HOUSE AND LAND PACKAGES IN HIGH DEMAND LOCATIONS

“A GREAT OPPORTUNITY FOR mrd CLIENTS TO INVEST IN WELL LOCATED HOUSE & LAND PACKAGES CLOSE TO INFRASTRUCTURE
AND WITHIN GROWTH CORRIDORS”

Three locations to choose from – Townsville | Cairns | Gold Coast – Coomera

Call us on (07) 5580 8888 for more information

Marion and I started buying in a 90/10 split because my income was $42k and hers was $18k. Later we ran our own business and income split so property purchases then were made at 50/50. It is important and can save you thousands of dollars a year.

Understand that the term “joint tenants” automatically means 50/50 or equal ownership between purchasers whereas “tenants in common” can be any percentage split.  As joint tenants (50/50) the death of one means the property reverts to the other partner. If tenants in common the death of one means their share is disposed of as dictated by their will (check with your accountant on this). Unfortunately once a property settles the ownership is fixed and mistakes cannot be easily undone, without huge costs in stamp duty.

Let’s look at a fairly typical example of a couple (call them Gary & Jane) buying two Investment Property Purchases; one then the other. Gary’s taxable income is $55k p.a. and Jane’s is $20k p.a.

PURCHASE # 1

After settling purchase number one, “The Wharf” in Robina for $459,000, and assuming you capitalise your expenses (if you are not sure what that means; please ask me to explain – it’s important), the results are as follows:-

50/50 Split

• $20 weekly holding costs
• Taxable incomes now reduced to $40,000 and $10,000

90/10 Split

• $40 a week POSITIVE cashflow and a $60 a week difference to the bottom line!
• Taxable incomes now reduced to $32,000 and $18,000

PURCHASE # 2

After the second settlement; this time using a $335,000 apartment @ “The Beaches” in Cairns as an example. Using Gary & Jane’s NEW reduced taxable incomes to calculate their cashflow position after the second purchase, and again capitalising the expenses.

With a 50/50 Split and using the new taxable incomes of $40k and $10k p.a. Gary & Jane are $53 a week positive cashflow better off!

If they had opted for a 90/10 Split on the first purchase I would then use incomes of $32,000 and $18,000 respectively to calculate the cashflow result after a second investment. Again assuming Gary & Jane purchase as tenants in common and split the ownership 90/10, the positive cashflow outcome improves and becomes $57 a week.

In your circumstances, as you purchase more property you may need to alter the split to favour one person or the other to get maximum tax benefits. We would never suggest you “push the envelope” with the tax office, nor do we offer any of these personal thoughts and experiences as investment advice; just food for thought. It is important that you understand your entitlements and take action to benefit from them.

Happy Investing,

Martin Bell

mrd Customer Care Program… because investing is personal

What Benefits Are There In A Financial Health Check?

Read case studies…

http://investmentmentor.com.au/2009/02/20/property-investor-crash-victims/

Yes please…

I would appreciate a complimentary Financial Health Check

http://www.investmentmentor.com.au/contact.htm

You would have seen the great deals that one of our highly respected developers in Cairns put to us recently. He was desperate to clear his remaining current completed stock before his lender would fund his next  projects.

• He offered our clients reduced prices
• He offered our clients settlement rebates
• He offered our clients rental guarantees
• He offered our clients free management of the properties

He was desperate to clear them out!

Here at mrd we put a lot of time and effort into educating property investors so they are in a position to make informed buying decisions. This last week has seen the evidence of this as many prepared and informed investors leapt on this offer.

• This offer extended to properties in The Sanctuary in Townsville
  Now Sold Out
• The developer offered us properties in City Park in Cairns
  Now Sold Out
• The developer offered us properties in Clifton Waters in Cairns
  Now Sold Out

The developer is smiling as he can see his chance to move forward again.

The next project due to complete is Clifton Views. This one is almost all sold out too; a few 2 & 3 bedroom units only remain.

