and harder to get when they seek financing for the balance of the apartment at settlement, particularly when the apartments are revalued.
A real-life example has been provided by Beller, a diversified property group with offices in Australia and China. The owner's name and address of the property have been withheld.
An off-the-plan apartment was purchased for $485,000 on a 10 per cent deposit ($48,500), which meant 90 per cent, or $400,000, equity was required.
The bank valuation at completion of the apartment was $400,000, a 17.5 per cent discount on the purchase price. In addition, bank borrowing has been reduced to 80 per cent of the valuation, which is 80 per cent of $400,000 ($320,000).
That means the purchaser has to come up with an extra $116,500.
The expected rent for the apartment at the time of sale was $460 a week, which is a net gross rental return of about 5 per cent on the original $485,000 purchase price.
The actual rent is $360 a week – that's a return of 3.85, which is 21 per cent discount on the original estimates.
National Australia Bank and Australia and New Zealand Banking Group have capped their loan-to-value ratios at 90 per cent.
Westpac has announced investors will be required to have a minimum of 20 per cent deposit for investment loans.
Decisions by ING and AMP to tighten, or even cease, new lending reflects their concerns about being swamped by borrowers turned away by major banks.
Barry Marshall, principal of Barry Marshall Real Estate, a boutique Melbourne-based agency, says thousands of investors who have purchased off-the-plan apartments on higher loan-to-value ratios and lower interest rates than currently on offer from the major lenders will be seeking alternatives.
"Investors have to get the money from somewhere," Marshall adds.
SMSF HURDLES
Investors facing a funding squeeze on an off-the-plan property in their self-managed superannuation fund need to clear several more hurdles created by contribution caps and legal restrictions on their trust.
A super fund trustee has entered a legal contract with the seller that is fully enforceable. A trustee cannot walk away from the agreement without serious legal repercussions.
"You can top up any shortfalls with super contributions to your concessional cap or non-concessional caps," says Aaron Dunn, managing director of The SMSF Academy.
But if the concessional contributions cap are exceeded these amounts may be subject to excess contributions tax or refunded and reassessed by the Australian Taxation Office to include the amount within your personal tax returns, along with an interest charge, he says.
Some lawyers suggest a new contract outside of the fund.
"I have seen circumstances where the vendor will allow for a new contract to be drawn up," says Dunn. "In such an instance, you would expect the original deposit to refunded and the new purchaser pay a deposit the new deal," he says.
Those considering this need expert legal and tax guidance to ensure it does not create contract and tax problems.
Other options might be to seek a top-up loan for the shortfall from a related party, such as another member of the fund.
"This can create potential problems in the ranking of the mortgage if there is a default or bankruptcy," says Dunn. "The related party will rank behind the bank in the event of default."
There will also be additional costs in drawing up a related-party loan agreement.
Monday, July 27 2015
As I flagged back in my article in May there is a major problem looming for off the plan unit buyers.
An article in the Fin Review this week also highlighted the issue
http://mtafinance.com/news_and_research/view/1167/unit_buyers_get_crunched
A number of major lenders have just pulled the rug out from under the feet of unit buyers and potentially left them high and dry. "This is causing alarm across the industry," said Tim Brown, chief executive of the Mortgage and Financing Association told the Australian Financial Review.
"Many of these are first-time buyers who will not be able to fulfil their finance obligation under the contract and will lose their deposit as many of the banks will not finance any investment loan over 80% and in some cases will not lend on investment at all," Tim Brown said.
Having put down a 10% deposit, apartment buyers typically arrange finance for the rest as the apartment nears completion - now set to find that finance has become both more expensive and harder to secure.
Many lenders will no longer accept a 10% deposit and now require minimum 20% purchaser funding. The tests for loan servicing have now also substantially changed meaning people may now qualify for significantly less than at the time they signed a contract.
Some lenders have also basically said they will not honour previous approvals. So buyers who thought they had their lending locked in may also be in for a rude shock.
With people not being able to settle this could have a substantial negative impact on unit prices as contracts fall over.
If you have bought a unit off the plan you need to have your situation reviewd as a matter of urgency to assess your options. Contact us today for an assessment.
Thursday, July 23 2015
The headline consumer price index came in at a lower than expected 0.7 per cent from the March quarter for a 1.5 per cent rise from a year earlier.
So-called trimmed mean inflation, which strips out volatile price changes, was 0.6 per cent in the second quarter and 2.2 per cent from a year earlier. Economists had tipped gains of 0.6 per cent and 2.1 per cent.
Core inflation remains firmly within the bottom half of the Reserve Bank of Australia's 2-to-3 per cent target range, preserving its ability to cut the official cash rate again if needed.
"With sub-trend growth in the economy, low wages and a global environment characterised by low inflation and strong competitive pressure, the inflation outlook is not a constraint should a weaker than expected demand outlook put the RBA in a position of needing to act on its easing bias," said ANZ Bank analysts Jo Masters and Katie Hill.
Prices that were under upward pressure included medical and hospital services, which gained 4.5 per cent, the ABS said. Domestic holiday travel and accommodation fell 5.4 per cent.
