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

RESIDENTIAL property values on the Gold Coast are set to benefit from a booming population and strong demand for housing, according to research from PRDnationwide.

The research, compiled by Lynda Campbell of PRDnationwide’s Gold Coast office, shows the city needs 129 new dwellings a week to cope with the present population growth of 3.6 per cent — 2.1 per cent higher than Australia’s national growth rate.

Ms Campbell said while the actual population figure was down from previous years, this was a direct result of recent local government boundary reforms rather than a declining population.

“Population figures have dropped below 500,000, but when you consider that Beenleigh and its surrounds no longer form part of the Gold Coast, the population growth is still significantly high,” she said.

The report states that building approvals for houses and apartments on the Gold Coast have dropped dramatically in the 12 months to June, 2008.

“Building approvals aren’t keeping up with the residential demand resulting from the Gold Coast’s burgeoning population,”said Ms Campbell. “The last year has seen approval of 735 fewer houses and apartments across the region.

“Combined with current record low interest rates, this drop in supply and continual increase in demand should have a positive impact on property.”

>>> Gold Coast needs 129 new homes a week: report – Realestate News – Gold Coast, QLD, Australia.

Here are a few examples:

1. A probable sale price in a seller’s market
2. A probable sale price in a buyer’s market
3. The value of the land acquisition, construction of the dwelling and associated costs of bringing the product to market
4. A representation of a banks risk assessment of a property

While 1, 2 & 3 are self explanatory, let me expand on # 4.

By way of example, let’s assume in this instance that a finance application is received by a bank to fund the purchase of an apartment or townhouse; I.E. a property that’s part of a community title scheme.

As in all cases, the underlying purpose of the bank carrying out a valuation is commercial. The valuation represents their internal risk assessment associated with the proposed loan and will be interpreted in the context of their current lending policies and dictated by that lenders risk parameters. Therefore, any outcome that you and I may receive will be after consideration has been given to the following:

• The individual unit or townhouse within the development. While this bit is obvious and understood by most people, other commercial considerations that the lender relies upon may not be.
• A lenders total exposure within any one development as a whole. A bank may be happy to loan up to 80% of an individual unit… they would probably not be willing to loan up to 80% of the total value of all the units in that project. Therefore, it can happen that after a certain number of the properties have been funded by a particular lender… anyone else looking for funding of a subsequent property in the same development may be unable to secure an equal valuation, as those gone before them. That is, a bank may agree to take on another client in that development but insist on a much tighter valuation criteria forcing the purchaser to take up more of the overall exposure to keep the “lenders LVR” down.
• A lenders total exposure within the surrounding area (postcode). Again as above. Banks will make a commercial decision as to the level of exposure they are comfortable to have in a particular area. Once those limits are reached they will not necessarily pull out and say no more… but any future loan applications in that locality may only be approved subject to tougher valuation guidelines.
• The availability of funds will also affect the banks risk rating.  When funds are plentiful they may be happier to loosen their risk ratings. When the supply of money is tight (as in recent months) they are quick to tighten their risk ratings again.  The sub prime mess in the USA has had an impact on property valuations here… due to the banks difficulty in obtaining more funds from overseas.  NB: This has very little to do with the true value of the property.

Economic uncertainty dampens a lenders ability to accept risk.  As one broker aptly put it, “they are all withdrawing back into their shells”.  The more volatile the money markets are… the more cautious the banks need to be with their risk ratings. Understand that this practice is not only good business management… but it is also part of their fiduciary duty to shareholders.  On a world comparison Australian banks have been more prudent with their risk than their overseas counterparts. This is a very good thing in that it has insulated us from the worst of the world’s financial woes.

Investors need to correctly understand the process of property valuations and there are more factors to consider. Let’s shift focus away from the bank / lender and onto the valuer.

The Commercial Consideration of the Valuer

Effectively, when a valuer is contracted to value a property one consideration is possible litigation. Suppose the purchaser defaults and the property is “disposed of” in a fire sale (i.e. well below market price), if a lender does not manage to recoup their exposure they may sue the valuer for losses. One way for a valuer to insure that they never need to make a claim against their professional indemnity insurance policy is to ensure that the purchaser puts more into the deal than the 20%. I have challenged the reasoning for low valuations on more than one occasions. While none have ever been admitted it to me… the commercial decision to protect or insure themselves from possible future litigation has been transparent and clear.