To view our property page and access various downloadable reports… Click here or http://ypim.com.au//2

NB: These are nearing completion with expectation that they will be available for tenanting within a month.

Finance Structure & Cash Flow Health Check

Our recent offer to complete a complimentary, no obligation Finance Structure & Cash Flow Health Check has been widely taken up. If you would like us to undertake this same service on your behalf please click the link below to send us your contact details.

More Info…

http://ypim.com.au//3

Yes please; I would appreciate a complimentary Financial Health Check

http://ypim.com.au//1

Happy Investing,

Nick Lockhart

mrd Customer Care Program… because investing is personal

How it has come about

The developer has recently released to market those last remaining units that were not made available for sale at the time the project commenced.

The developer behind these properties is one that mrd has worked with in the past. We are confident that the location, build quality and finish will make for an exceptional long term investment.

Banks in general are nervous about the general economy. As such, some are reducing their most recent valuations within this project… from what they were previously valuing them at.

These new bank valuations, in our opinion, do not reflect the state of real market as much as they expose the banks very strong attempts to mitigate their risk… by ensuring that purchasers who borrow 80% (of the valuation) will chip in more than just 20% (of the purchase price).

We have used our relationship and track record as leverage to negotiate with this developer to have him agree to absorb the difference between the market value and recent bank valuations.

This developer has been told by his lender that he must clear ALL his remaining completed stock before they will agree to funding the construction of his newer projects.

This change of attitude from his lender; who had previously said “YES” to his funding request – before the global credit crisis – has incentivised/motivated the vendor to make this limited, attractive offer on those last remaining completed stock items.

Therefore, we are excited to be able to offer a small number of investors, a brand new property at 2005/2006 prices, PLUS a few other sweeteners/incentives as well.

“This presents a tremendous opportunity for mrd clients”

That statement is correct; but it is also a gross understatement! Aside from yesterday’s pricing, mrd clients will still receive all our standard benefits and guarantees.

Each property comes with value added buyer incentives. Some also offer significant savings on the purchase price plus a cash rebate at settlement!

UDO’S PROBLEM JUST BECAME YOUR OPPORTUNITY!

FEATURES

• A never before seen by mrd offer; negotiated and ‘signed off’ on with one of our trusted developers
• A limited number of properties; completed and ready to settle; some already have tenants
• A cash rebate at settlement on Clifton Waters apartments
• Property management fees covered for 2 years on Clifton Waters apartments
• Rents guaranteed at better than a 5% gross return for between 1 year (or 2 years for Clifton Waters)
  

BENEFITS

• If you have cash sitting in a savings account earning less and less interest, this is the opportunity to make it work a lot harder for you
• It has never been cheaper to borrow money. This means your investment will be positively cashflowed from the outset (or if not, soon after). Combine surplus rental income with the mrd Advanced Finance Strategy and we will show you how to potentially pay off your home loan sooner. Many people will save (literally) tens of thousands of dollars with this strategy
• Imagine positive cashflow from day one (or for some, soon afterwards) and a rebate cheque in your pocket as a “rainy day buffer”
• Maximise your disposable income while you minimise your tax liability and set up a bright financial future for your family

INDIVIDUAL PROJECT OFFERS

CLIFTON WATERS @ Clifton Beach, Cairns

Added incentives on offer with this new project include:

• Discounted purchase price of up to $40,000
• A cash rebate at settlement
• 2 bedders reduced from $330,000 to $295,000 PLUS a $5,000 cash rebate @ settlement
• 3 bedders reduced from $340,000 to $329,000 PLUS a $19,000 cash rebate @ settlement
• Two years FREE property management
• Two years rental guarantee @ greater than a 5% gross return
• $1,000 ONLY deposit required

Click here for PDF Property Report

THE SANCTUARY @ Fairway Waters, Townsville

Added incentives on offer with this new project include:

• 2 bedders (ONLY) for $328,500
• NB: Those already settled are renting for $340 a week
• Waiting list of prospective tenants wanting to move in
• 12 months rental guarantee at greater than 5% gross return
• $1,000 ONLY deposit required

Click here for PDF Property Report

CITY PARK APARTMENTS @ Mooroobool, Cairns

Added incentives on offer with this new project include:

• Priced from $195,000 (1 bedroom);  $265,000 (2 bedrooms); $360,000 (3 bedrooms)
• 12 months rental guarantee at greater than 5% gross return
• $1,000 ONLY deposit required

Click here for PDF Property Report

WHAT NEXT?