Josh Williamson, an economist at Citigroup, said if either growth or inflation fail to show signs of strengthening later this year the Reserve Bank will cut the official cash rate by 0.25 of a percentage point to a record-low 1.75 per cent in November.
"Moderate inflation – in the lower half of the 2-to-3-per-cent target band in underlying terms – buys the RBA more time to leave the already accommodative stance of monetary policy unchanged," said David de Garis, a senior economist at NAB Bank.
Tuesday, July 21 2015
(SOURC: THE PROPERTY OBSERVER)
News Ltd columnist Alan Kohler says it will take nothing short of a recession to bring Australian house prices down.
Australian house prices were not in a bubble, but instead, in a "new normal" and are not going to come down on their own, the columnist said.
But he noted Deloitte Access Economics’ latest economic outlook where director Chris Richardson said: “The chance of a recession is higher now than it’s been for quite some time. China’s economy is the key.”
Alan Kohler referenced the RBA's recent comments:
“…there are no examples internationally of large falls in nominal housing prices that have occurred other than through significant reduction in capacity to pay (e.g. recession and high unemployment).”
And: “There is no mechanism to get a large and sustained level shift down in prices while a substantial fraction of the population can -- safely and sustainably -- service the obligations involved in paying the higher price.”
Finally: “…there is no example in Australia or internationally where supply expansion on its own generated housing price declines of a similar order of magnitude to the increases in prices seen in some Australian cities in recent years.”
Noting what’s happening in China, Alan Kohler suggested there is no chance of interest rates going up, so serviceability is only likely to improve.
"In fact, rates are more likely to come down further to try to prevent a recession here."
Kohler concluded the one bright spot was the big increase in the supply of apartments, which has resulted in smaller price rises among apartments than house, especially in Melbourne.
"Those who own a house already are winners; those who don’t will have to buy a flat."
Tuesday, July 21 2015
(SOURCE AFR)
Australians might think Chinese investors have pushed up property prices, but "we ain't seen nothing yet," according to Colonial First State Global Asset Management chief economist Stephen Halmarick who is tipping the liberalisation of China's capital markets will inflate asset prices acrosss the globe.
In recent weeks there has been a lot of focus on the challenges facing China as it opens up its financial markets to foreign investors, and what the associated volatility means for other economies like Australia.
"But what will really matter for the world is how China opens up to allow its people to send money offshore. Australians might think they've seen a lot of Chinese investment in the Sydney and Melbourne property market, but we ain't seen nothing yet," Mr Halmarick said at a panel hosted by the Australian Institute of Superannuation Trustees in Sydney.
China's main equity market, the Shanghai Composite Index, surged more than than 150 per cent in the 12 months to mid-June as the bourse was opened up to foreign investors, before plunging 32 per cent in a matter of weeks. Since the government intervened to stabilise the market with a capital injection in early July the Shanghai Composite has bounced back by 13 per cent. The direction of the ASX has tracked the rocky path of China's market over the past month.
Aberdeen Asset Management head of fixed income Nick Bishop agreed that outflows of Chinese money in the years ahead is likely to have a far greater impact on global financial markets than the recent rise in inflows of offshore capital into China.
"China is a nation with a huge balance of household savings, because there has been no social safety net. Don't discount the ability of Chinese money to flow offshore and push up global asset prices, even if the economy slows down more than expected."
Mr Bishop said the biggest risk out of China would be a change in direction from policymakers.
"But we expect the authorities to continue to react to market volatility in a way that balances the challenges of the nation's structural reform push and plans to open up its financial markets with managing slower growth."
According to data from the National Bureau of Statistics, China is on track to achieve its official economic growth target of 7 per cent in 2015, down from growth that was in excess of 10 per cent a few years ago.
"The official figures show China is still growing at 7 per cent, although it feels a lot weaker," Mr Halmarick said.
Many fund managers are sceptical of the accuracy of data released by the Chinese state, but it is nevertheless a pretty reliable indicator of relative changes, he said.
"If all of a sudden the official statistics start saying Chinese growth has slowed to 5 per cent then we'll know we're in trouble, but I don't think that is likely."
Macquarie Asset Management head of fixed income Brett Lewthwaite said the slowdown in China is being well managed by the state and tipped a "soft landing".
After all, China has the advantage of being governed by a centralised government with a 10-year fixed term. That makes it easier for policymakers to stick to their long-term reform plans, despite setbacks caused by periods of turmoil.
"Nobody ever said the liberalisation of Chinese markets was going to be easy," Vanguard Asia Pacific head of investment strategy Jeffrey Johnson said.
Tuesday, July 21 2015
Selling your old home at the same time as buying a new one can be challenging as it’s difficult to know where to start.
It might seem obvious, but the number one thing people overlook is actually finding out the full costs of a move including what they can afford and how much a lender will be prepared to lend them.