The Subjective Consideration of the Valuer

I would be remiss not to mention the element of SUBJECTIVITY in this whole process. Each of us have different tastes, likes, prejudices, opinions and so on. The same applies when it comes to property valuations.

While some may tell you that the preparation of a valuation is an exact science… it absolutely is not in practice. If the person who valued my last purchase had not have liked it or thought I was paying too much he would not have valued it at contract price. The purchase before came in at $30,000 under contract price and the one before that was $19,000 under. I understood that that was their opinion (and I can’t help it if they were wrong… ha, ha). Aside from having to use more of my own equity to make the deal work, it made no difference whatsoever.

EXAMPLE 1: Two identical, mirror imaged, townhouses were valued early this year. In each case Westpac appointed Herron Todd White to undertake the valuation. The first one came back valued at contract price. About 10 days later the second one came in $25,000 under contract price. Both properties were sold for $455,000 and identical in every way.

So why the difference? In this case it seems the only reason was two different staff members from Herron Todd White were used. While they worked out of the very same office and valued the “same” property on behalf of the same bank etc… they obviously had different opinions. That’s what I mean by subjectivity not science.

Confused yet? Wait, there’s more….

EXAMPLE 2: Two apartments were valued in the same complex earlier this year. OK, one had three 3 bedrooms and the other two. In this case there were differences, including prices, lenders and valuers used. Nevertheless, how could the first one be valued for 13% (purchased by an mrd staff member) and the second was valued at contract price (purchased by a Victorian purchaser)?

Would you take the advice of a financial planner who had graduated from university with a degree; but lacked life experience or any financial success himself? Our laws say that unless you have the qualifications (piece of paper) you cannot offer any financial advice; regardless of how much personal experience, wealth and success you may have accumulated. If you have the piece of paper, regardless of how badly you lack in personal experience, wealth or success you can advise others.

In saying that I am not attempting to suggest all valuers lack experience… but I would love to know how much property investing success they had. After all, if it is a science and they are so sure… within 10 years they should all be well on their way to great property wealth; or so you would think.

Summary:

1. There are numerous commercial considerations for a lender (as with all individuals and companies alike) that a bank will impose as part of the valuation process
2. Actual valuers are usually employees
3. Their qualifications come from classroom training
4. They operate under the commercial policies of their employer
5. Their employer is contracted by the lender
6. The lender sets parameters to reflect the commercial considerations of the institutions overall (risk) policy
7. A valuers subjective opinion may be reflected in the result given. That opinion may or may not be based on solid research and fact. In the current market it may reflect how the valuer has been impacted by negative media reporting
8. A valuer may not be a property investor (or even an investor at all). This would not (unfortunately, in my opinion) disqualify him/her from operating as a valuer
9. In their defence, valuers are not paid anywhere near the money that would be necessary to justify the time required to undertake a proper “scientific” analysis of the worth of a property. The time they can reasonably allocate to the job requires them to rely heavily on an online program called RP Data, which is generally out of date by the time the information is received from the titles office and uploaded. Neither does this program tell enough of the story behind a sale; leaving the valuer to err on the side of caution etc

So, if you are thoroughly confused now you are forgiven!

Happy Investing,

Nick Lockhart
mrd customer care program… 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

By 2056, Queensland will be the second most populous state and will house one quarter of all Australian residents compared to 24% of all residents which are projected to live in Victoria. Queensland is projected to overtake Victoria as the second most populous state in 2050. Western Australia’s portion of the Australian population is also projected to increase with the states population growing from 10% of the total Australian population during 2007 to 12% of the total population during 2056.

Essentially, this increase in population throughout all areas directly equates to demand for new housing. Based on a total population increase of almost 10.5 million persons between 2007 and 2056 a significant number of new dwellings will need to be delivered to cater to this strong demand.

On a state by state basis, Queensland will require the greatest number of dwellings over the 49 year period, with the population projected to grow by 4,562,911 persons. Based on an average household size of 2.6 persons, this equates to demand of 1,754,966 total households or 35,816 households annually, a conservative estimate given that households are becoming smaller.

