1. How good will your portfolio be if we have another world war?
2. How good will your portfolio be if we have a worldwide recession or depression?

Well, with regards to Q 1, I still have no concrete answer for, and hopefully never will. With respect to Q 2, however, I can now (i.e. only now) say from experience… “It’s all ok”!

My portfolio now numbers 13 properties. When interest rates were 9% plus it was of some concern. We would have remained OK for a couple of years at those high rates because the equity we have built up provided us with a buffer (safety net).

Now every 1%  rate cut puts an additional $35,000 a year in my pocket. We’ve had 4% slashed from our rates in recent months (less what the banks failed to pass on) and the season of low interest seems set to continue for some time.

I use a separate line of credit for my property expenses (i.e. rates, body corp and so on); only paying interest charges from my cashflow. Interest rates are falling and rents are rising so cashflow is looking better and better. I don’t have to work, so while the world “financial crisis” works its way through the system; affecting us all, I remain content and comfortable holding a large property portfolio.

Increasing Population + Shortage of Rental Properties
= Low Vacancy Rates = Rental Increases

OK; ‘so far so good’. With cashflow under control, there’s no stress in us holding a portfolio of 13 properties. BUT, what about growth and the lenders?

Certainly, growth has been flat over recent months but prices have not dropped in most areas. An article in The Australian last month said:

“In fact, the latest RP Data-Rismark Index results show that Australian house prices declined by just 0.8 per cent in the 12 months to October this year, and increased during the most recent three months”.

They are talking about the country as a whole (the good, the bad & the ugly); whereas certain areas have outperformed others. As an investor I discriminate against much property and only accept that which I believe will perform better for me.

I have always accepted that property values travel through cycles. I have every confidence that the short supply of property will mean that the growth in prices will/must kick in again. NB: We were about 80,000 dwellings short for 2008 and the Australian Bureau of Statistics  expect around 100,000 too few to be built this year; with the undersupply continuing around those annual figures till 2018 at least.

The mrd set ‘n’ forget, for busy people TM system that Nick promotes has worked for me personally; in good times and in bad and I have no reason to believe my ongoing confidence will be met with any disappointment! Why? Because I believe the fundamental law of “supply and demand” will ensure any outcome other than that which I expect, will be nothing more than a short term aberration.

For the benefit of those who have not spoken with me, let me explain a little of my personal strategy. It revolves around drawing on equity from my portfolio. For those of us in “retirement”, that means using low-doc or no-doc loans; not easy to secure with competitive rate at the moment.

What next?

My plan; or perhaps “flukish luck” (ha, ha) when Marion and I contracted to buy our 13th investment property; included an “ulterior motive”. We bought a top floor, 3 bedroom apartment adjacent to the Robina Town Centre. We thought we may eventually like to downsize and move into this ourselves.

We are now very close to having a number of our properties revalued so as to clear the security from our owner occupier. This is to allow us to then change the security supporting some of my loans away from my own home onto some of my earlier investment properties. With our own home unencumbered (and debt free), we will sell up, pocket the lot and move into the 3 bedroom apartment.

I accept new valuations at this point in time will not be great; but that’s fine, our goal is to simply clear the security from our owner occupier so when we sell we remain in control of all the cash we receive. We will do this without having to qualify for any new loans. No need to be concerned about the availability of a low-doc or no-doc offers – we won’t need either!

I already have an offset account set up for our 3 bedroom apartment. Therefore, after selling we will have $550,000 clear (conservatively) to put into an offset account that sits against (what will be) our new principal place of residence. NB: Selling is something we encourage you rarely ever do. In this instance, it allows us to fund the retirement we want. Because it has been our principal place of residence there will be no capital gain tax. A tailored solution that works for us, even in the face of the global credit crisis!

Some may ask: “Why don’t you simply pay out the loan on your new apartment instead of keeping the debt and putting what funds you get from the sale into an offset account”?

Good question! “Because to do so would mean that I would immediately lose control of the $550,000. If I wanted to get at any of the equity created in the new unit (by paying it off), I would have to go through the exercise of making a fresh loan application; and risk being knocked back etc, etc.

My strategy to have the existing debt on the unit 100% offset still ensures we have a $ZERO (non tax deductible) interest bill, while still allowing us the freedom to draw on the $550,000 as I need it over the next “however many years”; without the need to prove serviceability! Now when you add to that the two hundred plus thousand dollars we currently have available in other lines of credit, one can begin to see that no matter how tight credit for a retiree may become, we will be pretty much set for a number of years to come.

