Puzzle Finance Blog
Three keys to unlocking rates puzzle
RESERVE Bank governor Glenn Stevens said it last month; and just in case you didn’t hear or believe him, he said it again yesterday.
The RBA’s official interest rate is on hold for some and perhaps many months. The exact words he used — and they were exactly the same last month and this — were: “a period of stability in interest rates.”
That didn’t stop the economentariat from seeking deep clues in the RBA’s statement, to tell them — so they could tell you — what he REALLY meant.
They “found” essentially two — one in what he did say this month and didn’t last month; and one in what he didn’t say this month and did last month.
This month he said “the exchange rate remains high by historical standards”. Last month, he’d merely noted “the exchange rate has declined further”. So, hint, hint, he’s back to trying to “jawbone (down)” the Aussie.
In contrast, whereas last month he had said that the RBA “expects growth to remain below trend for a time yet”, that was missing from this month’s statement, replaced by a more upbeat “over time, growth is expected to strengthen”.
The problem is that the two “clues” pull in opposite directions.
The first would suggest that the RBA wanted a lower Aussie, as that’s needed to boost growth — and, stretching it out, that if we and it didn’t get it, further rate cuts might come back onto the agenda.
The second would suggest that the RBA now believed we might get growth closer to trend and get it quicker; therefore the next rate change was more likely to be an increase than a cut.
The holistic answer to all that deep speculation is two words: the Ukraine. A month ago, far less three months ago, who was predicting that the Ukraine could destabilise global financial markets and potentially force a reassessment of policy around the world.
I’m not suggesting that we are now necessarily teetering on the edge of another precipice. But rather to make the point, that the best laid plans of mice, men — and Reserve Bankers — are hostage to “events”. In particular, to those from out of left field.
Or as Zhou Enlai said: “it’s too early to tell.” He was talking about the significance of “recent” events in Paris — although whether in 1789 or just back in 1968, is a matter of interesting conjecture.
Whatever, I’m borrowing the quote on behalf of Stevens, in respect of which direction the next rate move, when it comes, will be. That is to say, I doubt that he has the faintest idea.
The changed words from February’s statement to March’s were about something far more modest; they were all about context, not about sending subtle hints about the “next rate change”.
February was about explaining and contextualising a shift in policy. The RBA was shifting from its previous stance of mild ease to one of neutrality.
In the context of that and slightly disturbing — or “challenging” — December quarter inflation figures, the RBA wanted to make it very clear it was ruling out not just further rate cuts, but any suggestion of rate rises.
Hence, the avoidance of any explicit reference to the Aussie being “too high”, which might have suggested a rate cut was still possible; but equally the specific reference to the forecast of below trend growth, to rule out any speculation of a hike.
This month, as the RBA was merely repeating its policy stance, it was more relaxed about noting relevant dynamics — both the high (but still relatively lower) dollar; and strengthening (but still not rocketing) growth.
But at core nothing has changed — either from the policy stance initiated a month ago or the forecasts of (gradually strengthening) growth and (marginally moderating highish) inflation that it was founded on.
In this context, the three sets of statistics — released yesterday, today and tomorrow (well, actually, next Thursday) are critical. Both in telling us what is happening, but also how they play into the RBA’s perceptions.
Yesterday the trade data showed that net exports on their own would add 0.6 per cent to GDP growth in the December quarter — with those GDP figures to surface today.
That would double the contribution of net exports to growth compared to the December quarter a year ago when we got an overall growth rate of 0.5 per cent; and could push annual growth over 2.5 per cent.
Two points. We will find out today — there are just too many variables to try to predict the number.
But more importantly, today’s GDP figure is about yesterday — the December quarter. The RBA bases its rates policy on where tomorrow’s growth is headed.
The big factor in that is the coming fall in resources construction. The RBA is actually being “optimistic” to believe that growth elsewhere in the economy will offset that enough to bring overall growth back closer to trend.
Next week we get the monthly jobs numbers. They are a critical part of the RBA’s two-tier balancing act. First in assessing where the economy might be headed; and then how they play into the RBA’s rate rhetoric.
It’s tried to walk a delicate line between predicting deteriorating jobs and the resources investment cliff (or slope), into a still-strengthening overall economy.
It is that line which essentially gets you to steady rates. At least, while it’s still “to early to tell”.
Posted by Terry McCann - Herald Sun on 5th March, 2014 | Comments | Trackbacks | Permalink
Pay off full balance on time to avoid backdated interest
Interest-free day calculations on credit cards are so complex and poorly disclosed it is no wonder they provide a rich stream of revenue for the banks. About $6 billion in interest payments runs into the coffers of the banks and other financial institutions each year from credit cards.
''I'm yet to see a clear and concise explanation from any of the banks, even though that was one of the stated aims of the 2012 credit card reforms,'' says Andrew Duncanson, of comparator site Mozo.
When the cardholder does not pay off a statement in full and on time, lenders charge interest on the whole balance, usually back to the date of the purchase, which could be nearly two months earlier, Duncanson says.
Also, if full payment is made only a day late, the interest is usually backdated to the purchase date, on the whole balance, he says.
Retiree Ken Pheeney, 66, from Bundaberg, was not aware of how the interest-free period worked until he learned the hard way. He had a debt of $2000 on his card and paid off all of the debt but $50 by the due date.
''I got charged the interest on $2000 even though I was $50 short,'' he says. He was hit with an interest charge of more than $50. Ken rang the bank to complain and it was only then that he realised that interest was charged on the whole $2000 even though he owed only $50 on the card. After he complained, the bank waived the interest charge as he usually paid off the card debt in full by the due date. If only half of the $2000 is paid off by the due date, Mozo calculates the cardholder would pay up to $88 in interest under the worst-case scenario.
If the cardholder paid off the full balance of $2000, but one day late, Mozo calculates the cardholder would pay interest of up to $73. Some cards backdate interest only to the start of the current month, but most go all the way back to the purchase dates.
To make matters worse, with most cards, the cardholder also loses their interest-free period on subsequent purchases, Duncanson says.
In the example, interest on the $1000 is carried forward into the next statement period. Cash advances start accruing interest, which is usually higher than the purchase interest rate, when the cash is withdrawn or transferred online. Mozo says the average interest charged on purchases is 17.3 per cent and usually higher for cash advances. ''It's so complicated that most people won't ever get their head around the subtle differences,'' Duncanson says.
''The best advice is to always pay off your full balance, on time,'' he says. For those who pay off the balance in full by the due date and do not make cash advances, there will be no interest charges. Duncanson says if the cardholder is unable to pay off the balance in full by the due date they should shop around for a card with a low interest rate.
With the changes to credit reporting rules, missing a payment has greater implications than just interest charges. Under the new rules, more information is held on credit records, including credit card repayment history.
For example, a minimum credit card payment more than five days late will be recorded. A poor record could make it harder to get a loan.
''Another thing that trips up people is balance transfers with zero rates,'' Duncanson says. These offer a low or zero interest rate on the debt that is transferred from the old card. But the low or zero interest rate is usually applied on the transferred balance for a certain period, after which the purchase or cash advance interest rate is charged, Duncanson says. ''There will be no interest-free period on purchases until the balance is paid off in full,'' he says.
Posted by John Collett - The Age on 5th March, 2014 | Comments | Trackbacks | Permalink
Busting finance's tall tales
I've noticed a number of myths and misconceptions that keep coming up about mortgages, so I thought I would address the 10 most common.
1. It's not worth refinancing a mortgage for an improvement of half a per cent. If you have a $350,000, 30-year loan with an interest rate of 5.24 per cent, and you refinanced to a rate of 4.74 per cent, you would save $107 a month and $38,480 over the life of the loan. Is that worth it to you?
2. I can't refinance a fixed-rate loan. Not true. You can refinance a fixed-rate loan but you'll be hit with a break cost, which is compensation for the loss the bank will incur when you leave.
Weigh up the break costs versus the potential savings and see what you come up with.
3. I need a 20 per cent deposit. Many lenders will give you a loan with as little as 5 per cent deposit, although with less than 20 per cent you will have to get lender's mortgage insurance, which some lenders will include in your loan.
4. I want to use a mortgage broker but what about the fees? Mortgage broking fees are paid by the lender, not by you. A mortgage broker finds you the best loan at the most competitive rate.
5. A competitive rate doesn't really matter because the Reserve Bank controls home loan rates. The RBA adjusts the cash rate from time to time but each lender can change their rates as they see fit.
6. Once I find a good rate, I'm sorted for the life of my loan. Lenders can move their variable rates at any time, so a loan that's competitive today might not be competitive in the future.
7. It doesn't matter if you pay your loan monthly or fortnightly. False. A 30-year, $350,000 loan on a 4.74 per cent interest rate, would mean monthly repayments of $1,823.66. If you paid half ($911.83) fortnightly, the loan term would be 25 years and six months, and you'd save over $53,000 in interest. Weekly payments are even better!
8. I'm too old to refinance my mortgage. Age discrimination is illegal. A bank looks at your repayment ability, so they're looking at your income and the loan term.
9. Self-employed people pay higher interest. If you're self-employed and can't produce your tax returns, you may be offered a low documentation loan that can have higher interest rates. If your financials and tax returns are in order, you qualify for the same rate as a PAYG employee.
10. Banks keep secret files on my credit history. Wrong. All lenders use a credit reporting system to check your history. Know what they know by finding out your history at mycreditfile.com.au.
What do you think? Talk to me on Twitter @markbouris
Mark Bouris is executive chairman of wealth management company Yellow Brick Road: ybr.com.au
Read more: http://www.smh.com.au/money/busting-finances-tall-tales-20140301-33sni.html#ixzz2urQTpOy9
Posted by Mark Bouris - The Age on 2nd March, 2014 | Comments | Trackbacks | Permalink
Picking the right investment property a balancing act
Rental investors need to weigh up various factors
Pinpointing rental demand is important in residential property investment, and vacancy rates - the proportion of unlet dwellings - can be a useful measure.