So what do these population changes mean for housing? Although consumer confidence is currently low and there are few buyers and lots of sellers, the projected rate of population growth suggests that ongoing demand for housing will continue to be strong. Based on supply fundamentals increasing demand for housing stock is likely to translate into future pressure on housing prices. One of the fundamental issues associated with population growth is ensuring appropriate levels of infrastructure, including transport, health care and schools are planned for and rolled out strategically. Planning and development of this infrastructure should precede or at the very least run in parallel with population growth rather than follow it, as has often been the case in the past. This is particularly essential for new affordable housing options being developed in the outskirts of the nations metro areas. It is these areas where commute times and costs make affordable housing an undesirable option for most of the market.

Source: Extracts from MyRPData

The national end of month property indices report released today by RP Data & Rismark International confirms that the supply and demand imbalance currently being experienced in the Australian property market has placed a floor under housing prices, resulting in minimal value falls.

Based on the analysis in the report, this is most evident in the metropolitan areas around the country where record population growth has not been accompanied by new dwellings to satisfy the housing demand.

According to RP Data National Research Director Tim Lawless the property market has proven to be remarkably resilient with national dwelling values remaining positive over the 12 months ending August 2008. Over the three months to August 2008 there was a modest decline with property values down by just 0.96 per cent over this period.

Mr Lawless said the recent figures should put to rest claims that Australia’s property market is headed for a crash. “In fact, values are holding relatively firm particularly when compared to the benchmark equities S&P/ASX 200 Index which dropped by 19 per cent between January and August,” he said.

The only capital city to record a material decline in property values was Perth where this market fell by 5.69 per cent over the August 2008 period. While this fall in values has caused some distress for home owners, Mr Lawless reminds owners that the results need to be placed into context where values increased by 13.9 per cent annually over the past five years..

One of the most interesting findings in the indices release today was the convergence of the capital city market dynamics over the past six months which revealed that all capital cities recorded slightly negative growth; no particular city was significantly out of step with the others.

According to Rismark International’s Dr Mathew Hardman “Clearly, the observable phenomenon of the two-tiered markets in Sydney and then in Melbourne and to a lesser extent in Brisbane and Perth has disappeared ”

“Market movements are now similar across all metro areas rather than value falls being isolated within the mortgage belts. This balancing can be attributed to the squeeze the more affluent markets are experiencing due to the turbulence in the financial and equities sector.

“Looking towards the next six months, strong excess demand in most capital cities is creating a floor under property values, making large falls unlikely,” Dr Hardman said.

According to RP Data, with population growth projected to remain high and interest rates falling, the demand/supply imbalance is expected to protect the market from any major falls in property values.

Rismark International’s Dr Hardman believes that unemployment is not a major factor driving property prices; affordability, excess demand and market momentum are far more significant he said.

“Although unemployment is rising, unless it grows rapidly to significantly greater levels, eg 6 or 7 per cent over the next couple of years, excess demand will eventually outweigh affordability constraints and begin to push property markets upwards again, probably by the second half of 2009.”

“Over the long term, home unit values tend to track GDP growth, while house prices exceed it by approximately 2 per cent. In Sydney, house and unit values relative to GDP have returned to their pre 2000 levels so affordability is slowly returning to the Sydney market,” Dr Hardman said.

Around the State

Sydney Property Market:

In 2005 – 07, we observed a two-tiered market in Sydney: the separate dynamics of the north, east and Sutherland shire rising or steady versus the west and south west falling. In 2008, this distinction has largely disappeared. The Sydney market as a whole has fallen by about 2 per cent over the past few months and this is true across all areas. We don’t believe large falls in any particular region are likely, but neither are rises. The market will likely show some volatility from quarter to quarter, but little overall direction for the rest of 2008 and into early 2009. Sydney house values are still the most expensive in the nation with a median value of $565,180. With rental rates increasing and property values showing a modest fall, rental yields have continued to improve. Houses are returning an average gross yield of 4.57 per cent and units are returning an average gross yield of 5.71 per cent.

Melbourne:

Melbourne is also down about 2 per cent over the last few months and again, the falls are generally consistent across the entire city, with the outer eastern and south eastern suburbs falling on average by a little more (3 – 5 per cent). Melbourne house values have fallen by 0.14 per cent over the August quarter and are now recording a median value of $448,271. Unit values have increased by 0.68per cent over the three months to August to reach $362,771.