The “crisis” will pass, however, in the meantime a clever strategy and proper financial structuring will allow us to avert any interruption our retirement plans may have otherwise suffered. Then, when things get back to normal and my property portfolio  AND RENTS double in value again we will revalue the lot, increase our credit lines and continue to enjoy our retirement (with growing asset & income base). I am a month off 59 now. When Marion & I started on this journey I was about to turn 50 and I have been self-funded now for 3 years.

7 years + 13 Properties + A Financial Crisis = Never Work Again!

I can hear the voices screaming from all around cyber space “It’s ok for you! You have a significant property portfolio”. Compared to most maybe, compared to others… I’m crawling! Guess how you get hold of a large property portfolio yourself?

Start with a small one… but START!

Now is a good time to do it. Did I say “good”? I see the current “Perfect Storm” as being a ‘once-in-a-lifetime’ opportunity. Interest rates the lowest in 45 years (and falling); with property prices very affordable AND a rental crisis that’s only going to get worse.

My message to anybody who over the past years, didn’t get started because of their “WHAT IF” questions is: This works; so get started!

If your “WHAT IFS” are still plaguing you then maybe you should do nothing but sit tight for a few years and ask me again. I suspect, however, that I will have the same answer for you then.

* Please note: I am not a financial advisor, accountant or a finance broker – I’m just a very comfortable self funded retiree. The examples and opinions above are a compilation based on my own personal experiences, both in creating a $4.5mil property portfolio, starting with only $50k equity and also in helping a large number of people achieve similar goals of million dollar property portfolios. If unsure then consult your own accountant; hopefully one with some property experience and a personal retirement plan that is working. Financial advisors, in my opinion, rarely understand or recommend property, as their commissions come from other investment products. It should be a case of “don’t believe what people say, believe what they do!”

To ask me any questions or arrange a chat regarding how my chosen retirement plan may work for you, click here

Would you like me to guide you through an mrd complimentary & no obligation “Finance Structure & Cashflow Health Check”? Then simply complete the online secure form and I’ll be in touch with you next week; click here

Happy Investing,

Martin Bell
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

• One of the major banks reducing their maximum LVR (loan to valuation ratio) to 90% (previously 95%) for standard loans.  This same lender has also reduced their maximum LVR for low doc loans from 80% to 60%.  For those of you not familiar with low doc loans, they are loans designed for self-employed people who provide a written declaration of their income rather than supply past financial statements to a lender.
• A couple of major lenders, whilst still offering 80% LVR low doc loans, now require that loans above 60% LVR be supported by the previous 12 months BAS statements. One of these such lenders no longer offers professional package discounts (up to 0.7% off standard variable rate) for their low doc products where the LVR exceeds 60%.
• Another lender has decided to only refinance any existing low doc loans away from a select group of major lenders, not provide lines of credit on a low doc basis and will only allow cash out (i.e. funds provided without a specific current purpose) up to a maximum of 10% of the overall loan amount or $50000, whichever is lesser.
• A different lender has declared that they will no longer refinance any investment loans on a low doc basis.
• No doc loans, which are those where a lender does not require a specific income to be stated, have at this time vanished from the market. Up until a few months ago there were several lenders providing these products, however they have been gradually shrinking in number, with the last of these withdrawing their product in the last few days.
• A number of these changes to credit policies have been instigated by the mortgage insurers used by the banks, rather than their own internal credit policy departments. Generally where a standard loan is above and 80% LVR or a low doc loan is above 60% LVR then mortgage insurance will apply, with the insurers policies coming into play as well as those of the lender.

So whilst is some cases the tightening of credit policies will make borrowing more difficult, there are a number of finance providers that have made little or no changes to their credit polices, at this stage. Whether they will do so in the near future is of course impossible to predict. In this current climate it is quite reasonable to expect some further restrictions may be imposed, particularly in the low doc area.

Having said all of this, there is a big positive at the moment for property investors, which is of course the recent large reductions in interest rates (with more expected to follow). For many of you this will have greatly increased your borrowing capacity, so now would be a good time to have this reviewed and determine what may now be possible that was not just a few months ago.