But how much weight should a would-be investor put on this figure when they are deciding where to buy?
Australian Property Buyers director Karin Mackay says while investors should look for where ''there may be a shortage of rental properties'', the overriding factor is price growth.
''Capital growth is key,'' Mackay says, noting that this means not just looking at what median prices ''did last year'' but how a suburb has performed over the past 10 or 20 years.
Vacancy rates are typically higher in inner than outer suburbs.
Real Estate Institute of Victoria figures broadly show that Melbourne's outer suburbs (20 kilometres-plus from the CBD, excluding the Mornington Peninsula) had the lowest annual vacancy rate, of 2.1 per cent, in 2013.
By comparison, inner suburbs within four kilometres of the CBD had the highest vacancy rate, at 3.8 per cent, up from 3.4 per cent in 2012.
But Mackay says an inner-city investment should still perform better when it comes to capital growth. ''It will rise far quicker in value,'' she says.
A suburb-by-suburb analysis of vacancy rates by Australian Property Monitors showed middle and outer eastern suburbs - including Boronia, Ringwood East, Bayswater North, Montmorency, Heathmont and Bonbeach - had the lowest vacancy rates for houses last year.
For units, Cranbourne, Sydenham, Kilsyth, Thornbury and Cremorne ranked the best.
Dr Andrew Wilson, senior economist at Fairfax-owned APM, says several factor could influence such results, including increased activity from owner-occupiers, leading to a smaller pool of rental properties.
The strength of the market in middle suburbs, pushing more renters out further in search of more affordable rentals, may also be a factor, Wilson says.
He adds that the outer eastern suburbs also saw solid improvement in median house price growth last year and notes that ''not everybody wants to live in quaint inner suburban cottages or refurbished new properties … some people do want the middle ring-outer ring suburban lifestyle, and maybe that's part of it.''
Ian James, director of JPP Buyer Advocates, which also has a small property management department, says vacancy rates are playing an increasingly important role when investors are looking at buying units in the inner suburbs.
He says this is due to the large number of apartments now coming on the market within a few kilometres of the central business district. ''With the new amount of stuff coming on, it is damn hard to rent them out,'' James says.
Many units in inner city areas such as Richmond or South Yarra will still experience good capital growth in the long term, but renters may be harder to come by. And he says this is particularly relevant with the increasing number of people who are now relying on rental returns for their income.
''[Vacancy rates] play a higher part now I believe because people are actually thinking about different styles and types of property,'' James says. And vacancy rates in an area is just one factor to take into account when considering how easy it will be to rent out an investment property.
Barry Plant property franchise development manager Yvonne Martin says factors such as a property's distinctiveness, location and presentation all play a critical role in determining how attractive a property will be for renters.
Martin says the price range of the property is also an important consideration because properties at the top end of the market will have higher vacancy rates and there are more negotiations on rent than for properties at the lower end of the market.
''The more expensive the property, the more expensive the rental's going to be and the greater chance that it is sitting vacant for longer,'' Martin says.
Sprucing up a property makes financial sense
When Jason Wong and his wife Kim bought their two investment properties, vacancy rates were a consideration but not the deciding factor.
The couple currently own a three-bedroom unit in Burwood East, which they initially lived in, and a three-bedroom house in Boronia.
''At the end of the day, it's really about long-term investment for us,'' says Mr Wong, a development manager at Colonial First State Global Asset Management. ''If the property was vacant for some time, we wouldn't be too fussed about it but it is important in a longer term sense that we continue to get tenants.''
Mr Wong, who currently lives in Wantirna, says while the couple considered the demand for rental properties in the areas in which they bought, they also spent thousands of dollars sprucing up both places to make them as attractive as possible. This move proved to be particularly successfully with the Burwood East property.
''It was getting a bit tired internally and we were probably struggling a little bit to get tenants,'' he says.
''But as soon as we spruced it up, we had people actually upping bids to get in there.''
Posted by David Adams - The Age on 2nd March, 2014 | Comments | Trackbacks | Permalink
What the new comprehensive credit reporting system means for you
ON MARCH 12, a new comprehensive credit reporting system (CCR) will come into effect in Australia that will change the way lenders assess risks when taking new clients.
At present, a person’s credit file — the detailed collection of their financial history — is governed by the Privacy Act and only provides limited negative information, like defaults and bankruptcies to lenders.
However under the new system, known as CCR, a much wider range of information will be available, from details of credit cards and personal loans to monthly bill repayment history.
The information will also be able to be shared among credit providers, but not with telecommunications and utility companies at this stage.
Credit reporting agency Veda’s marketing manager Belinda Diprose said the changes are designed to provide a clearer picture of consumer behaviour.
“It’s really about making sure people aren’t overextending themselves and lenders have best possible picture when it comes to making a credit decisions,” she said.
“Previously they were able to share some information [like] credit applications you made as well as if you have an overdue debt, default, bankruptcy, court judgments.”
However the changes mean companies will be able to access additional information around the types of credit, limits and how often people pay their bills on time.
“If you miss a repayment by more than five days that will be marked on your file under the new system, However a default is not marked just because you missed a repayment,” Ms Diprose said.
Credit defaults are when a payment of $150 is more than 60 days overdue.
Ms Diprose said although the changes mean more information will be collected, they will allow people to establish a positive credit rating quickly and show they have recovered from negative events.
However people will need to remember to be vigilant with bill payments in order to keep their file clean — which could be a struggle considering 80 per cent of Australians don’t keep track of their credit history.
Ms Diprose said the changes will bring Australia more in line with the US and UK, where consumers actively use their credit score to seek out a good deal from providers.
“A good credit history makes you more attractive to credit providers … It’s a really important piece of that lending decision so you can get credit you want,” she said.
Veda’s top tips for managing your credit rating:
• Set up direct debits to ensure bills are paid on time
• Schedule loan repayments for payday
• Keep track of credit commitments and only apply for credit when you really need it
• Credit includes things like store finance so don’t neglect payments on your fridge or car
• Close any accounts you don’t need
• Get your bills via email and flag them to make sure they’re paid on time
• If you’re having trouble meeting payments, ask for an extension or negotiate new terms
• Get a copy of your credit report so you know where you stand
To get a copy of your credit score visit Veda.com.au
Posted by News Limited Network on 27th February, 2014 | Comments | Trackbacks | Permalink
Is it cheaper to rent or buy?
WHILE renting may seem the cheaper alternative to buying a home, new figures have revealed it can end up costing pretty much the same over the long term — and you’ve got nothing to sell at the end.
The figures collated by finder.com.au reveal that renting a house over 30 years will cost you almost $1 million, while buying a house at today’s current median house price will end up costing about $1.2 million.
Michelle Hutchison from Finder.com.au said the figures showed it was worth considering buying a home instead of wasting dead money renting.
“If you are renting that money has paid for someone else’s investment,’’ she said.
She said the total cost for a house based on the national median house price with a 30-year loan term was more than $1.2 million.
“Compared to renting, the national median weekly rent for a house is currently $424, which equates to about $998,830 over 30 years (adding current inflation of 2.7 per cent p.a.),’’ she said.
Ms Hutchison said it can be a tough decision to choose between renting and buying a home.
“The question to stay renting or to enter the property market is a constant struggle for many Australians because of property prices, saving for a deposit and uncertainty of interest rates,’’ she said.
“But if you compare the likely cost of rent for the next 30 years, it’s worth considering buying a home.’’
With the current low interest rate environment Ms Hutchison said it was more affordable to maintain a mortgage now than it was three years ago.
She said while buyers were concerned about affordability, it was still a good time to enter the market because interest rates were low.
According to figures from RP Data Darwin has the highest median asking rent in Australia for houses at $650 a week.
Where the renters are
Darwin — 43.2%
Canberra — 31.0%
Sydney — 32.4%
Perth — 28.2%
Brisbane — 33.7%
Melbourne — 28.0%
Adelaide — 28.8%
Greater Hobart — 28.2%
Source: RP Data
Posted by News Limited Network on 12th February, 2014 | Comments | Trackbacks | Permalink
Time to shop around for cut-price credit
If you have a home loan and are waiting for interest rates to fall further, don't count on the Reserve Bank to help out.
Governor Glenn Stevens last week gave his clearest signal yet that official interest rates will probably remain at their record low of 2.5 per cent for quite a while. Financial markets reckon that when they finally change, they will rise, rather than fall.
But that doesn't mean there's no way to save on borrowing costs.
After all, what you pay the bank for money is affected by other factors well out of Stevens' control.
And, fortunately, banks are competing fiercely to sign up more customers in anticipation of stronger credit growth. This means many are offering cut-price credit.
However, you'll probably have to shop around to make the most of this heightened competition.
Many are sceptical about how much the big banks in Australia really compete. They have an 80 per cent share of the market for new home loans, compared with about 60 per cent before the global financial crisis, after swallowing rivals such as St George, BankWest, RAMS and Aussie Home Loans.
Right now, however, there's evidence the banks are indeed competing to lend households money. Citi, HSBC and Bank of Queensland have all recently cut certain variable rates for new customers. Westpac and National Australia Bank have cut fixed rates, with NAB's four-year fixed-rate mortgage now at the lowest level in more than 20 years.
And, more subtly, banks are offering bigger discounts off their advertised rates, also to new customers.
A recent survey from JP Morgan analyst Scott Manning said the average discount off standard variable rates has risen by about 10 basis points to 85 basis points in the last couple of months - near 2012 peaks. On a $300,000 mortgage, an extra 10-basis-point discount is equal to a saving of $18 a month.
So what's the catch?
Well, the better deals are only for new loans. That means the vast majority of people with mortgages probably won't benefit from this competition.
After all, banks aren't doing this to be nice. They're competing more fiercely because they want to steal business from rivals.
This means the discounts will only really go to customers who are taking out new loans, or to those prepared to shop around.