Brisbane:

Brisbane has actually fallen more than Sydney & Melbourne over autumn & winter: on average by 3 – 5 per cent. The median house value is now $455,146 and the median unit value is now $326,606.
South East Queensland continues to be the strongest population growth region in Australia. Such strong demand for dwellings will continue to place upwards pressure on values over the medium to long term.

Adelaide:

Adelaide has also lost about 2 per cent over the past quarter, with the southern and eastern suburbs falling by slightly more than average: up to 4 or 5 per cent in some cases. On an annual basis Adelaide is still well in the black with property values up by 10.28 per cent over the twelve months to August.

Perth:

Perth has been remarkably resilient, considering the combined influences of the stock market decline and the rapid property price rises of 2003 – 07 and their effect on affordability. On average, the market is only down about 2 per cent over autumn and winter. The August indicative figures showing 5 – 6 per cent falls should be read with caution as they are based on a small sample of sales.

Canberra:

The Canberra market has also recently trended down: houses by approx 2 per cent and units by 5 per cent.

Darwin:

The Darwin market has trended down about 1 – 2 per cent over the past few months; however market confidence is expected to rise along with increased demand on the back of large investments such as the Inpex gas deal.

NOTE:

*RP Data and Rismark recommends that caution be used when interpreting property indices results as these results can vary depending on the methodology used and sample size.

In all RP Data and Rismark published indices, methodology is clearly indicated. More information on the RP Data‐Rismark indices can be found here: http://www.rpdata.net.au/indices/

In the lead up to the end of the 06/07 tax year, when “the experts” were promoting the virtues of investing into the Howard/Costello “tax effective Superannuation offer”, I didn’t believe them. Today I hear economic guru’s peddling the fear that our property market will follow the US lead and fall by up to 20%. Guess what, I don’t believe them!

Certain classes of property may see across the board falls as could residential real estate in certain areas; that’s why it is so important that we block out the noise and look at the fundamentals.

Yes, I too have opinions and I would appreciate a moment to throw some ideas your way for consideration.

The credit crunch has caused real challenges for real people. While I am on record as consistently promoting responsibility surrounding any form of investment, my confidence in the mrd strategy remains solid. We call it “Set ‘n’ Forget”; for busy people and the best evidence of my confidence and comfort level is in the purchasing of 3 additional properties since the subprime crisis hit.

Katrina and I purchased a property in November last year, another in February this year and we are settling a third next Tuesday; 7th October.

If you don’t ask the right questions you cannot expect to get the right answers and when it comes to understanding the likely impact of the U.S. economic crisis and global credit crunch on property values; it’s not sensation or emotion but rather the fundamentals we must draw counsel from.

My narrow investment strategy is challenged from time to time. Personally I don’t invest in superannuation, the stock market, managed funds or property trusts… nor do I invest in property outside of permanently let, median priced residential real estate in areas where the demand is increasing (i.e. where demographic change highlights that people want to live) and where the supply is limited. This latter point is why my preference is for areas that are predominantly built out and close to infrastructure and services (rather than the outskirts of suburbia… or “the mortgage belt”).

About a year ago a gentleman mused that I ought to have a more diversified or balanced investment strategy. I replied by asking: “By that do you mean a mix of investments that are likely to perform well, along with others that don’t”? Cheeky maybe; but I stick by the point I was trying to convey. It is my belief that The Safest Asset Class to Invest Into Will Always Be That Which Is NOT Dominated By Investors. And that pretty well eliminates everything other than what I outlined above.

The rural, commercial and industrial  property sectors are dominated by investors; as is holiday let, student accommodation and retirement villages (although retirement villages are a whole other subject for another day). The stock market, superannuation… and whatever else you care to suggest are all asset classes that are dominated by investors. Now I am not suggesting that these other sectors are not valid or that you should not invest in them… it’s just that I don’t because they are subject to the ups and downs of the market; as you probably need no convincing of right now!

According to RP Data National Research Director Tim Lawless the property market has proven to be remarkably resilient with national dwelling values remaining positive over the 12 months ending August 2008. Over the three months to August 2008 there was a modest decline with property values down by just 0.96 per cent over this period.