If you are looking to purchase property further into the future and are unsure as to what effect credit policy changes may have on you; i.e. you have contracted an off the plan purchase or are perhaps considering a purchase in the New Year, here are a couple of steps to consider taking NOW that could assist you later on:

Setting up new lines of credit (or increasing existing ones) against existing equity so that you will have access to higher level of funds at a later date should LVR limits for new loans be reduced.

If you have limited equity available to take the step above, work on building up your cash resources so that you will have a greater level of funds to meet deposit requirements on your new property purchases.

Obtain an ABN and register for GST (if you are eligible). For low doc loans, most financiers require you to be ABN registered for 2 years (in some cases only 1 year) and GST registered for 1 year (assuming you are declaring an income above the GST threshold, which is currently $75000). Eligibility details can be found at the following Australian Taxation Office web addresses:

ABN or GST (click whichever is appropriate)

NB: Any questions regarding ABN or GST matters should be addressed to your accountant or with the ATO directly.

The above information is designed to give you a general overview of the current lending environment, and whilst every effort has been made to give you accurate and up to date details there will no doubt continue to be at least a few changes in the weeks and months ahead. Whilst there are some difficulties in a tightened credit market, there are also opportunities in a falling interest rate environment. Please note that this is general information only and is not to be taken as specific or personal financial advice.

Craig Bergin

Footnote from Nick:
Craig is an Independent Finance Broker that has supported various mrd clients over the past two or three years. Thanks for your insight (and client support) Craig, much appreciated. Please blog any questions you may have for Craig below.

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

This month I considered the arguments and reasoning put forward by economists, journalists and commentators; who mostly said that rates were likely to drop by 0.5% (although some argued a case for just 0.24% and others no rate cut). I concluded that the likely rate cut would be 0.75% (or possibly more)…

On Tuesday morning (Melbourne Cup Day), I decided to send out a mid week newsletter to that effect. Our email was delivered to mail boxes about 8 minutes BEFORE the RBA made their announcement. I was not the slightest bit surprised by them moving to cut official interest rates by .075%, but I was completely surprised when I watched the news 7:30 Report, Agenda & Lateline etc to hear how “everybody  had been caught unaware”. “The RBA surprised everyone”; was the opening line on one programme.

It’s important to undertake solid objective research that enables you to conclude a carefully considered position. In these times of uncertainty, where fear is being peddled, like a commodity, this is even more important.

I am not an economist and I am not offering financial advice. I do believe, however, that most people would do well not to quickly dismiss what I write because someone on television said something different or because you think I may have an agenda.

I am not interested in turning my newsletter into one of political and/or economics; however, I am going to offer a few more of my (rambling) thoughts on Interest rates (now & moving forward into the early part of next year)… and on the Federal Governments introduction of a carbon trading scheme; by 2010. If I turn out to be wrong, maybe I will qualify to be called an economist

INTEREST RATES:

• Official Interest Rates will continue downwards and will be just 4% by April 2009
• I expect that the banks that have held off on passing on all of of Tuesday’s 0.75% rate cut will before this month is out

Q: So why did Commonwealth Bank announce that they will only pass on 0.58%?

PROFIT: The longer they hold off passing the full cuts on… the better for their bottom line. Then when they finally do pass on the difference they can grab another round of positive headlines.

POSTURE: Because they can!  After the years of bank bashing in Australia, the banks now feel vindicated for the way they have managed their affairs. After all, look at the rest of the world envying our banking system. They have some ‘poetic licence’ to ignore the external pressures being applied to them and take the attitude: “So are you suggesting we are not doing a 1st class job managing the banking system in Australia”?

Q: Why do I expect that they will pass on the remainder of this rate cut?

They may not, for my two reasons above. Anybody representing Government or a business or consumer lobby group who pressures them to do so can be ignored. After all, our banks are like “modern day hero’s” that have protected us from suffering the same fate the rest of the world has and is enduring.