Step 1 is very simple. Say “YES PLEASE” to a complimentary, no obligation “Finance Structure & Cash Flow Health Check”! The first thing we need to do is ensure that you are in a position where you can (and should) consider an investment purchase right now. We will run a complete personalised analysis of all costs, incomes and so on… to give you full disclosure and complete understanding of the impact a property purchase would have on your situation. Having said that, at these prices/rents… most people will be cashflow positive from the start. So, to take advantage of this part of our Customer Care Program; simply click here and include your best contact number and we will get back to you.

Happy Investing,

Nick Lockhart
mrd Customer Care Program… because investing is personal

These house and land packages are set in amongst a growing and developing area of residential community suburbs for young families and established Cairns residents. Located on the southern corridor of the Cairns Local Government area, the suburbs Edmonton and White Rock are the largest suburbs in Cairns with a mixture of commercial, residential and recreational amenities. Also available are packages in the very popular Smithfield suburb in the northern suburbs of Cairns.

These quality 4 bedroom/2 bathroom house and land packages are amongst a portfolio of multi award winning homes designed to reflect the environment with their emphasis on an abundance of space and light, maximizing ventilation and the frequent use of courtyard and patios to create a sense of freedom and serene comfort. The builder’s specifications are to design a “tenant‐ready” house and land with no hidden costs for the astute property investor.

Each villa within Terraces on the Hill has been designed more as a luxury house than a typical villa, with a choice of 2 and 3 bedroom configurations. Each of the villas also boasts its own courtyard – some as large as 104sqm – to emphasise the luxury of space. Units nearby have sold for over $500,000 making these units exceptional buying, starting from just $377,000!

With demand running high for quality boutique townhouse villas and with tenants already showing interest, the developer is prepared to give a 2 year, rock-solid rental guarantee – money in your pocket from day one – making these units ideal for investors seeking security in today’s volatile markets.

People insistent on seeing and touching a property before contemplating a purchase may be missing out on the benefits associated with an off the plan purchase. Off the plan is simply property not yet registered with the Land Titles office; either near completion or perhaps before construction has begun. There are numerous advantages buying off the plan but you need to understand the potential pitfalls.

Our initial research is to identify affordable areas with strong capital growth potential. Where demand for housing is strong and growing but available land is limited (the irrefutable law of supply and demand). Land value in areas of strong capital growth will generally make the construction of a single dwelling prohibitive. It’s in these areas located around infrastructure, employment and services that we tend to see more dense housing under construction; such as apartments and townhouses. With such development comes the opportunities to purchase off the plan.

Profiting From An Off The Plan Purchase

• Developers of medium to high density projects typically secure construction funding from banks and institutional lenders
• Any finance approval will generally be conditional on a percentage of pre sales first being achieved
• Price incentives may be offered to aid in securing quicker pre sales. This normally results in the first handful of purchasers buying at below market value
• Incremental price rises are commonplace after the required number of initial pre sales has been achieved
• Incremental price rises throughout the construction period are not unusual. This means that although all purchasers may ultimately settle on the same day, those who contracted early will pay less than someone who committed to their purchase later in the timeline

In a rising market it is not unusual for people who purchased off the plan to settle their property at well below market value (tomorrow’s property at yesterday’s prices). Developers often hold back some property sales in a project until the very end… when they expect to realise a premium sell price. As a rule of thumb, land values are rising and construction materials and labour costs are steadily increasing. That’s why property bought tomorrow will almost always cost more than property bought today. Once you have your name(s) on a fully executed contract of sale, the purchase price is fixed and any capital growth the property experiences throughout the construction phase  is yours to keep!