To take advantage of the competition, you may have to threaten to switch banks and see if your lender can match it. As the banks know, most of us don't do this. Changing transaction accounts is enough of a hassle in itself. With a home loan, you may also need to have the house valued, or arrange a new lenders' mortgage insurance policy.
Just how reluctant are we to switch banks? The Australian Institute has reported that only 3 per cent of us switch each year. With that degree of inertia, banks can compete more fiercely for new customers without inflicting much damage on the bottom line.
To really take advantage of the current wave of competition, borrowers may need to confront the messy process of switching, or at least make their bank think they are prepared to leave.
Posted by Clancy Yeates - Money Manager (Fairfax Digital) on 12th February, 2014 | Comments | Trackbacks | Permalink
Should you fix your interest rate?
THE year is shaping up to be interesting. Sadly, this does not mean I am in possession of some top secret information, retrieved via encrypted message from a satellite above Uzbekistan and verified by a man with a moustache, trench coat and thick accent.
Rather I mean ‘interest rate’ interesting. Clearly that is not as exciting, but to be fair, for those of us encumbered with mortgages — or about to be — it is important. This is because the level of interest charged by lenders can be the difference between your daily coffee being a small flat white, instead of a super-size grande double shot mocha with low fat yaks milk. Or more seriously, interest rates can be the difference between living comfortably financially and really struggling — and the changeover can happen very suddenly.
A recent report from Westpac chief economist Bill Evans gave predictions for interest rates for 2014. It is fascinating reading as banks need to provide a balanced analysis as their customers are not only home loan slaves, but savers too.
So what does this mean for you? Now in no way must you take an article written by me as an assurity, but when I read this information, it made me decide to fix my home loan.
I’ve been considering this for ages. I waited and waited, but even with the predictions some minor rate cuts may occur in 2014, it seemed right for us as a family now.
Deciding to fix or stay variable is a personal decision that each person needs to take based on their own financial circumstances. It depends on many elements, not just RBA rates, but the deals the lenders and brokers will offer you personally at any particular time. I weighed up the risk and decided it was worth it for us right now — but that does not automatically mean it would work for you right now.
The key is to assess the information on how it relates to you and your financial goals and fully understand that playing the fixed rate game is exactly that; a bit of a game, a bit of punt, with a genuine risk factor built in.
I do consider that RBA rates will vary a number of times this year — it is even predicted they could drop further! Will that decrease be that significant and will it translate into more competitive fixed home rate loans? Many experts do believe if we are not at the bottom of the interest rate cycle we are pretty close, and history tells us that.
Rates in the UK and US have not gone down further in recent years and these countries have similar housing markets where home ownership is a typical financial and personal goal for many people. What is really up for question and concern for borrowers is whether rates will increase again this year, and if they do, will that kick start the rate increases cycle all over again?
You can only lock in rates in this country for a limited period of time — typically a minimum of one year and most commonly two or three years. Alternatively you can fix a portion of the mortgage leaving the remainder on the usual variable rate.
This always sounds such a great, shrewd way to manage your finances, but if you are like me you sit procrastinating because even though it seems the right time to ‘fix’ what if the rates carry on going down? In such a case, you will feel very financially cheated.
You should remember too before making this decision that most of the deals around fixed rates are exactly that — deals. This means there are penalties if you want to sell up and pay off the loan courtesy of an inheritance from long lost Great Aunt Sheila who went missing at sea on her world cruise, last seen dancing on the Captain’s table, gin and tonic in hand before heading towards the deck for some fresh air. In such instances not only do you have to pay off the loan but many thousands of dollars in penalties.
So should you or shouldn’t you fix? Here are my pros and cons to help you decide if you are considering taking the plunge:
•If you are sure you know you will NOT need to sell up/pay off within the fixed term period
•If you feel confident rates are close to the bottom of the rate cycle
•If you can obtain a competitive fixed rate from a lender with no fees other than the unavoidable penalties
•If you know you can live with yourself, if rates take a further drop and understand there is a risk that could happen during the period
•If you like certainty, like to set your budget and hate financial surprises!
•If you are unsure about your housing needs over the next few years, or the value of your home could be on the rise and you may want to sell
•If you feel home loan rates are likely to decrease in the forthcoming years
•If lenders deals are not attractive and are set much higher than variable rates, or just do not seem sufficiently tempting
•If the thought of paying 4.9 per cent, when lenders are offering 4.6 per cent, because you should have waited, is going to drive you insane, stay flexible! (This is a hard one I can tell you)
•If you can cope with the highs and the lows and know how to put money aside when rates are low to cover the other times.
Andrew Winter is the host of Selling Houses Australia on Lifestyle.
Posted by Andrew Winter - The Daily Telegraph (News Limited Network) on 11th February, 2014 | Comments | Trackbacks | Permalink
Getting it right on the money
Setting the valuation on your property can be a stressful affair, but there are ways to make the process smoother.
It's the age-old dilemma for property sellers. Price your castle too high and risk missing out on potential buyers. Price it too low and ... well, who wants to pocket less than you should?
Analysts have been saying that prices are on the rise, but it's particularly hard at the start of the year to know where the market's headed. And, of course, it depends on the specifics - your region, suburb, street and your property. Still, there's much you can do to ensure an accurate valuation ahead of listing.
A logical starting point is to approach at least three agents for a free appraisal. Agents have access to latest sales data - through companies such as Fairfax-owned Australian Property Monitors, RP Data and Residex - as well as their fingers on the pulse of the market.
"You need to compare apples with apples, not apples with oranges," says Richard Earle, of agency Jellis Craig. "Something with similar architecture, number of rooms, land size." But, he adds: "No two houses are identical."
But before you bring in the agents for what amounts to a job interview on how they plan to market your property, do your own research so you are up to speed with recent sales in your neighbourhood. That can start with visiting open homes in your area, for a comparison of price guides. But for details on what comparable homes
were actually selling for late last year, the data providers can help. APM's street reports, for instance, cost $29.95, or there are property reports for $49.95.
Even more detailed analysis can come from an independent property valuer, who takes a more thorough approach. These services - costing from $400-$1200 - consider myriad factors, including basics such as number of bedrooms and bathrooms, zoning of the land, size, renovations and ability to add value, even the aspect and slope of the block. They also consider proximity to amenities, any detrimental factors and market conditions.
"We have [valuers] who concentrate on certain precincts, going in and out of four or five properties a day," says Tony Kelly, managing director of national valuation firm Herron Todd White. "They quickly build up a knowledge base based on fact."
Kelly says independent valuation removes emotion and doubt that agents might overvalue a listing to win business. He says they are often sought when multiple vendors are involved, or homeowners, particularly at the top end of the market, are considering selling as part of their financial planning.
Buyers' agents are even getting into the game of trying to help vendors determine a price, through their vendor advocate services. Propertybuyer.com.au chief Rich Harvey says it uses its on-staff registered valuer, combined with property visits and comparable sale analysis.
"The more unique a property, the more difficult to price," says Harvey.
Frank Valentic, of Advantage Property Consulting, urges sellers to go to open homes and auctions to see what properties are selling for. "The basic rule is to look at one superior property, one similar, one inferior - that's how we judge," he says. "But it's not an exact science; there's always a bit of guesswork."
Agents such as Barry Plant's Mike McCarthy are keen to provide a range to allow time for market feedback, which influences price.
"After the first week or so we can see whether
we are on the mark or need to adjust [the price] depending on what the market is telling us," McCarthy says.
This works best for auctions, particularly for more established suburbs. He says housing is more homogenous in the urban fringe, and therefore easier to price. Sell, sell, sell - Three things you can do to maximise price
1. Don't scrimp on marketing. "You can't sell a secret," says selling advocate Rich Harvey.
2. Declutter and depersonalise. Take down wedding and family photos, for example.
3. Approach three or four selling agents.
4. Look at property data from companies such as Australian Property Monitors.
5. Enlist the services of a selling advocate for comprehensive valuation and help selecting the right agent.
6. Obtain a sworn valuation.
7. "Don't accept the first offer," advises advocate Frank Valentic. You need at least a couple of weeks to assess the market before inviting offers.
8. Hire a stylist to make the interior flow throughout, advises Sydney agent Brigitte Blackman.
9. Keep pets out.
10. Landscape the garden with fresh turf, and spread woodchips on the garden beds.
Home and business opportunity
In the family since the 1960s, the Kingsville property was home - and place of employment - for builder Frank Schipano's dad and mum.
"My father ran a mixed business until the 1980s," says Schipano.
Leased out to other businesses, including a shoe retailer, the property at 63 Kingsville Street has been let go in recent times, making it ripe for renovation.
"We were going to fix it up and rent it again but were approached by (Barry Plant Yarraville) suggesting we put it on the market," says Schipano.
"I hadn't contemplated it."
Barry Plant sales consultant Hayden Kay sees great potential for the uncommon retail-residential opportunity in the current market because it can be used as a business and residence or, to a particular buyer, converted into a single larger home. But he confesses it isn't easy to value.
"It's a bit of an odd one for us to figure out a price point," he says.
"There hasn't been a lot to compare it to over the past five to 10 years (in the area)."
The agency walked developers, renovators and small business owners through "to get a feel for where they thought the property was at".
"We're looking at the mid-$500,000s," says Kay. But is it worth $600,000? $650,000? Maybe, he thinks. A March 1 auction will decide.
Posted by Paul Best - The Age on 8th February, 2014 | Comments | Trackbacks | Permalink
Home ownership is a dream but a mortgage doesn't have to be a nightmare
IS IT better to rent or to buy? Typically, the rent-or-buy debate is limited to financial questions. Will my mortgage payments exceed my current rent? Should I wait for interest rates to drop a little further?
Recent years have demonstrated that there are no longer dependable answers to these money questions - and that maybe they weren't the right ones to begin with. So we've shunted them aside to examine what we consider to be the more significant points of the debate: Does every man still need his kingdom, even if that kingdom's value plummets from month to month? And how will a 25-year debate limit future opportunities?