HOWEVER, I do expect them to pass the full rate cuts on for the following reasons:

1. They have an obligation (moral responsibility perhaps?) on them, having been the beneficiaries of the recent Government deposit guarantee. We the tax payers are the underwriters of this guarantee; which has enabled them access to more funds and has LOWERED their borrowing costs
2. I agree that last month there was a ‘YES’ but this month it’s a ‘NO’ to the argument that the RBA factored in something for banks to hold back on. No, the RBA lowered rates by the full 0.75% for the benefit of consumers
3. Throughout this global liquidity crisis, Australian banks have managed to maintain near record profits. There is massive political, social and moral pressure to “ease the squeeze on working families”
4. Globally speaking, our banks have great strength and are positioned to grow. Lots of opportunity exists right now for strong healthy banks to gobble up some that may be a little “punch-drunk” right now. As an example, the Commonwealth Bank has just acquired Bank West from the Bank of Scotland in a “fire sale”. That just shows how a set of circumstances can means DISASTER for one… but OPPORTUNITY for another (PS: I have chosen my side).

In my opinion, there are so many, many reasons for property owners, investors (& would be investors) to remain optimistic about the opportunities going forward.

While we will experience a significant slowdown and rising unemployment; I don’t believe Australia will enter into a recession. In part because of the underlying health of our economy… but also because Kevin Rudd has way too much ego to even contemplate allowing history to label him as economically questionable. He knows only too well that the legacy of Paul Keating contains a lot of positive and progressive policies… that are simply lost on the memory that he delivered the “Recession we had to have”. At election time, Governments can be undone by those simple (yet often unfair) one liners.

The current global challenges are not of Kevin Rudd’s making. Yet he has been charged in no uncertain term to keep Australia out of recession. Maybe you and I have not charged him with this responsibility… but I believe he has charged himself and will therefore do whatever he has to to keep us growing.

If he can stand before the Australian public in 2010 as a leader who steered Australia through her most challenging time in recent memory… and if we as a nation avoided a recession, he is almost assured of another term.

CARBON TRADING:

The Opposition, Business groups and many others argue the merits of delaying the introduction of a Cap and Trade Carbon Trading (Emissions Reduction) Scheme… for a year until 2011. It is a HUGE effort for the government to meet this election promise and many would agree that a delay would be in our national interest given:

• Financial Crisis
• Growth slowing
• Unemployment rising
• Financial pressure on families and businesses

The Opposition are probably already scripting their “We told you so speeches” for when the “perceived inevitable” happens… i.e. the Rudd Government announces a back down. However, my personal opinion is that Rudd won’t have a bar of it. He will push his Ministers & staff and commit to doing whatever it takes to go into the next election with his head held high. He’ll want to say to the Australian public:

“They said it couldn’t be done before the full impact of the global credit crisis was understood… well we did it DESPITE the global credit crisis!

Again, this may be as much about ego as it is about going to the next election having fulfilled what was promised before the last… DESPITE all the hurdles that have since appeared. That’s OK, however, because those of you who were growing up in the 1970′s (such as Kevin Rudd) will remember the Skyhook song “Ego, It’s Not A Dirty Word”.

I reiterate again that I am not an economist and the future is one of those things better understood from a position of hindsight. So with regards to:

• The banks passing on the rest of this week’s rate cut… ask me in a month
• Official interest rates falling to 4% by April 2009… ask me in 6 months
• Rudd getting (at least in part) his emissions trading scheme up and running by 2010… ask me in 2011

Happy Investing,

Nick Lockhart

PS: If you Google “reserve bank australia interest rate cut 0.75%” the front page will bring up 10 results. 9 tell the history of the 0.75% rate cut and 1 predicts it (mrd in position @ today, anyway.

Last month there was talk that the RBA would drop official interest rates by 50 basis points or 0.5%. I believed there was justification for them dropping rates by a full 100 basis points; or 1%. I kept my opinion to myself and as history has shown, they did…

The majority of the talk from economists, journalists and commentators is that this afternoon the RBA will reduce rates by another 0.5% (50 basis points). A few economists disagree and say that with inflation still high and the impact of the Australian Government’s stimulus package yet to kick in (in about a month they unleash $10.4b on the economy) there will be no rate cut… or perhaps just 0.25% (25 basis points).

I disagree. Personally I believe there is justification for a rate cut of at least 0.75% and perhaps another full 1%.

Yes we have higher inflation, but the job of the RBA is to keep it between 2% and 3% over the cycle and right now the need to avoid recession is paramount. With the exception of Qld & WA (the resource rich states) the rest of Australia – especially NSW – is doing it very tough. Our biggest threat is that unemployment will rise out of control, further fuelling a drop in both business and consumer confidence; already pushed lower than has been economically justified, by irresponsible negative journalism and those ‘painful pessimists’ being given way too much air play.