In my opinion it is not that difficult to ensure my investment dollar will perform if I understand the fundamental law of “Supply & Demand” and stick to my narrow, conservative strategy.

Let me explain…

In good times and bad everybody needs a roof over their head. They may close their commercial business or stop holidaying but they will either own or rent a place to live. In Australia we already have a housing shortfall of 50,000 a year (about a thousand dwellings a week) and with the immigration intake increasing by 20% this year as our government works overtime to attract skilled migrants to help us with our skills shortage… the pressure on residential housing will only increase; regardless of what happens in the global economy!

ANZ Australian Property Outlook 2008 reported that In risk-adjusted terms, residential property has delivered vastly superior returns to all other broad asset classes. In risk-adjusted terms since 1984, residential property returns have more than tripled those of equities and more than doubled those of commercial property and government bonds.

More recently, total returns on residential property have accelerated, underpinned by a sharp tightening in the housing demand/supply balance that is driving both rents and house prices sharply higher.  Heightened uncertainty in global credit markets following the meltdown in US sub-prime mortgages has seen risk aversion rise sharply.  Fears of recession in the US will continue to weigh on global equity markets and a ‘flight to quality’ will add to the weight of money that is driving residential (and other) property markets higher.  Using a simple volatility adjustment more fundamentally, a severe and potentially intractable shortage of housing will continue to drive house prices and rents sharply higher in the years ahead.

So back to my comment that “If You Don’t Ask The Right Questions You Will Not Get The Right Answers”… I am often asked what’s the best type of property to invest in; houses or townhouses and apartments? Wrong question… It’s not what should I invest in but where should I invest? Personally I look for the following in a property:

• Is it priced within my capacity to borrow the necessary funds
• Are the holding costs (post settlement) affordable
• Is it a median priced property for the area
• Is it livable
• Is it located in an area that is attracting people
• Is it fairly built out around the said property
• Is it conveniently located close to infrastructure, employment & lifestyle options
• What future investment, that will drive the local economy for years to come, has been planned, approved and/or commenced

Your research ought to focus on changing demographics. I am not so concerned with the attitudes and trends that drove property prices in the 1970′s, 80′s or even 90′s; that’s history. I consider the attitudes that currently prevail and are likely to prevail into the future. Petrol prices, greenhouse gasses, water restrictions, “Generation Y” and so on, etc. Such research will undoubtedly lead you to areas where houses are old and being replaced with higher density living. I have said more on this in other blogs, but I repeat that I avoid high density in preference for medium density. Position or location rather than the product is what primarily drives my decisions.

See also RP Data – Rismark Property Value Index Release: “Property Market Results Defy Doom & Gloom Merchants”

Happy Investing,

Nick Lockhart

• A fundamentally broad based economy benefiting from regional industries including sugar production, mining, cattle grazing and fishing; each of which form large elements of the North Queensland regional economic base with no end in sight in particular to the boom in mining services
• Gross Regional Product (nth region) 06/07 up 7.8% to $11.8 billion
• Defence bases expanding by 2012 – 1500 soldiers and support staff moving from Holsworthy
• Business challenge: Skills shortages & increased supply costs

Population

• Currently 170,000
• One of Queensland’s fasted growing cities – 220,000 by 2026
• Median age: 33 (state average: 35), lower age increases rent demand

Housing Supply

• 1,680 new dwellings are required p/annum
• March qtr – 9.2 months new unit stock level down from 20.7 months supply in December
• Median Sale Price: Weighted average sale down from $510K – $480K

Rental Vacancy Rate

• Houses 2% December Qtr (up from 1.9%)
• Units 2.6% December Qtr (up from 2.8%)
  *between 3% and 4% is a balanced market

Median Rents

• Up 12% yr to June
  • Inner City
    • 3 bdrm unit $410
    • 4 bdrm house $400
  • Townsville Area
    • 3 bdrm unit $380 (up from $350 – 8.6%)
    • 3 bdrm house $320 (up from $280 – 14.3%)
• Further rent rises expected catching up with 6 years of strong median sales; tight vacancy rate and drop in new dwelling supply

Overview of its strength as a place to invest

• Benefiting from the ‘Rise of the North’ – North Qld becoming the place for lifestyle and opportunity
• Survey reveal dramatic increase in the area’s liveability
• 26 suburbs now boast sale greater than $750,000, no longer just inner city

Source: RPData

Click here: The Sanctuary Apartments

In all likelihood we will see higher levels of confidence return to the property market on the back of rate falls and demonstrated domestic stability. The most recent consumer sentiment figures released by Westpac and the Melbourne Institute have risen considerably during August and September, providing further evidence that market conditions are likely to improve.