Buying Off The Plan Benefit Summary

• Commit to purchasing a property today
• Will not have to pay for it for months or even years
• NO cash flow shortfall to subsidise pre settlement
• NO rates payable pre settlement
• NO body corporate fees payable pre settlement
• NO need for a tenant pre tenant
• NO maintenance pre tenant
• NO wear and tear pre tenant
• Property will still be brand new at settlement (maybe 2 years away)
• Settle tomorrow at today’s (or perhaps yesterday’s) price

WARNING: In my considered opinion, based on much experience… any investment property worth owning will initially be negatively geared. Prior to the recent interest rate falls, the cash flow shortfall on the best buys was often in excess of $200 a week.  Someone buying off the plan would effectively be saving this $200 a week shortfall until the day of settlement (rent plus tax refund… less interest, council rates, body corporate, maintenance, insurance, management fees etc). That’s about $10,000 a year! Many times people mistakenly set out to purchase an already completed property to secure an immediate tax benefit. As important as a tax deduction is to a property investor, it is  just one part of the equation and should never be the sole driver of any investment decision.

By Way Of Example

• A property costs $300 a week (before tax) to hold
• The negative gearing benefit produces a $100 tax saving
• Your net cost (after tax) would be $200 a week
• Buying off the plan means you would not save the $100 in tax while the property was under construction (negative)
• Buying off the plan means you would not be paying the $200 a week shortfall (positive)
• So therefore, buying off the plan means that my $100 a week still goes to the tax man but I don’t have my $300 a week holding costs
• Buying a completed property means I will have $300 a week in holding costs; less $100 tax savings
• Even though you are not saving your tax you are still $200 a week better off having an off the plan property that has not yet settled

When A Project Runs Over Time

Another advantage of an off the plan purchase that is often overlooked is that many of them run over the scheduled time and complete long after they were originally supposed to. Why is this an advantage? Because it means the savings in the example above are multiplied.  Given the price is fixed, the longer it takes a developer to complete a project that I have bought into the better.  My capital gains clock is still ticking away in my favour as it’s MY NAME that will appear on the title post settlement, yet I am avoiding that cashflow shortfall in the meantime. The longer a project takes to complete… the more money I save.  I could end up settling on a property with two years capital growth already in it, yet my carpets etc are still brand new. This allows me to ask a better rent than if the property was already two years old.

Some of my off the plan purchases have simply been because that was all that was available. Brand new projects are normally sold out well before construction completes; so the person waiting to see it and touch it will miss out completely. Due to the current climate we have been able to secure on behalf of clients some great developer offerings on completed stock.

The Other (Negative) Side To Off The Plan Purchasing

While I freely subscribe to the many positives that result from an Off the Plan purchase, there are pitfalls that you need to be aware of. The biggest PLUS in buying off the plan is also the biggest MINUS; the time frames involved!  While these time frames can work to your advantage (as outlined above) they can also work to your detriment when it comes to dealing with banks.  Any finance assessment and approval done with your lender will expire after 3 to 6 months; which is really of little good to someone not needing the funds for say 12 or 24 months. 

You will need to satisfy your finance clause and go unconditional on your contract at the front end of the process (normally 21 days from the date of contract) but you will not have unconditional finance approval from your bank until the end part of the construction timeline.

The way to approach this is to ensure your broker assesses your borrowing capacity now to ensure you would qualify for the necessary finance under the current lending criteria and with consideration for your ongoing financial and family situation.  As completion of the new property draws near a formal application will then be lodged with your lender to secure the funds required at settlement.