In the rent-or-buy debate, as with most big life decisions, a single, concrete answer is elusive. The most important thing you can do is make sure you've asked yourself the right questions.
My parents' generation had a collective fantasy about being mortgage-free. I guess it's understandable in some ways. So much of people's incomes go to mortgages, so to have that burden lift could mean a considerable lifestyle change. For many, a mortgage payment eats up 30 per cent of the monthly cash - sometimes more.
We often also believe that fully owning our homes allows us to enjoy them more. However, many will admit that once the debt is paid off, they sell up and buy the next debt-generating house. The truth is that paying off a mortgage isn't the overwhelming relief many people expect.
What we homebuyers don't consider is what happens to us for the 25 years during which we are paying the house off. Having a huge debt over our heads is not conducive to taking risks and seizing unforeseen opportunities. When all we can see into the future is the gradual eroding of our debt to the bank, it's not exactly a carpe diem situation. It's pedestrian, conservative and an almost imperceptible advancement from year to year. Our efforts fall like drips of water into a pool, hardly impacting the volume unless seen over decades. It's no way to think about your life's progress, that's for sure.
When you apply for a mortgage, you're risk-profiled. Will you be able to pay back the debt? Is the security a good bet? Is your health good enough? That type of thing. Getting approved is a dream come true - now you can kickstart all your big plans!
But then you end up spending a ton on furniture, renovations, even landscaping. Most people don't accurately estimate the costs of all these add-ons to the cost of a home, and it's highly likely that you'll go into more debt as you start racking up new expenses. Your dream home can easily start to feel more financially dangerous than a Hollywood coke habit. You start to worry about how you're going to recover pretty soon after you've started.
At this point, making a career change or a risky move starts to seem like a pretty bad idea. Although you can sell the house, the costs of doing so in cash terms, not to mention emotional terms, often make it seem impossible. If a partner or young family is in the mix, there's even more at stake, and even more inconvenience involved in making a sudden change.
I have known companies who do everything in their power to encourage their young up-and-comers to buy a house early in their careers, thereby tethering to a life nearby. Moreover, buying a house means you're less likely to end up working for the competition once you're comfortably settled in your job title. The dark artists of employee entrapment have used mortgages as weapons for decades.
The desire to own one's own property is innate for many of us. Ownership gives us a sense of security and fuels our egos. Having a place that you call your own means that you can't be evicted on a landlord's whim. It's easier to visualise a calm and happy future when your home is your own. But home ownership isn't necessarily a requirement for rosy future planning. That's a fallacy that's grown up out of a culture of home ownership. After all, you don't need to own a painting to enjoy it.
I have a friend who is a keen sailor and loves boats. He says there are only two days of boat ownership that give you great pleasure: the day you buy it and the day you sell it. It's much better to rent them. If something goes wrong, someone else fixes it. If your family grows, you rent a bigger one. If you have a tough year, you trade down from a 90-foot Swan to a 30-foot Beneteau. You're flexible.
The same can be said of renting houses. You can chop and change as your life develops, and if the market crashes, you aren't locked into a house with so much negative equity that the next 10 years of sweat and toil will just get you back to level.
If home ownership is for you, however, it's time to change your relationship with debt. My friends in banking think that paying back the capital on mortgages is crazy. They see a mortgage as a way of leveraging a great lifestyle. The more debt you can get, the better. It means more toys, more art, better wine and bigger houses.
They don't see the debt as painful but liberating. As with all things, you can change it for a price. Get used to buying and selling houses, moving money and mortgages around, and you'll see that 25-year debts are anything but. They are just about today, and if they get you what you want and free you to live your life the way you want, fantastic. Just don't think in terms of paying the whole thing back. They don't, which partly explains how the market collapsed so dramatically not long ago.
Since I can remember, I have been fascinated by people's dreams. It struck me from an early age that our fantasies shape our lives and how we live them. Idle conversation often gives me insight into such dreams, as people almost unconsciously mention that if they were to win the lottery, they would take that trip, move to the country, learn to sail, and on and on.
Essentially, these people feel that if by the weirdest fluke of chance they miraculously won millions of dollars, they might then live their life. That still is very strange to me. It's as if they are somehow incapacitated from choice and freedom unless they receive a huge windfall. This is a belief that is patently untrue.
The bummer is, our minds can work like that. Many people look forward to retirement for their whole lives, thinking at that point they can finally do what they want. If you think like that, chances are you will be disappointed. You'll be the same person when you retire, with the same limitations and fears. If you can't enjoy the present, do you really expect to change that much when you're 65?
The same can be said for houses. Our feelings toward them are irrational. They are loaded with emotion. A haven to raise a family, a sign that you are doing well, a place for friends to connect, a playground or an albatross around your neck - it's all a matter of perception.
Buy or rent? I guess it doesn't really matter. What matters is how good you feel about your decision. Big debt at a young age can be crippling for some and yet highly motivating for others. Inspired by my fanciful banking friends, I finally got over my fear of debt and now live in a huge pile by the sea.
My name is on the deeds, but I know that the bank really owns it. Nonetheless, I can live with that. I'm living the life I want, and I love it.
Paint some pictures in your head and choose the one that feels great regardless of the logic. It's your life. Live it.
Posted by News Limited Network on 8th February, 2014 | Comments | Trackbacks | Permalink
How to raise capital for your business: eight alternatives to an IPO
The Australian demand for initial public offerings has shifted away from small caps to favour larger listings, forcing many smaller and mid-market companies to find other ways to raise capital.
The IPO Watch report from chartered accounting group HLB Mann Judd suggests a definite trend towards bigger floats.
In 2013, 19 of the 49 listings on the Australian Securities Exchange were for companies with a market capitalisation over $100 million. However, they accounted for 92 per cent of the funds raised.
Within the small cap sector (market capitalisation under $100 million), 53 per cent were from the $75 million to $100 million range. This was a big shift from 2012 when only 4 per cent of floats were for companies valued above $50 million and there were none at all above $75 million.
As a result of the bigger valuations, the average raised by small caps was $12 million, up from $5.3 million in 2012 and $6.8 million in 2011.
The smaller the company, the less likely they were to meet their subscription target. HLB Mann reports that 100 per cent of floats for companies with a market capitalisation over $100 million reached their target, while for small caps in the $25 million to $100 million range it hovered around 96 per cent to 98 per cent. The minnows in the $10 million to $25 million range struggled the most, with only 67 per cent reaching their subscription targets.
“My personal opinion is you need to be of a decent size to consider a listing and if you go in too early, you just get lost among all the other small caps,”says Simon James, a HLB Mann Judd corporate advisory partner. “You want to get capital at the lowest cost and if you’re too small, the cost of capital is incredibly expensive, firstly in terms of the price of doing it and all the roadshows to actually raise the money, and secondly in terms of the discount you have to give to the market to ensure it gets away.
“You see the spike in share prices of small businesses on listing and that’s primarily because it’s been priced too cheaply, which isn’t in many business owners’ interests.”
So what are the alternatives? Listed below are eight possible non-IPO options for capital raising, with analysis of the availability, advantages and disadvantages of each one.
1. Engineer a reverse takeover
Recently, a number of technology companies have done reverse takeovers of mining companies in order to secure a back-door listing on the ASX. Bulletproof Networks and Decimal are two recent examples.
But James says this accounts for less than 5 per cent of the deals on HLB Mann’s books and the reason is that it is often so time consuming and expensive that you would be better of doing an IPO.
“Ultimately if you’re doing a back-door listing, the listed company has failed. You’re basically starting from square one, so you’re looking for potentially something the board has some interest or knowledge in, which may be totally different to what the company did before,” James says.
Brett Boynton, the co-founder and managing director of gold company Signature Gold (an HLB Mann client), adds: “A reverse takeover or back-door listing isn’t going to give you access to capital unless your story is good and there’s a particular pool of capital that would invest in you except that you’re not listed.
“It’s a very difficult thing to get right, not least because there’s a lot of lifestyle directors sitting on these boards who are very happy to just carry on taking five grand a month and they are not really interested in either being moved off the board or doing more work.”
2. Sell the company
The less risky model, particularly for technology entrepreneurs looking for an exit, is to sell to a cashed-up buyer like Microsoft, Google or Apple. Boynton points out that the falling Australian dollar is likely to make this option even more attractive because of the increased return from a sale in US dollars.
James says there is heat in the market for technology valuations and the prudent move would be to go for cash rather than scrip.
“Do US investors know how to value a technology company? If you look at the price-earnings multiples of some of these businesses... Freelancer is actually making money so that’s better than some of the other technology businesses that are worth billions and aren’t making money,” James says.
“I cut my teeth in London in the dotcom boom days making people very rich on paper listing all sorts of weird and whacky ideas but whether anyone actually made any money and the valuation is correct, there’s a difference between a paper valuation and a cash valuation, and if you sell to one of the majors, especially the Googles or Apples that are cashed up, you can sell your technology and get paid cash, it’s a hell of a lot better than sitting on [scrip]. The founder of Freelancer is worth x hundred dollars in paper but actually being able to convert that into cash and diversify his personal portfolio of assets is easier said than done.”
Matt Barrie did actually have an offer from Japanese company Recruitco to buy Freelancer for $US400 million. At BRW we think he was right to float the business on the ASX instead - but that won’t be true for every business.
3. Debt, otherwise known as bet the house
This is the most expensive option and will often involve mortgaging the family home, which is a risky move.
HLB Mann’s James quips that the problem with debt is that banks will usually only lend to people who don’t really need it.
“Usually the most expensive cost of capital is debt,” James says. “The banks are starting to lend a little more, the cash rate is on a 55-year low, and Westpac is expecting it to drop to 2 per cent by the end of the year. But even if the actual cash rate is low, the rate for a mid-market company is ridiculously high, and if you haven’t got property security to put on the table, you’re effectively at credit card interest rates if you can actually get over the line at all.”