People often get so caught up in the emotion and excitement of looking for their perfect home that they overlook the financial realities and costs of such a move. There are a multitude of factors and costs that come into play when changing properties many which most people don’t anticipate. This often means people find themselves caught in a bit of a bind at the 11th hour and often have to wear a lot of unexpected costs to proceed and end up with a more expensive loan than they anticipated.
Not a great start to something that was meant to be a positive experience.
Getting a proper financial evaluation up front before you start looking means you can get a much clearer understanding of what your options are and the implications of different scenarios.
One of the tools we use for our clients is our Property Changeover Calculator. This allows us to assess the outgoing and incoming costs associated with a move so a client has a better understanding of their end financial position and likely ongoing costs.
We can also explore a range of “what if?” scenarios to assess the impact of different sales and purchase prices.
This means our clients are better informed upfront, and means we can determine the appropriate structure for their needs before they proceed.
Contact us to discuss your next move or even just to get a financial check up
Tuesday, July 21 2015
Valuation firm Herron Todd White has just released it's latest national property clock and has identified Brisbane as a market on the rise. This is consistent with the view of a number of independent researchers including BIS Shrapnel which have pegged Brisbane for growth over the next few years.
Related articles
Queensland the place to invest
Brisbane house prices buck the trend
Friday, July 17 2015
A surprise interest rate cut in Canada and the prospect of a similar move next week in New Zealand have stoked speculation the Reserve Bank of Australia will follow suit later this year.
While the Reserve Bank remains reluctant to cut rates again, the direction taken by two of governor Glenn Stevens' closest global peers helped send the Australian dollar to a six-year low of US73.54¢ on Thursday.
The Bank of Canada's cut its benchmark interest rate to 0.5 per cent on Wednesday. The RBA is expected to sit on its hands for a few more months yet, but it is also hard to see how the underlying terms of trade dynamics and mining capex unwind result in anything but persistent sub-trend growth, stagnant wages, and ultimately a lower cash rate.
Joshua Williamson, a senior economist at Citigroup, noted that the Bank of Canada has justified its cut because its economy faces a "significant and complex adjustment" and is keen to shift Canada's reliance on energy to "non-energy output".
"That sounds very similar to what's happening here in Australia," he said, alluding to the Reserve Bank's repeated call for more "non-resources" economic growth.
The Bank of Canada, like its Aussie and Kiwi counterparts, also signalled that it believes the need for greater macroeconomic stimulus should take precedence over financial stability.
Citigroup expects the Reserve Bank to remain on hold next month but cut the official cash rate from its current record low of 2 per cent to 1.75 per cent in November.
"What hopefully we'll see come our summer is that the US recovery has enabled the Fed to tighten, that's lifting the US dollar, that's helping other people depreciate and the rest of the world to ride on the US economy's coat-tails."
Tuesday, July 14 2015
Buying an older property can be like buying an older car. Sure you might get it at a cheaper price but that doesn't't mean you will get a better return over the long term. There's a number of factors that could turn your bargain buy into an expensive lesson.
Repairs
Generally when you are starting out as a property investor your budget can be a little bit tighter. Which means you don't really want to be putting your hand in your pocket in the initial stages of holding a property. But like an older car things are going to wear out over time and need replacing and if the property is 10 years plus then there is a good chance a lot of things will require repair. None of them necessarily major but a few visits from a sparky and a plumber over a year can add up. Although add to that a hot water system and an air-con and we are staring to get up there.
Yes you can claim a deduction but you don't get all of that outlay back. If your income is $80,000 only 32.5% so you still have to front up with rest.
Structural issues
Of course with an older property your issues could stretch beyond just minor repairs. Unless you have really done your homework your investment could be hiding some substantial structural issues. Even a building inspection has limitations - they don't pull out walls to check the frame work, or rip up floor to look at plumbing. They can only check what they see.
With a new property it is certified at various critical stages to ensure it meets current building codes and standards. PLus new properties come with a 6 year structural warranty.
Depreciation
Depreciation is one of the big cashflow drivers that many investors and even accountants miss. The higher the level of depreciation the more cash coming back into your pocket courtesy of the tax man. But buying older properties means you will generally get little or no depreciation benefit.
Tenants and rent
Unless we are talking uninterrupted views on Sydney Harbour an older property with comparable features and location is generally going to rent for less that a new one. A new clean home with modern fixtures and fitting is going to appeal to quality tenants as they know they are not going to be renting a property that is going to be hassle free.
So cheap does not equate to good. And a cheaper price does not mean the house will be cheaper to run.
Contact us to discuss your property investment strategy.
Friday, July 10 2015
According to onthehouse.com.au Queensland comes out on top for high-yielding and still growing suburbs. Of 56 suburbs across Australia where the average rental yield surpasses five per cent and the capital growth predictions are at least three per cent for the next eight years Queensland suburbs make up 41 per cent of the list with 23 suburbs appearing.
Affordability is a main contributor to high rental yield rates, with 75 per cent of the suburbs on the list having median values below the national median of $491,000 for houses and $452,500 for units.
The median house value in Brisbane sits just below the national median at $484,500, while in Sydney the median house value is almost double that at $961,000.
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