Unconditional Without Unconditional Finance

Once the finance clause has been satisfied, your contract normally becomes unconditional. However, for the most part of the construction phase you will not have unconditional finance approval from your lender. In almost all cases this is not a problem, however, responsibility and care need to be shown in a few areas:

1. Changes to your financial situation. Changes to your financial situation will change your borrowing capacity. You need to ensure that any changes you are contemplating will not disqualify your ability to secure the settlement funds required. Don’t quit a job or cut back your spouse’s hours or borrow money to renovate your home etc without first having your broker assess how such a change will impact on your ability to secure the funds required for the new purchase.

2. Bank lending criteria. In response to the global credit crunch our banks have greatly tightened their lending criteria. Someone who previously qualified for funding could now find themselves outside their bank’s lending parameters. If you are currently contracted to buy an off the plan property and you have any doubts whatsoever as to how the recent changes to the bank’s lending rules may impact on you, I suggest you speak with your broker and have him/her reassess your borrowing capacity. Of course we are here to help too; but not until Monday 5th January.

3. Valuations. The Valuer is potentially another “curve ball” for you to consider.  Valuations generally come in at between 5% and 7% under contract price; therefore it is vitally important to keep a little “up your sleeve” for a contingency. Where possible I suggest you consider having your home valued and lines of credit set up against the unused equity during the initial 21 days finance clause. This will eliminate the nasty surprise of having a low valuation also applied to your own home later on. For these reasons we discourage people from going to contract on a property that would require all of their borrowing capacity. For more on valuations see my article “Valuations; Will Somebody Please Explain” click here.

4. Sunset Clauses. Where a project is delayed and titles have not issued by the sunset clause date, either party can terminate the contract. I have heard of instances on a few occasions where a developer has cancelled contracts and reissued them at a higher price; either because of greed or to recoup the additional costs he has incurred because of the delays to his project. I only know of one instance where this has happened to mrd clients back in 2003. Normal practise is that the solicitors will arrange to have the sunset clause extended to cover any delays.

In Summary

• There are pros and cons for buying already constructed property as there are with those off the plan.  Whatever choice you make ought to be after you have identified the ongoing strategy necessary to manage your portfolio:
  - With an already completed property purchase you will need to manage any weekly cash flow shortfall and be mindful of your tenants needs
  - With off the plan property you need to manage your personal finance situation until settlement
• Obligations and entitlements are imposed upon all that are party to a contract. Just as a developer has his obligations to you that he must meet, so too do you as the purchaser need to ensure that you meet your obligations
• Buying off the plan offers great advantages but you need to understand your obligations and address them with responsibility and discipline
• Off the Plan purchases are most suited to those who have a strong employment history and/or strong equity backing them
• When buying off the plan ensure you consult with your broker before making any employment or family changes that may affect your ability to secure funding.  If you expect a change to your situation, such as adding a little person to your family, please advise your broker upfront so they can factor that into the initial calculations
• If you know your situation will be changing down the track, speak with us ahead of time about helping you plan a strategy that will work for you both now and when your situation changes

From all the team @ mrd have a wonderful Christmas break; we look forward to helping you make 2009 your year of financial possibility.

Happy Investing,

Nick Lockhart
mrd customer care program… because investing is personal

NB: If you missed out on participating in one these Web Seminars you can now watch it online; click here.

The Global Credit Crisis & Property Investors

As property investors the good that has come out of the recent global turmoil has been a massive reduction in interest rates. I am now so very close to being cashflow positive across my property portfolio… and interest rates are still falling and likely to stay very low for years to come!

The downside for property investors is that lenders have tightened their lending criteria making it harder to secure funding that it was previously, in some instances. With interest rates falling, however, serviceability has been made that much easier creating opportunity for many who previously could not secure funding to now qualify.

The Global Credit Crisis & Property Developers

The impacted on developers has been massive. Companies large and small have all been affected. Many developers have gone broke or just closed up shop, others have shelved projects indefinitely and are waiting until they see evidence of investors returning to the market. Others have soldiered on but have had many new funding hoops to jump through put in front of them.

Banks have been scared to lend to each other, so regardless of whether you are an individual looking to borrow money to buy a property or a developer looking for the funding necessary to complete a project… 2008 has seen a real tightening of lender willingness.