4. Hit up your rich mates
Start-ups often tap into angel investment networks and find high net-worth individuals to invest seed funding. For example, young Melbourne entrepreneurs Chad Stephens and Chris Koch tapped family connections to secure investment from the founders of CarSales for their start-up 1Form, now sold to REA Group.
However, even assuming you have the right connections, HLB Mann has noticed this market is tightening.
“High net-worths were a popular source of money over the past couple of years in Australia,” James says. “We’ve got lots of people with cash floating around looking for alternative investments. We’re starting to see that one dry up a bit.
“I think people have been banging their heads on the walls in terms of accessing that cash. It’s very hard to get through the gatekeepers to actually get to the right person and then to be able to articulate your proposition in a way that gets it over the line. It’s very time consuming and costly way of doing it and unfortunately not much success around it.”
5. Get into bed with private equity
Fundraising from private equity investors can be a good option if you can pull it off. This was how Boost Juice founder Janine Allis grew her business, creating Retail Zoo as an owner of multiple franchise chains by selling a large stake to The Riverside Company several years ago. However, James says smaller and mid-market companies might find it a difficult market these days.
“Private equity from an Australian point of view has been hit hard over the last few years,” James says. “There are some funds that are doing well. But as fund sizes get bigger, the investment decisions seem to get bigger too.”
James cites figures from the Australian Private Equity and Venture Capital Association (AVCAL) that in 2013, private equity invested $5.5 billion in Australia and the average deal size was $109 million or new investments and $14 million for bolt-ons, which were also less common.
“The problem is private equity can afford to be very, very choosy so if you’ve not got a very smart business plan, an excellent management team on board, and a growth story that you can articulate, then you’re just wasting your time, because the guys are seeing all the deals coming through and can cherry-pick,” James says. “The advantage of private equity though, if you can get the right deal size and the right team behind you, is that it’s not just cash, unlike an IPO where it’s mums and dads and institutions, you’re getting an advisory board and network of people who can add value to the business.”
6. Get into bed with your competitor
Some companies might get a better result from creative solutions that don’t require cash. James suggests that mergers or partnerships can be a good idea.
“It’s a cash-free way of plugging a hole in the business. Whether you’re looking to enter a new market, develop new products, bring in some know-how, if there’s another business out there that’s already got that, why not join forces either formally or informally?” James says.
“Mergers are a lot more popular [at the moment], they’re harder to do, and take more investment time, but the chances are the people you’re merging with are sharing some of the same pain and if you get together maybe one plus one can equal three.”
7. Beg from the public
Traditional crowdfunding where people back projects for either altruistic reasons or to acquire “rewards” are a good option for businesses that need capital to develop a particular product. Listing a project on a site like Kickstarter or Pozible can work as a pre-order channel and lets the entrepreneur test the market before committing capital. The concept has been around a few years and there have been some great business success stories, making it an increasingly popular option.
But James is sceptical about the moves afoot to allow equity-based crowdfunding, arguing that it would be too onerous for entrepreneurs.
“The biggest problem with any fundraising is managing a diverse shareholder base,” James says. “If you get to the point where something has worked from a crowdfunding point of view ... and you end up with a million mums and dads owning a share each and you have to go to a shareholder vote every time you want to do anything, it would be a huge drag on the company,” he says.
8. Save for a rainy day
Do you actually need to raise finance at all? Perhaps you can achieve your goals the old-fashioned way, by growing revenue from customers and conserving cash within your business.
“The only other way is to save your own cash, retain your profits within the business, don’t distribute them out, keep reinvesting in the business itself,” says HLB Mann’s James.
Many successful companies have boot-strapped to get where they are today. A good example is software company PageUp People that became a multi-million dollar business through organic growth. It is only within the last two years that the founders Karen and Simon Cariss have taken on outside investment, to help fund expansion into Asia.
The upside is that it’s less risky, you don’t dilute your equity or take on costly interest repayments, and you can be confident you’re building your business on solid foundations rather than quicksand. The downside is that it is slower and your competitors may grab market share and entrench their position.
Posted by Caitlin Fitzsimmons - BRW on 6th February, 2014 | Comments | Trackbacks | Permalink
Negative gearing is a positive remedy
A new wave of Generation Y investors is entering the property market and many are using negative gearing as their way in.
ME Bank chief executive Jamie McPhee said high prices had forced many young buyers to enter the market as investors instead of owner-occupiers. ''What we're seeing is that people who are buying an investment property are still living at home or renting with a group of people,'' he said. ''When their financial situation improves when they've saved more, they can move into the home.''
According to the Australian Bureau of Statistics, the number of first home buyers has fallen to a record low, but these figures don't take into account those whose first property is an investment and Mr McPhee said the official number underrepresented the case. A recent national survey by ME Bank based on 1500 households found 15.3 per cent of Gen Ys were saving for an investment, while 24.7 per cent intended to buy a home to live in.
Mr McPhee said the rise in first home buyers saving for an investment was in the more expensive parts of Melbourne and Sydney.
First home buyer Foong-yue Cheah bought a three-bedroom house in Noble Park for $348,000.
But Ms Cheah, a 30-year-old procurement officer at RMIT University, quickly realised it was more viable to use it as an investment and rent a property closer to work.
Now living in a two-bedroom flat in Brooklyn with her fiance, Jonathan Lee, she is receiving $250 rent a week from her Noble Park investment.
''My income is above a certain tax bracket, so it makes sense to have a property that may be negatively geared so that I can claim it back,'' she said.
''For the amount that we pay in rent, it just made more sense to live in the Brooklyn area. For the same amount of money we'd be hard pressed to be able to mortgage something this close to the city.''
A survey conducted by Mortgage Choice in 2013 also pointed to a new generation of home buyers using investments to enter the market.
The figures, based on about 340 Gen Ys surveyed nationally, found 40 per cent of them were looking for an investment property as their first purchase.
Century 21 Australia chairman Charles Tarbey said most people who used this strategy didn't have a choice.
''They're going to have to buy an investment property because they can't buy what they want to live in [near] where they work,'' he said.
''They're just trying to get into the marketplace more than anything else.''
AMP Capital chief economist Shane Oliver, who also bought an investment property as his first purchase, said renting and investing had many benefits.
''Using the tax system - negative gearing - to get into the property market has a lot of benefits for first home buyers,'' he said. ''You can buy a property bigger or more valuable than one you can actually afford to live in [and] make it into a suburb you ultimately want to live in. It just means you may not move into your dream home for two or three years.''
And these first home investors typically target units, says St George chief economist Hans Kunnen, because the loans are smaller and more manageable.
But it's not for everyone, Mr Kunnen said, only for those who are ''fairly forward thinking and very financially literate''.
Posted by Christina Zhou - The Age on 2nd February, 2014 | Comments | Trackbacks | Permalink
Why credit cards’ free travel insurance could cost you
Is it worth using the free comprehensive travel insurance offered by many credit cards, or are you better off just buying the cover?
For most of us, having free cover means we use it because it doesn’t cost anything and it’s there. But at least take the time to check the level of cover you’re being offered and whether there are potential pitfalls that may make it more cost-efficient in the long run to pay for a more comprehensive policy.
The Australian Financial Review asked comparison site finder.com.au to compare insurance policies offered free to card holders. All policies offer unlimited medical cover, but there can be other differences, such as the limit on laptop replacement in the event of theft, that can make the difference between being irritated or thrilled by free cover.
“It’s very unusual to get something for nothing, especially when it comes to credit cards,” says Finder spokeswoman Michelle Hutchison. “While it’s great to see that many credit cards offer complimentary travel insurance, there are usually costs involved, and that may end up costing travellers more than taking out cover from a direct provider.”
The excess, how much you have to pay towards replacing something when you make a claim, can be a key irritant, especially when you have to pay it more than once. When you buy a travel insurance policy you can pay a bit extra to waive the excess – also called an “excess eliminator” – but most free policies offered to credit card holders don’t offer this.
And as you can see from the table, some of the policies compared charge a flat $250 excess while others vary this depending on the nature of the claim. As an example, Hutchison cites the ANZ Low Rate Platinum card that does not charge an excess on travel delays, gold and surf equipment.
What about that stolen laptop? If you’ve got the ANZ card, you’ll be able to claim up to $4000 a laptop, but $5500 in total on the Bankwest Breeze Gold card or Bank SA Platinum card, both owned by Westpac.
If you’re hoping to use your card’s free cover on your next trip, make sure you know how to activate it. Years ago, you were required to pay for the whole trip on the card, but now it ranges from $250 to $1000.
Posted by Debra Cleveland - Australian Financial Review on 23rd January, 2014 | Comments | Trackbacks | Permalink
Owning your own little piece of paradise
Mark Anderson was always peering in real estate agency windows whenever he was on holiday. Noting the prices, checking out the features. He was like any typical holidaymaker who dreamed of owning their very own weekend escape. ''I wanted somewhere I could treat as my own, as opposed to a caravan park or someone else's holiday house,'' he says.
''I liked the idea of personalising a place and knowing your things will be there instead of having to pack everything in the car.'' Anderson and his wife Louisa had been thinking of buying a holiday house for 10 years. In 2012, their fantasies turned into reality when they purchased a property in Venus Bay, on Victoria's south-east coast.
''We had always wanted a house by the ocean,'' he says.
''And I love fishing, so a place like Venus Bay offers surf, river and inlet options. It's also commutable in that it is a two-hour drive from Melbourne and we can make a day trip if necessary, or leave early on a Monday morning to start the working week.'' The three-bedroom, fully-furnished house cost the Andersons $260,000. They estimate it would be worth $270,000 now.
But making a return was never the aim, says Anderson.
''If you are only measuring an investment by cold, hard cash it probably isn't a good investment,'' he says. ''I like to throw in some of the intangibles of lifestyle and family benefits and we bought our holiday house with that in mind. Financial advisers were keener on me buying their investment products and inner-city apartments, but there is more to life than dollars and cents.''