I can no more pick what the RBA will do than I can a Melbourne Cup winner… but I can offer Nick’s opinion that the announcement of just a 0.5% rate cut this afternoon will only be “tinkering at the edges”. Personally I half expect the Reserve to go further. Regardless, today’s announcement means a happy day for Katrina and me. Who needs to pick a winner on the horses; we are guaranteed a BIG win?

Christmas is just around the corner, presenting the RBA with a natural stimulus OPPORTUNITY before we hit December and many businesses start to wind down. As mentioned the government’s $10.4b stimulus package will kick in in a month and yes that will help. Leaving a rate cut above 0.5% until December (or worse; early 2009) will miss a window of opportunity to give the Australian economy a serious inoculation against very low business and consumer confidence.

I think Melbourne Cup Day 2008 could see a lot of Australian’s and Australian business owners celebrating a great win when the RBA makes it’s announcement this afternoon. If so, don’t be overly surprised. Globally speaking our interest rates are still high and the RBA is mindful of the many businesses contemplating letting staff go prior to Christmas. I believe that some better than expected news is just what is needed.

The government’s stimulus package will go a long way towards getting consumers spending. This will create jobs and lift business profits. My justification for suggesting the RBA could go even further than economists expect is more about confidence and employment than it is about spending, however.

Do you read my articles in our Friday newsletters? I hope you do… in which case you would already know that I have my considered views on many subjects economical. I am not on the RBA board and have no say in what they do to interest rates. So regardless of how far they may move this afternoon, I believe there remains an argument for a cut of at least 0.75%; with more to follow in the months ahead!

CELEBRATE because whether or not you bet on horse races… every mortgage holder will this afternoon celebrate some sort of a financial windfall!

Happy Investing,

Nick Lockhart

PS: Have you been “freaked out” lately thinking house prices in Australia are about to crash by up to 40%? IMPORTANT!!! Before you act on fear, emotion, the counsel from media and/or those pessimists (who are W.R.O.N.G. by the way), why not get the facts? You can register for FREE to participate in one of two web seminars I am hosting – tomorrow evening and next Wednesday evening. I will clearly articulate FACTS and you will go away encouraged!!!

Click here to register for our FREE web seminar now

A well know finance industry figure recently launched a series of seminars. After reading the professionally crafted sales email, designed to invoke fear and panic and have me rushing to attend his paid event, I decided to address what appears to be a case of insincere opportunism.

Studying the world of global finance since last year is his authority for making such predictions. He proposed failure within our financial system is so systemic it is irreversible;  concluding our property market would soon crash.

A man (or a woman) with an experience is never at the mercy of a man with an opinion.

I lose respect for those who prey on the unsuspecting; profiting from their fear. My criticism is not isolated to this example; there are numerous other ‘self appointed experts’ seducing the vulnerable. Fear of the possible fallout from the global credit crisis has provided a perfect vehicle for some to sell seminars, newsletter subscriptions and various services… such as finance broking in this instance.

Let me quote a line from the robot on the TV show Lost In Space:

“Warning, Warning; Danger Approaching”

Step 1 of this sales process: You’re at work when an email arrives. Negative from start to finish, it leaves you feeling “sick” with fear and despair. Having watched 60 Minutes last week… and listening to the guy who works next to you, your emotions were already frail. Now confusion reigns, you wonder if your security might collapse about you. “Why not”, you say to yourself; and in a scared moment you whip out your credit card and register for this event. After all, times are tough and you don’t want to live a life of regret.

Step 2 of this sales process: You take your seat after having spoken with no less than 8 other concerned investors. You’re glad you made the effort to attend; those who didn’t must be in denial, you think to yourself. The meeting starts and soon come the charts, the graphs and lots of complicated information. You don’t really understand all this stuff about Australia’s debt to savings level and income and productivity, etc; but the guy speaking seems to know what he’s talking about!

At work the next day you discuss everything best you can with the guy next to you. He’s happy that you are coming round to his way of thinking… after all misery loves company. You believe that you need to have your properties refinanced NOW before their values drop. The guy from the seminar will handle it for you.