Waterside Residential:

We have received the following update from the developer…

16th December 2008
UJ/jat

Waterside Residential Pty Ltd
ABN: 65 092 231 000

Mr Nick Lockhart
mrd Realty
Suite 4, Gallery Vie
226 Varsity Parade
Varsity Lakes QLD 4227

Dear Nick,

Re: Commencement of Waterside Residential Development – Cairns

Just a short note to keep you informed of the progress of this development.

Currently in this market it has become extremely difficult to obtain development finance. We are currently working with our financial institution to secure adequate funds to commence this project. The banks have indicated their support but at a later stage. We anticipate to hold further talks re this matter with the bank in early February/March 09 where we will have a clearer picture of a starting date.

We will keep you informed as to our progress early in the New Year.

Yours sincerely,

UDO JATTKE
Managing Director

In layman’s terms… Udo had been promised funding and expected to commence this project earlier this year. His lendersubsequently moved the goal posts and said that they would now not release any funding to commence this new project until after he had completed and sold out on some others that he had in the pipe line. Most of these are now sold and Stage 1 of Clifton Views is due to settle in late January, meaning in February or March next Udo will go back and renegotiate the terms of the funding he needs to commence Waterside.

In short, this project has been held up and we hope to have a more concrete update to you in the early part on next year.

Please see the latest mrd Cairns Region Property Report by clicking here and the PRD Nationwide Property Watch: Cairns Market Overview by clicking here

Special Incentive from UDO:

Udo has come up with a special offering to enable him to quickly sell off the last few completed apartments his banks are insisting he sells before releasing new funding to him. This offer is open to anybody interested in purchasing one of the below listed properties or to anybody wanting to transfer from a Waterside Residential purchase onto one of the below listed properties:

1. Cash deposit refund of 10% will be returned to the investors (for those transferring from a “Waterside Residential” contracted purchase)
2. The deposit on new contracts will be only $1,000.00
3. Any extral legal fees incurred up to the value of $1,000 will be paid for, on receipt of invoices from clients solicitors by way of a reimbursement at settlement (for those transferring from a “Waterside Residential” contracted purchase)
4. Management letting fees waived for 12 mths (conditional upon Glencorp Property Management being given the management rights)

The Following 6 ONLY Properties Are Being Offered With Bonus Incentives

City Park (2 only) – Expected settlements in mid February 2009

• 12 mths management letting fee waived (Glencorp Property Management only), plus
• 12 mths rental guarantee ($360 pw)

Clifton Waters (4 only) – completed and ready to settle in 30 to 60 days

• 2 bedroom – price reduced from $325,000 to just $295,000
• 3 bedroom – a rebate letter of $20,000 to be paid at settlement will be attached to the contract but not part of the contract making price $309,000

From all the team @ mrd, we wish you and your family the very best for Christmas and we look forward to partnering with you on your wealth creation journey in 2009.

Merry Christmas,

The mrd Team

mrd Customer Care Program works for you… because investing is personal

NB: If you missed out on participating in one these Web Seminars you can now watch it online; click here.

The Global Credit Crisis & Property Investors

As property investors the good that has come out of the recent global turmoil has been a massive reduction in interest rates. I am now so very close to being cashflow positive across my property portfolio… and interest rates are still falling and likely to stay very low for years to come!

The downside for property investors is that lenders have tightened their lending criteria making it harder to secure funding that it was previously, in some instances. With interest rates falling, however, serviceability has been made that much easier creating opportunity for many who previously could not secure funding to now qualify.

The Global Credit Crisis & Property Developers

The impacted on developers has been massive. Companies large and small have all been affected. Many developers have gone broke or just closed up shop, others have shelved projects indefinitely and are waiting until they see evidence of investors returning to the market. Others have soldiered on but have had many new funding hoops to jump through put in front of them.