The couple and their three adult children stay at Venus Bay as often as they can and also rent it out for $950 a week or $250 a weekend. But the occupancy rate is just 13 per cent. It is often leased during school and public holidays, when the Andersons would like to be there.
This is the downfall of the ''hybrid holiday house'' theory, says buyer's agent Chris Gray.
Worst of both worlds
''In the peak periods is when you want to use a holiday house, but that's when it's going to get the best rent,'' he says.
''So if you've got a place in a ski resort, you want to use it in the middle of winter.
''Or if you've got a place on the coast, you want to use it over Christmas, New Year and the summer season and that's when everyone else wants to use it, when you would be making a fortune.
''So unless you want to do the opposite and go to a ski resort in the middle of summer and to the beach in winter, it's not generally going to work out as well.'' The common mistake most holiday house buyers make is relying on their property as an investment. Gray says weekenders are luxuries, not nest eggs.
''People choose holiday homes purely on emotion,'' he says. ''They're not buying in the highest capital growth area, not looking at tenancy, not looking at what industry is supporting the local area.
''They're buying based on where they want to hang out on the weekend and it's the worst possible way to invest.''
During the global financial crisis holiday homes were often the first assets to be sold off, says Gray. However, today there is more economic stability and with Australia's property market performing strongly, Gray says it's an opportune time to investigate holiday homes.
''Now's not a bad time to get in,'' he says, ''Everyone's has got over the GFC and they probably have more equity than they had a year or two ago.''
Angela and Rob Swincer own two holiday apartments in picturesque Port Lincoln, South Australia. The couple bought the properties purely as holiday accommodation and have never spent any of their own holidays there.
When they bought one of the properties in 2009, the occupancy rate was 45 per cent.
Today it's at 80 per cent, which Angela attributes to the property having its own website, Facebook page and increased advertising online and at the local visitor information centre.
''I might put in two to three hours a week on social media and answering queries, and it's made a huge difference,'' she says.
Both of the properties have absolute water frontage, so the rental prices are between $220 and $250 a night.
It may seem high, but after paying for a cleaner and ongoing maintenance costs, Swincer says she won't be retiring any time soon.
''Eventually it will be a good investment,'' she says.
''When it's busy it's good to have some extra cash coming in, but a lot of that is spent back on the property.'' Holiday home dos and don'ts
Summer is the season for holiday house purchases. But before you take the plunge, Jessica Darnbrough from Mortgage Choice says there are some important rules of thumb:
- Contain your search to properties within a two-hour drive from the CBD. These houses are much more likely to have higher occupancy rates than those further afield.
- Ensure you can survive the lean periods. Don't base your loan repayments on regular rental returns because there are sure to be quiet months.
- Look for a property that's in good shape. You don't want to be spending a small fortune on repairs. Holiday houses are for holidays, not work.
- Aim for a deposit of at least 20 per cent. It's not essential to own another property before buying a holiday house, but it is crucial to have a meaty deposit.
- Speak to local agents and research online booking sites to get an idea of what rental returns and occupancy rates to expect. Does your holiday house destination have a proven rental market?
- Choose a house with an ample kitchen. Tourists are likely to want to save money by cooking for themselves on holiday.
Posted by Kate Jones - Money Manager (Fairfax Media) on 22nd January, 2014 | Comments | Trackbacks | Permalink
Five tips to clean up your credit history
Only have one or two credit cards? Well, shine that halo – in the new regime of credit reporting you’ll be a “good” risk and more likely to get the thumb’s-up for a loan.
So far credit bureaus have only reported “black marks” on consumers’ credit worthiness. But thanks to new rules from March 12, consumers can win points for paying bills on time and having fewer lines of credit because banks and financial institutions will be able to view both the good and the bad on their credit history.
“Put simply, consumers get the benefit of having their good conduct recognised and taken into account when a credit provider is considering their application,” says Kim Jenkins, managing director of credit bureau Experian. “It will also allow consumers to negotiate better terms as they will be aware of their credit worthiness through their credit report.”
But what about if you’ve become a profligate credit card holder and opened four or five cards because you want one for the free travel insurance, another for the loyalty program and others because of their low rates? Even if you’re not using all of them, a potential lender will take a dim view.
“From March lenders will see all the credit accounts you hold. So if you have four credit cards and the limit on each is $10,000, while they don’t know what the actual balance is they will assume the worst – that you owe $40,000 – and turn you down for a loan,” adds Jenkins.
But there’s time to redeem yourself, says Alex Parsons, CEO of financial comparison website RateCity.
“A consumer who has had a sketchy credit history with a black mark in the past but is now working hard to rectify their credit situation stands to benefit the most from the new credit reporting,” he adds.
“That’s because banks will have more insight into their credit file. But this consumer will need to be diligent in making an effort to improve, because the banks will be watching.”
1.Check your credit report annually
You can request one free copy of your credit report each year, says Jenkins. You get this from the credit bureaus, including Experian, Dun & Bradstreet and Veda.
2.Be careful about shopping around
Having too many credit accounts will highlight you as a bad credit risk. If you have more than just a few credit cards, you’re better off consolidating them into one account. Also reduce any unnecessarily large credit limits you have, suggests Parsons.
3.Beware default payments
This is where a payment is worth more than $150 and is 60 days overdue. By contrast, a missed payment – for example if you are on holiday and miss paying your phone bill by a few days – will not go on to your credit file.
4.Seek help early
If you’re having difficulty servicing a debt, ask your credit provider for help such as setting up a payment plan. This way you keep your commitment to pay the debt and the provider gets the money repaid.
Set reminders on your fridge or on your phone so you don’t miss any payments. Set up automatic direct debits from your transaction accounts to pay bills before the due date, says Parsons.
Posted by Debra Cleveland - Australian Financial Review on 21st January, 2014 | Comments | Trackbacks | Permalink
Time to tackle debt and kickstart your finances
Back in the office and ready to tackle a new year? Kickstart your own finances with an eight-point plan that’s more about inspiration than just a mechanical checklist.
1. Pick a dream
What’s the one thing in 2014 that is within reach and that you would love to achieve? Is it getting more into superannuation, paying a big chunk off your mortgage, setting aside more for school fees or getting your credit card under control? Picking one or two rather than a huge list of money “wannabes” means you’re more likely to feel it’s achievable and thus gun for it.
2. Take action
Work out what you need to do to achieve your target. If you’re concerned about whether you’ll have enough for retirement, play with online calculators like MoneySmart to see what your current super balance will give you in annual income when you retire. Financial planner Craig Wilford of Nexia Australia points out economists say we will need about $1 million to retire comfortably but it’s probably more helpful to think in terms of what your end super balance will give you in annual income after retirement. Working with the calculator helps show you how your annual retirement income increases in line with bigger super contributions, for example up to the $25,000 annual “concessional” (or pre-tax) cap if you’re under 60 or $35,000 if you’re older. If it’s your mortgage you want to focus on, there are terrific online calculators that show how compelling it can be to pay extra and save potentially hundreds of thousands of dollars in interest and cut the term of your loan. Most of the banks have these calculators, as does MoneySmart, the consumer finance website of government watchdog the Australian Securities & Investments Commission (ASIC). Look for credit card calculators if this is where you want to concentrate your efforts. The ideal is to get to a situation where you pay off the card in full each month and so don’t pay any interest. If you think the calculations on mortgages are compelling, this is even more so with credit cards where interest rates can be around 19 per cent compared with mortgage rates of, say, 5.5 per cent.
3. Tailor-make a budget
You’re better off drawing up or refining your budget once you know what your main financial goal is going to be. Otherwise it can be a reasonably pointless exercise trying to cut back discretionary spending just for the sake of it – far better to know exactly where you’re going to redirect funds and know it’s going to make a big mark.
4. Tidy up tax
While this sounds like a no-brainer, financial advisers tell me there are many, many instances of clients paying tax that could very easily have been avoided. One example was of someone who had sold a business and “parked” the proceeds of several million dollars in a joint bank account with his wife. As a top taxpayer he ended up paying 46.5 per cent on half the interest earned on the account for the several months it took him to realise that the bank account should have been in his wife’s name as she is not in paid work so has a much lower tax rate. Wilford points out this is also a good time to review investment structures like a family trust, DIY super fund or a company structure. If you have one, is it still working for you? If you don’t have one, are there good reasons why you should consider one?
5. Understand investments
Whether these are held directly or in a super fund, if you don’t understand the investment should you be in it? Key is knowing your risk profile, says Wilford – how much risk is appropriate for you depending on your age, and whether you’re getting as much return as possible without taking on too much risk.
6. Plan for rainy day
If you have debt and dependents, do you have enough insurance in place so that loans would be covered if something happened to you or your partner? Review your cover each year – especially as you pay off debt and kids grow up when you may not need to keep the cover at current levels.
7. Sweat the small stuff
At the time of the year when many households are still recovering from high credit card bills thanks to Christmas spending. David Simon and Rachel Stocker from BT Financial Group suggest budgeting for this in a separate account – starting now. “Look for an account that has low account-keeping fees and a high interest rate. Set up a regular savings plan, where a regular amount is allocated from your pay or automatically withdrawn from your everyday bank account and deposited to your Christmas savings account,” the pair say in an address to the Davidson Institute, a Westpac financial education initiative.
8. Be inspired
Keep plugged in to how other people reach their financial goals and what you can learn from that. Joe Sirianni, executive director of mortgage broker Smartline, tells the story of how a young couple about to have their first child who wanted to buy a house with a garden near family but could not afford it. So they approached it differently and bought two investment units with the intention of reducing the mortgage as much as they could in five years. They then used the equity in the apartments to buy the home they wanted.
Posted by Debra Cleveland - Australian Financial Review on 20th January, 2014 | Comments | Trackbacks | Permalink
Market ready for first-time buyers
Look beyond the figures for signs of a resurgence in 2014.
First-home buyers were a rare commodity in the property markets in Melbourne last year, with the ending of state government incentives for buyers of existing properties and ongoing competition from investors leaving them on the outer.