With fewer buyers in the market, ABS statistics are highlighting a reluctance by developers to initiate the building of new housing projects. This may be good news for sellers, as the lack of new stock helps to underpin existing market listings with a floor price. Investors should also benefit as population growth and a general housing shortage will likely drive up rents in coming years.

Dwelling commencement figures recently released by the Australian Bureau of Statistics (ABS) show dwellings commencements have declined for the second quarter running. Construction on just 38,348 homes commenced in the three months to June, a seasonally-adjusted drop of 3.7% on the March quarter.

Source: My RPData

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
- Warren Buffett

So how do you interpret the headlines and the media commentary on our property markets as an investor?

Let’s look at some other recent headlines:

Tough times puts halt on new homes – Gold Coast.com
NEW home building is set to slump and will not pick up again for three years. That’s the bad news from the Housing Industry Association, which says the Gold Coast will be hard hit by the slide in housing starts and mortgages. A big drop in new home building starts is expected to lead to a shortage of nearly 11,000 homes in this financial year alone, said HIA executive director (Queensland) Warwick Temby. He said the poor showing for new housing came at the wrong time for a state experiencing record population growth and new lows in rental vacancies.

New home building to fall by 20% in December quarter – Courier Mail
NEW home building in Queensland will fall by nearly 20 per cent in the December quarter, according to a just-released report on the residential market. “We have a relatively inelastic supply side, so no immediate bounce is expected and this is bad news particularly for those searching for affordable rental housing,” Mr Temby said.

House prices set to slide in capital cities
Credit growth braked to a 15-year low, while retail sales went into recession. As a property forecaster predicted that housing prices will fall 10% in the year ahead, fears are increasing for the economy, especially in the south-east. The markets, which until recently predicted another rate rise, tip the Reserve Bank to cut rates later this year – assuming the slide in the economy and the markets continues.

Three very strong and potentially frightening articles that would leave most people fearful contain gems that will leave the astute investor with a sparkle in his eye.

Over Sunday morning breakfast, I was listening to a radio interview with Tim Lawless; head of RP Data (a company that maintains records of house sales and similar data, right across Australia). RP Data is not a real estate agency. It is highly unlikely they would have any “vested” interest in whether the market moves one way or another. My belief is that Tim, more than most of us, has his “finger on the property pulse”.

Tim commented on the above report (House prices set to slide in Capital Cities) saying that it was “either very brave or very silly” and labelled it “sensationalist”. He said that while Perth had experienced some drop in house prices, the fundamentals of supply and demand still apply. That with 176,000 migrants entering the country we are building far too few dwellings (see other numerous mrd blog postings on this subject) and while the consumer demand may seem low at the moment, primarily because of the interest rates, he saw any drop of prices to that degree as very unlikely.

Supply and demand is still the determining factor of a product’s worth from banana’s to houses. Regardless of what else may be happening in other sectors of the Australian economy, everybody needs a roof over their head and they will either buy or rent and “water will eventually find its’ own level”.

If I invest in ‘liveable property’ in those places where the long term demand exceeds the available supply; then over the medium to long term I should see capital gains. Any short-term softening in the market will be short lived and, given that I follow a buy & hold strategy, not affect me personally.

Drops in new home building starts with the ongoing population boom leading to a shortage of nearly 11,000 homes this financial year alone rings of opportunity to an investor.  Lack of supply and greater demand will not only ultimately increase the capital return but the rental return as well, leading to a greater capacity to hold the property.  Housing affordability issues for first home buyers means more people renting, and more people renting means less rental properties available, pushing up rents again.

So are these articles positive or negative reports for property investors?  If you believe as I do that long term capital growth relies on limited supply and increasing demand then these are very favourable articles indeed. There are of course, no “guarantees” in property investment, other than the guarantee that if you never invest in property then you will never make any money in property.

Martin Bell

Property Strategist