Banks have been scared to lend to each other, so regardless of whether you are an individual looking to borrow money to buy a property or a developer looking for the funding necessary to complete a project… 2008 has seen a real tightening of lender willingness.

Seashells @ Clifton

We have received the following update from the developer…

16th December 2008
UJ/jat

Glenwood Homes

Mr Nick Lockhart
mrd Realty
Suite 4, Gallery Vie
226 Varsity Parade
Varsity Lakes QLD 4227

Dear Nick,

Re: Commencement of Seashells Development – Cairns

Just a short note to keep you informed of the progress of this development.

Currently in this market it has become extremely difficult to obtain development finance. We are currently working with our financial institution to secure adequate funds to commence this project. The banks have indicated their support but at a later stage. We anticipate to hold further talks re this matter with the bank in early February/March 09 where we will have a clearer picture of a starting date.

We will keep you informed as to our progress early in the New Year.

Yours sincerely,

UDO JATTKE
Managing Director

What Does This Mean?

In layman’s terms… Udo had been promised funding and commenced earthworks earlier this year. His lender subsequently moved the goal posts and said that they would now not release the funding for this project until after he had completed and sold out on some others that he had in the pipe line. Most of these are now sold and Stage 1 of Clifton Views is due to settle in late January, meaning in February or March next Udo will go back and renegotiate the terms of the funding he needs to commence Seashells @ Clifton.

In short, this project has been held up and we hope to have a more concrete update to you in the early part on next year. NB: In today’s final newsletter for 2008 my feature article is on the topic of “Off the Plan” purchasing… in it I analyse the cost benefits of delays.

Please see the latest mrd Cairns Regional Report  by clicking here and the PRD Nationwide Property Watch: Cairns Market Overview by clicking here

From all the team @ mrd, we wish you and your family the very best for Christmas and we look forward to partnering with you on your wealth creation journey in 2009.

Merry Christmas,

The mrd Team

mrd Customer Care Program works for you… because investing is personal

In the current round of Web Seminars we are offering, I highlight four key factors that are a MUST… if you expect to draw any credible conclusions.

1.    Record Population Growth
2.    Investors Have Fled The Market
3.    Home Ownership Unattractive
4.    New Construction Has Stalled Badly

1. RECORD POPULATION GROWTH

Australia is currently experiencing the fastest population growth in 200 years. Our population is predicted to grow by 350,000 this year for the first time in over 200 years. That represents approximately the combined total population of Geelong, Cairns & Bunbury; or the whole of Canberra.

The 1850’s Gold Rush years, Post World War 1 (1919 onwards) and post World War 2 (1946 onwards) saw our 3 previous population explosions. Today we see a similar pattern emerging; i.e. rapid and prolonged growth, too few workers and pro-immigration government policies.

Record population growth means a significantly stronger demand for new housing! Given our record numbers of new migrants will generally rent for a season, demand for rental properties will continue to strengthen.

2. INVESTORS HAVE FLED THE MARKET

Rising interest rates in recent years have squeezed rental yields making property look unaffordable. Add to the mix a booming stock market (averaged over 20% per year between 2004 and 2007) and one can see why property has not been the preferred investment vehicle of recent years.

Since becoming familiar with the term “subprime”, seeing the global credit crisis unfold… and hearing of property values in the US & UK falling by 30 & 40%, many would-be-investors have opted to stay on “strike”. It’s fair to say that since the highs of mid 2004 only the ‘brave’ have continued to invest in property.

Investor demand accounts for about 50% of all new housing starts and about 70% of unit starts. Therefore, that investors have fled the market means significant negative impact on the supply of new housing and increased demand on existing rental accommodation.

3. HOME OWNERSHIP HAS BEEN UNATTRACTIVE

As with investors. the housing affordability barrier, rising interest rates (& general living costs) and of course the US initiated subprime crisis has left many would-be home owners lacking the confidence to purchase.