Figures from the Australian Bureau of Statistics last week showed that the number of first-home buyers as a proportion of total borrowers nationally fell to a record low of 12.3 per cent in November. Experts say strong prices growth is one of the main reasons for this drop off and it is forcing most to continue renting, with only a lucky few able to turn to their parents for help.
But there is some optimism that these buyers will return this year. Among those predicting a turnaround is national real estate group LJ Hooker, which estimates 110,300 first-home buyers will enter the market this year, up from 90,551 last year. Victoria should have 30,000 new first-home buyers and NSW 26,000.
Georg Chmiel, chief executive of LJ Hooker, attributes the recent decline in first-home buyer numbers to demographic, social, economic and price-related factors, as well as cuts in first-home owner grants, but he believes "the overall outlook is strong and encouraging".
It's a good time to buy in Melbourne, he says, although cost will determine where buyers look, with the inner suburbs proving tougher for first timers and parents in some cases helping out with deposits.
Melbourne-based property consultant Peter Hay says the fact that there has been fewer first home buyers in the market means now is a good time for them to buy - particularly given the current low interest rates.
"(A)nd they should try to get a fixed rate loan for as long as possible," he says.
Simon Cohen, of Sydney-based buyers' agents CohenHandler, expects continued competition in
that sector of the market this year, but says conditions will remain good for first-home buyers looking to purchase.
Angie Zigomanis, senior manager with BIS Shrapnel, is expecting a proportion of first-home buyers to be armed with a deposit during 2014.
The removal of the $7000 grant at the end of the June for established dwellings, and its replacement with a $10,000 grant for new or off-the-plan homes, has been offset to a significant degree by stamp-duty concessions for new properties, Zigomanis says.
This week's ABS figures showed that there were actually more of these buyers in Victoria in November compared with the previous month. First-home buyers made up 12.2 per cent of new housing loans, up from the record low of 11.7 per cent in October.
But not everyone is optimistic. Peter Bushby, president of the Real Estate Institute of Australia, predicts that, without a co-ordinated and strategic approach by governments at all levels, the return of first-home buyers to the market "may be delayed for quite a while".
He says that while interest rates are expected to remain low, the difficulty of raising a deposit remains "the major concern of first-home buyers".
Strong auction results pushing up prices in Melbourne and Sydney were also a concern, "pushing first-home buyers further away from being competitive with investors and changeover buyers".
Do's and don'ts for first home buyers
- Do your research when looking to buy. This includes spending time getting to know an area - its pros and cons - and what properties there typically sell for.
- Don't be afraid to seek advice. Fairfax-owned Australian Property Monitors offers a Property Report for $49.95.
- Do be patient - you don't need to land the first property you come across.
- Don't allow your emotions to get the better of you when buying. This is particularly the case of buying at auction.
- Do buy within your means. This means giving yourself financial wiggle room in case of unforeseen circumstances such as interest rates moving up or the loss of employment.
- Do be prepared to compromise - there's no such thing as a perfect property.
- Don't overlook obtaining a building inspection, particularly with regard to termites.
- Do get a fixed priced contract if buying a house and land package and make sure you're aware of any additional costs.
Sources: Peter Hay, Hay Property Group; Simon Cohen, CohenHandler Property Advisory; apm.com.au
Posted by David Adams - Domain (The Age) on 18th January, 2014 | Comments | Trackbacks | Permalink
How to buy an investment property interstate
Most property investors usually start with a property in an area they know well, or at least in the city in which they live. But buying a property investment in another state is also a smart strategic move – and if prices in your own city have reached their zenith, it can be more affordable.
Peter Bushby, the president of the Real Estate Institute of Australia (REIA), says the advantage of buying interstate is that you can benefit from the different peaks and troughs of the property cycle. If you do your homework, you could buy at the bottom of the cycle in an up-and-coming area interstate and enjoy strong capital gains in the near future.
“In addition, diversification is a useful strategy in any investment portfolio,” Bushby adds.
However, doing your homework is key. “No matter where you’re buying, you really need to investigate the market you’re looking at and understand the opportunities,” Bushby says. “Where there’s opportunity, there is also the potential for risk and you need to be mindful of that.”
Where do you start?
Your investment strategy should be based on in-depth research and analysis of the interstate area or suburb you have earmarked for your next investment property.
Say, for example, you have set your sights on the outer Melbourne suburb of Lynbrook – identified by property market expert John Lindeman of Property Power Partners as being among the top 10 boom suburbs of 2014. Begin by researching the suburb online to gain an understanding of the local economy, the area’s rental demand and potential for capital gains.
“Look at economic studies of the region you are researching,” Bushby says. “Is there population growth that would fuel demand for rental properties? Are there any threats that would inhibit rental demand? For example, a large employer potentially shutting its doors?”
Bushby also recommends visiting the area before making an investment, to do some on-the-ground research and meet with local agents. “It’s not your patch so you may not understand it as well as your own city or state,” he says. “It’s useful to visit the area if you haven’t been there before.”
Property management from afar
Another important aspect of buying an investment property interstate is that you won’t be handily nearby for regular inspections or if a tap is leaking. You must, therefore, find the right estate agent to manage the property and factor in travel costs for inspections or any issues that may arise.
“You need to have skilled people there to manage your property and you need good reliable support in the area for any maintenance that will be required. You should factor that into the cost of the investment,” Bushby says.
“The underlying theme here is to do your homework,” he adds. “Do as much risk assessment as you can before stepping into anything like this.”
Posted by Rate City on 18th January, 2014 | Comments | Trackbacks | Permalink
How to turn yourself into a property developer in 2014
RISING house prices are tempting investors back into property after a few lean years, and many are considering taking the next step and chasing bigger bucks through property development.
It can promise more riches than simple investing but has more potential traps for beginners, and a whole new world of knowledge to master.
Author, property developer and university lecturer Peter Koulizos says there is a great opportunity to make money in property development, "but there is also a great opportunity to lose a lot of money, because the risks are higher".
"Most capital city house prices are still below their peaks of three years ago and interest rates are very low, so it makes property development more affordable for the average mum-and-dad developer."
Koulizos says research is the vital first step. "That starts with the council," he says. Every council has a development approvals process and plans that outline minimum block size, minimum street frontage and other issues.
Developers need to research prices and know how much a property is worth. Koulizos says long-term investors may pay an inflated price for a property but are still winners if they hold it for 10-15 years, but a developer looking to turn it over faster does not have as much time to make up for their mistake.
"Get a fixed-price contract from a builder, and one where they guarantee the build time," he says. "In development, time is money. The longer it takes, the more your holding costs. And avoid changing plans once you have signed off on them."
Koulizos recommends writing down the worst-case, best-case and probable scenarios, and you should aim to make a gross profit of 20 per cent on the project.
Metropole Property Strategists chief executive Michael Yardney says now may not be the best time to start a new development, because house prices have already picked up and developments usually have long time frames - often a two-year process.
"A good way for the beginners to start is through renovations. It has much shorter time frames and you also learn budgeting, dealing with builders and dealing with banks," he says.
Yardney says it is vital to start small. "You are going to learn most of what you will learn in the first two or three developments. It's going to cost you more than you thought." But property development is a great strategy because you are not just waiting for the market to rise - you buy assets at wholesale prices and are able to create capital growth, he says.
Yardney says it is vital to surround yourself with a good team of experts. "If you are the smartest person in your team, you are in trouble," he says.
SOL Results property coach and developer Stan Kontos says his top rule is to ensure you make your money when you buy the property, not upon sale.
"Undertake a feasibility study for costs such as demolition, subdivision and so on, based on today's price, not a projected future price," he says.
"Don't depend on it going up and, if and when it does, consider this a bonus."
Kontos says people who do not like risks should not go into property development.
"Find a mentor, be teachable and get taught. Don't make the mistake of learning as you go."
Kontos says beginners need equity of about $50,000 to $100,000, plus a steady cash flow, and should only pick developments they can afford.
"Start by researching a specialist area," he says. "The risk is reduced when you understand the area and the council zonings, as well as any future changes."
EIGHT STEPS TO SUCCESS
1. Before looking at land, work out your finance and team of advisers including real estate agent, solicitor, architect and development manager.
2. Check the local council's policy toward development and come up with a concept.
3. Buy land at a price that allows you to make a commercial profit.
4. Get development approval, which can take months.
5. Get working drawings prepared so you can then obtain a building permit.
6. Obtain quotes from builders and finalise finance for the construction period.
7. Next comes the building stage, lasting 7-12 months. Most developers never get their hands dirty, and are more like a producer of a movie.
8. At final completion, the project is refinanced and leased, or sold. Be sure to always have an exit strategy before you start.
Source: Metropole Property Strategists
Posted by Anthony Keane - News Limited Network on 13th January, 2014 | Comments | Trackbacks | Permalink
Should you pay off the mortgage or invest elsewhere?
Homeowners who are more focused on their own mortgage than how the next generation will get into the property market face an interesting choice once they’re seven to 10 years into their home loan.
By that stage they’re usually earning more and have extra funds to either power down the biggest loan they’re ever likely to have, or start building other assets.
Advisers argue there are two good reasons to pay off your mortgage.
The first is it’s a non-deductible debt, meaning you don’t get a tax deduction on the interest because it’s not for income-producing purposes as it is on an investment loan.
The second is, by getting rid of the debt, you’re in effect getting a return equivalent to your loan’s interest rate. Even better, it’s tax-free because you’re not actually earning it but saving yourself from paying it.
Using the same amount to invest would mean you’d have to get an even higher return to justify doing this over using the funds to pay off your loan.
Let’s look at someone paying the top tax rate of 45 per cent (not including the Medicare levy) who is paying 5 per cent on their mortgage. The return they’d need from another investment to better the after-tax savings of repaying the mortgage would have to be at least 9.1 per cent. For someone on the next tax bracket of 37 per cent, the required return would be 7.9 per cent.