Follow The Timeline:

• Fear and uncertainty has prevailed for some weeks now
• You receive an email, written by a paid professional, that left you feeling that you should to attend his paid seminar
• Once there you’re convinced your greatest chance of surviving the impending property crash is to refinance your properties now
• You are given new lines of credit against the increased value of your properties
• You are encouraged to draw down all you can from those new lines of credit and deposit the money safely into an offset account against your loans. Why? To protect you from a so called margin call from your lender; after property values drop. NB: A broker is not paid a commission until a loan is drawn down

When consumer sentiment is low and people are fearful, this will perhaps sound like wise rationale! Caution is recommended, however, whenever someone offers to rewrite existing loans. The benefits to you should always outweigh the costs you will incur.

NB: These seminars are in the future so I may be completely wrong; but if it smells like a duck, waddles like a duck and quacks like a duck… chances are… it’s a duck!

Don’t be unwise when it comes to the buying or selling of assets. Prudently managed, DEBT can be your best friend. Get on the wrong side of it and it’ll whip you.

If I am wrong and just being overly optimistic, why has the Reserve Bank, the Federal Government & the Treasury Department not made a huge “song and dance” and sounded the same warnings as I read in the seminar invitation? Are they avoiding a panic, asleep at the wheel… or is someone being opportunistic right now?

If we had not had a change of government almost 11 months ago you could be forgiven thinking it was in the government’s interest to hide any damage caused by years of financial mismanagement. The political hype over who are the better economic managers and an eternal desire for politicians to score political points puts that theory to rest, however.

If the dire predictions of this individual selling his seminar were accurate:

1. The new Government would be busy warning us of the “problem left to them by the previous government”. There is just 2 years until the next federal election
2. The treasury department would be warning the government. They are employed public servants, they don’t have to face the electorate… but would be blamed if they failed to sound a clear warning and things went really bad
3. The Reserve Bank would say so and adjust monetary policy to prepare the economy. Again, they do not have to face the electorate every 3 years. Putting up interest rates during last year’s federal election is pretty compelling evidence that the decisions they make are outside of politics

I don’t take financial counsel from someone with an opinion. To me these seminars are an opportunistic way of capitalising on genuine concern and fear in the marketplace.

If the merchants of doom we have heard in recent weeks are correct; then I am wrong; but so are:

• Michael Matusik: A long standing, respected, property industry analyst who is selling his reputation and his analysis, not a product or seminar.
• The numerous respected economic forecasters; such as at the ANZ bank. Our banks are sound, secure & profitable at a time when the global industry around them is not.
• Warren Buffett: One of the richest men in the world. He says “Be Fearful When Others Are Greedy  And Greedy When Others Are Fearful”.
• Glenn Stephens: Governor of the Reserve Bank
• Ken Henry: Secretary of the Treasury Department
• Wayne Swan: Treasurer
• Lindsay Tanner: Finance Minister
• Kevin Rudd: Prime Minister
• Malcolm Turnbull: Opposition Leader (and multi millionaire former businessman & merchant banker
• Julie Bishop: Shadow Treasurer
• Etc, etc

There will be many people with many opinions in times of uncertainty. Just remember that not all of them have your best interests at heart; so let the decisions you make be informed and considered.

Happy Investing,

Nick Lockhart

A History Lesson…

The worst excesses I have seen in the residential housing market was the selling of overpriced property through the 1990′s. Many people have heard of Two Tiered Marketing… where interstate and overseas investors paid a different price to what the locals were paying.

This practice came about as a result of greedy developers flooding markets, in particular the Gold Coast with more property than there was demand for. Driven by profit, rather than demand, the result was a massive oversupply of coastal high rises and Surfers Paradise became Renters Paradise. The law of supply and demand ensured that rents fell encouraging many disgruntled vendors to sell.

Property is so forgiving that even those who paid too much when they bought in the 1990′s, were still significantly better off by the early 2000′s.  Let me share with you a real life example of what happened to someone. I’ll call him Ian.