Scared, priced out of the market, unable to secure funding or unable to service a loan? regardless of the reason why new home ownership has been unattractive; the result has been that many renters in recent years have simply continued to rent. This has placed further pressure on existing rental housing stock

4. NEW CONSTRUCTION HAS STALLED BADLY

Since 2005 the absolute number of completed residential properties has fallen and they are forecast to continue falling in 2009. The US subprime crisis cemented this downward trend in demand for new properties. Add to that, in recent years we have seen the high profile bankruptcy of some large developers along with massive financial pressure on many smaller developers. The cost of finance has skyrocketed for developers… i.e. if they can find a lender who will back them. Understandably, developers are very nervous… many have simply shelved their new projects until such time as they see clear evidence that investors have returned to the market.

Developers going broke, developers shelving projects and/or developers unable to secure funding means new construction has stalled badly and as a result greatly reduced the supply of new property further adding to pressures on existing housing stocks.

DISSECTING THE EVIDENCE

• FACT: We are experiencing the greatest housing shortage in 200 years
• FACT: Because of the new Federal Government’s immigration policy, we are experiencing the strongest population growth in 200 years
• FACT: Since about mid 2004, broadly speaking investors have fled the market
• FACT: Since about mid 2004, broadly speaking home ownership has remained unattractive and renters have continued renting
• FACT: Since about mid 2004 the construction of new dwellings has stalled badly
• FACT: In mid 2004, national rental vacancy levels were about 3.5%. This level is considered a balanced market. Rental vacancy levels have dropped to below 1.5% now and are expected to continue to drop to historical lows of between 0.5% and 1% in 2009. These levels represent a stressed market
• FACT: When the demand for rental housing grows at a faster pace than supply, increased demand can be offset by diminishing vacancy levels
• FACT: When vacancy levels reach just 1% it is said that we have NO VACANCY, as the 1% represents the few days between tenants moving and carpets being cleaned etc… prior to a new tenant moving in
• FACT: Therefore, once vacancy levels fall to 1%… there is no room left to offset increasing demand by diminishing vacancy levels
• FACT: When demand increases and supply decreases and vacancy levels are already stressed; i.e. no vacancy… market forces mean rents have to go up… and significantly where population growth is significant
• FACT: Interest rates are the lowest they have been in years and are expected to reach (near) record lows by mid 2009

Now you have the FACTS, rather than simply “opinions”; may I suggest you draw your own conclusions as to what might happen with Australian property in mid to late 2009?

• With the cost of renting about to soar and the cost of ownership dropping significantly (i.e. rental incomes up and interest charges down), what do you expect the market will do?
• With stock market volatility and uncertainty and interest earned on cash deposited dropping away, what do you expect the market will do?
• With serious increases to the first home owners grant, what do you expect this group to do?
• Given rental properties vacated by first home owners will not produce a glut… because vacancy levels are at an all time low (stressed market) and the population is growing by the size of Canberra each year, what do you think the market will do?

Can I go out on a limb and tell you what I think; I may be wrong, but I don’t think I am?

1. I expect rents to soar in 2009
2. I expect interest rates to continue to drop next month and in 2009
3. I expect confidence to come back to the market, drawing back owners and renters alike
4. Given there is a lag of a few years from when developers decide to build again and new stock being ready to live in… I see no relief for the poor tenant for at least a few years
5. I also believe that the combination of all that I have just outlined will result in the next property price surge

So, in summary…

Those who have been building a property portfolio as their preferred vehicle for funding their retirements (NB: assuming they bought the right residential property in the right areas) are soon going to experience the property investors trifecta:

1. Rising incomes (rents)
2. Falling costs (interest)
3. Increasing equity (values)

I would love to address the subject “We are not the USA” and compare the FACTS relating to how we are different and why what happened there will not happen here; but I will save that for another day.

May I invite you to register your interest for either our next FREE Web Seminar this Wednesday evening… or if you let us know what other time(s) best work for you, we will run them according to demand CLICK HERE.

Happy Investing,

Nick Lockhart
mrd customer care program… because investing is personal