• In 1996 Ian bought a townhouse in Labrador (Gold Coast)
• Ian, who was from Melbourne, paid $140,000… which seemed  great buying as he was told at the time
• Ian soon after discovered that the real market value of his property was closer to $100,000 and that he had paid 40% over the top
• Today, 12 years on, Ian’s property is worth between $360,000 and $380,000
• Ian’s property has been cash flow positive for many, many years and “looks after itself”, financially. In fact it adds to his income
• Based on the more conservative value of his property today (i.e. $360,000, not $380,000); Ian’s capital gain is $220,000 or 157% on top of the 40% inflated price he paid
• Yes, Ian was ripped off because his holding costs (interest on loan) should have been less to begin with (and still less today)
• Yes Ian was ripped off because Ian should have a capital gain of $260,000 or 260%
• Ian had friends warn him against his decision. He bought, they didn’t and they later said “We told you so”!
• Ian would have preferred to deal with a more ethical company than the one he did. Nevertheless, Ian is very grateful that he did something as today his property portfolio extends beyond that one investment. He has surplus rental income and the capital gain and is well on his way towards setting his family up financially!

Remember these…

• The biggest risk you will take is to take no risk at all! Successful people will tell you that they failed forward. Failures in relationships, that we learn from, equip us to do better in the future… and failures in business, that we learn from, equip us to succeed at another.
• Learn from those who have achieved what you hope to achieve.
• Don’t blindly accept opinions; rather be considered and get the facts. It’s only when you are fully informed that you can make fully informed decisions
• Don’t let fear rule (any part of) your life
• Be fearful when others are greedy  and greedy when others are fearful - Warren Buffet

Happy Investing,

Nick Lockhart

As an ‘aggressive’ property investor and someone leading others, I am very mindful of my responsibility to be sober and considered in my views.

Successful people swim against the tide of popular opinion. They carefully consider facts before making decisions of far reaching consequence. As the events in America bring on a feeding frenzy for those with an opinion (and often an agenda); the need for sobriety is needed now more than ever.

My Considered Opinion:

Recent global events in the credit market haven’t altered my long standing confidence in selective residential real estate. I expect my investment strategy will ultimately defy some of the broad-brushed statements being tossed about by a few pessimistic economists; who ironically have had most of the recent television and radio airplay.

Many hours have gone into penning this article… I trust the few minutes it’ll take you to read will deliver real benefit.

Let me start with some background to put into context my thoughts…

I don’t like exaggeration, manipulation or dealing with people in business who lack a conscience. If I really thought the sky was going to fall in… I would close my business and go and do something else; but I am incredibly optimistic about the future. Katrina and I are looking forward to the settlement of our next investment property; about April next year, after the three we have settled since November ’07.

I listen, read and engage. Some follow cricket; I closely follow politics & economics with focused attention on monetary and fiscal policy. I consider the opinions of political leaders, economists, analysts, journalists, commentators and so on. I like to get inside their head-space in an attempt to understand the “why” behind their logic. It’s fair to say I am influenced by the many voices… but my conclusions will come back to basic fundamentals; and so should yours.

Over supply and lack of demand undid the property market in the USA… and the lack of investor confidence has undone many other investment markets. My investment exposure is limited to a market dominated by owner occupiers (i.e. the housing market). It will continue to perform on the basis that everybody needs a roof over their head (and I am really selective in where I buy).

Those who cannot afford to buy… rent. Australia has an existing housing shortage, a growing population and increasing (record) immigration numbers. The supply side of the equation has been hit hard by interest rates in recent years, so unlike America where homes were built to satisfy greed rather than need; my attitude is “DON’T PANIC” (as famously quoted in “The Hitchhiker’s Guide to the Galaxy”).

BEWARE of irresponsible borrowings! There are three types of debt and it’s vitally important to understand their differences:

First there is what can only be described as HORRIBLE DEBT

Horrible debt refers to debt used to purchase consumables, or things that depreciate… bought with after tax dollars (that is no tax deductions). Cars, furniture, televisions and all general credit card debt best describe this category. Clear what horrible debt you have as soon as you can and quit taking on any more. The interest free deals at Harvey Norman are not a good idea; unless you have the cash and temporarily park it in an offset account against your home loan until the interest free period expires.

Then there is TOLERABLE DEBT

Tolerable debt refers to the type of debt we incur when purchasing an item (such as the family home or a valuable piece of art) that appreciates in value, but offers no tax relief.

The “Great Australian Dream” ought not to be mortgaged and in debt struggling for 30 years, just so you can say “we have a home”. In my opinion, the great Australian dream is being a self funded retiree, while you are still young enough to enjoy it. To this end it may make more financial sense to accumulate property that others rent from you… while you go and rent something to live in. It’s horses for courses and no, one size does not fit all. That’s why our decisions need to be sober and considered, but only after we have defined our desired outcomes and we have the knowledge necessary to make such decisions.

Finally there is the good kind of debt that I like to call PRODUCTIVE DEBT

Because productive debt works for me, it’s the type that I want as much of as I can responsibly get my hands on! Productive debt is used to buy items that appreciate in value… And it also ATTRACTS TAX RELIEF. Borrowing to invest into property falls into this category and, done responsibly, is still the gateway to your financial freedom!

The danger we face is that we throw the baby out with the bath water, stick our heads in the sand and see opportunity pass us by again… for another season of our lives.

DEBT & RESPONSIBILITY

Sadly, I see too much evidence of people embracing one of two extremities with the following results:

1. Financially destitute people; due to their investments going bad
2. Financially destitute people; due to them failing to plan and take action for their “financial tomorrow”

Please don’t wake up one morning and find yourself in either camp; it’s completely avoidable. I believe that these difficult times serve to reaffirm the urgency of:

• Taking responsibility
• Being rational and considered in making financial decisions
• Blocking out the noise, hype and sensationalising of current events
• Not being dictated to by fear; which is generally ill-founded anyway
• Accumulate assets (albeit with conservative discrimination)

It’s always been provocative, however, my opinion is that safety comes by discriminating against those asset classes that investors predominately drive; anything other than residential real estate.

I “preach” fiscal responsibility. That does not necessarily mean do nothing so as to protect what you have; but subject to your debt levels and ability to service that debt… it may! We need to also consider opportunity cost, because time and inflation ensures standing still is really a backward step.

We need some sober balance to counter all the misguided, broad-brush, simplistic hysteria being screamed at us. Yes, some pretty scary stuff has been going down lately. Yes, many people will sadly see their nest eggs disappearing. Personally I am not convinced that the stock market will recover in a hurry and I think there is a justifiable reason for some concern surrounding the property market. However, those with well located, residential real estate… in areas of growing demand and limited supply; closely positioned to infrastructure and essential services… that offers lifestyle and employment options AND priced in the median bracket for such an area… should dig out an old copy of “The Hitchhikers Guide to the Galaxy” and take advice from the front cover “DON’T PANIC”!

You would be so forgiven for tuning out right now and saying “you’re only saying that because mrd deals in just residential real estate”… EXCEPT that I am on record everywhere for over 6 years as saying the opposite! Namely, mrd only deals in residential real estate because what I have outlined above is what I have believed and promoted; even when stocks were flying high!

We live in a society (world) that is debt propelled… so I am going to continue this theme of debt for at least a few more weeks. Please click the link above the top of this newsletter to pass this article/blog onto others who you believe would benefit from a sober & considered voice on the topic of responsible debt. I have attached a couple of relevant PDF articles that I encourage you to download and read… as well as some commentary snippets from others that I believe have a more considered view on the future of residential real estate, than some commentators getting much of the current airplay.

Happy Investing,

Nick Lockhart

No Rent Relief in Sight as Demand Remains High; say experts:

RP Data state research director Tim Lawless said demand for rental properties – far outstripping vacancies – had driven rents up sharply. He said while the Federal Government’s boost to the first homeowner’s grant would probably deliver a “minimal” increase in rental vacancies, in the long term it would not be enough to match demand. “We have such a dramatic undersupply (of properties) I really can’t see rents falling,” he said.

Download “This is Australia – Not the USA” – RP DATA Property Pulse

ANZ Property Outlook September 2008:

With evidence of a slowing economy, a series of interest rates rises to digest and falling house prices in overseas markets, the question needs to be asked: are house prices going to fall in Australia? We think not. Australian established house prices rose almost 8% in the year to June 2008 and are up nearly 10% per annum over the past decade. Following a brief respite in 2004, triggered by two interest rate rises in late 2003, house prices re-accelerated for a few years before softening into 2008, again in response to interest rate rises.

Download “ANZ Property Outlook September 2008“

Boost to the First Home Owners Grant:

In response to the Rudd Government’s announcement this week to boost the First Home Owners Grant, Opposition Finance Spokesman Joe Hockey warned the housing package could backfire. “There is a danger that this initiative could push up house prices,” he said. “It might be another way to help out the banks because it pushes up the value of bank securities against existing mortgages”.

Link To: Property Market Results Defy Doom & Gloom Merchants