Advisers such as Mike Ingham of Godfrey Pembroke say this is a rule of thumb only because it doesn’t take into account potential capital gains. You can work out the required return yourself, based on your own tax and mortgage rates, by following these steps: subtract your tax rate from 100, divide your loan interest rate by this figure, then multiply by 100.
Whether or not you choose to use all your extra cash to pay off your home loan, it’s vital to set an “end date” and to know exactly how much extra interest you’re up for by languishing with the standard 25-year loan.
Take a $600,000 mortgage with a 5 per cent interest rate. According to Commonwealth Bank’s home loan calculator, the monthly repayment would be $3508.
Let’s look at the small print behind this. What you’re actually committing yourself to is paying a total of $1,052,113 over 25 years. You’re not just repaying the $600,000, you’re also paying $452,113 in interest.
But what if you could pay an extra $1000 a month? Changing your monthly repayment to $4508 would cut your loan time to 16 years and three months. Your total payout would be $876,779, meaning interest of only $276,779 – a saving of $175,334.
While these are powerful persuasions, remember that compound interest has the opposite effect on investments: the longer you’re in them, the more time they have to accumulate. Let’s use, as an example, a couple we’ll call Mark and Amanda. Mark is 41, earns $150,000 a year and has $150,000 in super. Amanda is 38, earns $120,000 and has $90,000 in super.
One of the couple’s biggest expenses is childcare, which costs them about $3200 a month. Their twin sons are about to start primary school, and they’re debating what to do with the money they will save on childcare.
Working off the MoneySmart retirement calculator set up by the Australian Securities and Investments Commission, if they both retire at 61 their combined retirement income will be about $57,000 a year (in future dollars) assuming they continue making no pre-tax or salary-sacrifice contributions to super, but rely on compulsory super.
But if they salary-sacrifice $24,000 a year into super ($11,000 for him and $13,000 for her so they don’t exceed the $25,000 annual contribution caps), this will boost their annual retirement income to almost $76,000. That still leaves $14,400 a year from the savings on childcare.
Say the couple has the $600,000 loan mentioned previously, paying the extra $1200 a month will pay off their loan in 15 years and three months and cut their interest bill to $257,329. The overall interest saving by paying it off 10 years early will be almost $195,000, a welcome boost to any wealth creation plan inside or outside super. So there’s a good argument for paying off your home loan early and investing at the same time.
For most people, the latter will be into super, unless they are already close to breaching super caps.
Equity Trustees adviser George Bourbouras has a good adage: put away 20 per cent of your gross income every year into retirement savings. It will not only boost your nest egg but “condition” you for retirement where you won’t be able to live beyond your means.
Posted by Debra Cleveland - Australian Financial Review on 13th January, 2014 | Comments | Trackbacks | Permalink
Invest for the value and wait
Agents urge buyers to look at suburbs neighbouring the more favourite blue-chip areas.
Spotswood, the tiny suburb bounded by the Westgate Freeway, the railway line and the Yarra, has had little press since it lent its name to a 1990 comedy, starring Anthony Hopkins. But Brad Teal, director of Brad Teal Real Estate, believes the area will soon star again, this time as a property darling.
''Spotswood is a long, skinny postcode that is undergoing urban renewal around the railway station and I think it will enjoy very strong prospects in years to come because it's actually closer to the CBD than [Williamstown], with the Westgate's freeway access and the train.''
Mr Teal, whose agents cover Melbourne's north-west, also sees the potential for good buying in Niddrie, Airport West, Fawkner and Hadfield. The common factor in all those areas is that they are ''poorer sisters'' to more well-known suburbs, namely Williamstown, Essendon and Coburg, and are likely to benefit as those ''epicentre'' areas grow in value.
''Essendon rises, and therefore Niddrie and Airport West will rise afterwards as people get priced out of the epicentre marketplace.''
Peter Hay, director of Hay Property Group, suggests buyers looking for one or two-bedroom units should consider North Fitzroy.
''One or two bedrooms, are still sub $650,000, whereas Elwood and St Kilda have already topped that now. They have jumped $100,000 in 12 months, so I'd look just inner north. If you want four bedrooms, two bathrooms and a double garage, the other areas that are picking up, and still have growth to go, are Rowville, Ferntree Gully, Vermont, Wantirna.''
Buyers advocate Peter Rogozik steers clear of the term ''hotspot'', believing it can lead naive buyers to purchase in areas without paying enough attention to the fundamentals of good property investment.
However, he sees potential for buyers in inner north and inner western suburbs that have undergone gentrification, such as Footscray, Kingsville, Sunshine and Coburg. ''You can buy in these areas for hundreds of thousands of dollars less than your traditional blue-chip suburbs and not sacrifice any type of capital growth.''
Mike McCarthy, chief executive of Barry Plant, is a big fan of Frankston. ''A lot of people talk about Melbourne getting too expensive and Frankston, yes it's a long way out, but it has easy access now and there's really great buying there with really great value for money.
''In terms of affordability, it's hard to find anywhere in Melbourne that offers as nice an area to live in, with that sort of amenity, at that price point. The other area I like is Reservoir in the north … there's probably an oversupply of properties and there's a lot of potential for developers with big blocks.''
Mr McCarthy says areas like Reservoir offer buyers the ability to set themselves up for retirement with the strategy of securing a big block to use for their family home now, with the aim of subdividing later. ''There are huge blocks out there that you could probably put two, three or four townhouses in potentially. You might find yourself, in 10 years, sitting on a really valuable piece of dirt.''
He is also keeping an eye on Ringwood, which has great access to the city with the bypass, and is likely to benefit from the opening of megamart Costco and the future East West Link. Buying tips for 2014
- Areas where the median price point has moved significantly less than Melbourne's average can offer good opportunities for future growth.
- Look out for signs that an area is undergoing a renewal.
- Factor in the impact of major infrastructure projects, such as the East West Link.
- Focus on areas within five to eight stations of the CBD, which will ensure strong rental and owner-occupier demand in the future.
- Aim to buy a house that has land.
- Check owners corporation fees, because it's the hidden costs that reduce investment return.
- Be aware of the oversupply of new apartments in the inner city.
- Opt for older style or period homes that can't be replaced.
- Remember to factor in the other fundamentals needed for capital growth, such as transport, schools, streetscape, and proximity to lifestyle destinations, including cafes.
Posted by Kate Robertson - Domain (The Age) on 11th January, 2014 | Comments | Trackbacks | Permalink
Pros and cons of buying off the plan
Open the real estate section of any newspaper and you are bound to come across glossy advertisements spruiking a shiny new development being built in a prime location in your capital city, usually close to the CBD and established amenities.
With capital cities across Australia suffering from a housing shortage – which subsequently pushes up property prices – the proliferation of new developments is seen as contributing to meeting the housing needs of our growing urban populations.
One such development in Melbourne, Live Brunswick East by Little Projects, is selling off-the plan one-bedroom and two-bedroom apartments from $340,000 just 6km north of the CBD. In the inner Sydney suburb of Newtown, another new development Industri is selling one-, two- and three-bedroom apartments as well as terraces off the plan.
Buying off the plan means signing a contract to buy a home before it has been built. While there are benefits to buying an apartment off the plan, there are also drawbacks.
What makes it an attractive option
Property lecturer and author Peter Koulizos says the primary attraction of off-the-plan apartments for buyers is their location and accompanying lifestyle. “These apartments are often in desirable locations,” he says. “For owner occupiers, their number one priority is not to make a profit – it’s to enjoy a certain lifestyle and that is the appeal of buying off the plan.”
If you enjoy the thought of living in a brand new home that has had no other inhabitants before you, then buying off the plan may be for you. If you get in early, you have your choice of apartment that will suit you most, rather than choosing from what’s left at completion.
There can also be stamp duty savings, depending on which state you live in. In Victoria, you are eligible for a 40 percent reduction on stamp duty if you buy a newly constructed home for $600,000 or less. In NSW, you do not pay any stamp duty for new homes under $550,000 and receive a discount on homes between $550,000 and $650,000.
What can go wrong
Buying off the plan means you are buying something you can’t see – you are relying on the developer’s display suite to portray an accurate depiction of what your future home or investment property will look like. The result may not always be what you expect. Koulizos says developers can make changes during construction if they are running out of money, choosing cheaper finishes to finish the job on budget.
“Changes can be made without your permission,” he says. “It will be written in the contract in very fine print.”
Furthermore, Koulizos has researched the capital growth of off-the-plan apartments around Australia and has found that many apartments end up selling for less than their original price, especially if sold within four or five years of construction.
“You buy something at today’s prices in 2013 to settle on something in, say, 2016. The theory is that property price will have gone up in three years,” he says.
And generally, that’s true. What can happen with off-the-plan properties, however, is that investors tend to snap up these properties with the intention of on-selling their contract at a profit before the development is completed. “So you have a large number of apartments going up for sale in the one development, which invariably brings down the price of all other apartments,” Koulizos adds.
Another issue with buying off the plan, according to Koulizos, is the potential of an oversupply of new developments, such as what happened in Melbourne’s Docklands, where an oversupply has meant property prices have not increased in value in 10 years. Pyrmont in Sydney is another example of an oversupplied area.
If you are considering buying off the plan, Koulizos recommends the following checklist:
- Ensuring there is at least one car park on title.
- Look for views that can’t be built out.
- High-quality fittings and finishes.
- Quiet location.
- Read the contract carefully.
Posted by RateCity on 11th January, 2014 | Comments | Trackbacks | Permalink
Business calls for negative gearing review
Negative gearing tax breaks are inflating property prices and pushing home ownership out of reach for younger generations, business leaders warned.
Aussie Home Loan founder John Symond told AFR Weekend the tax break favoured investors and was distorting the property market.
“Negative gearing is a great tax break, but it needs a total overhaul to make it fairer. First home buyers have no hope of getting into home ownership these days unless they’re helped by their families,” Mr Symond said.
Company director Elizabeth Proust and Stockland chairman Graham Bradley have joined growing calls for a policy overhaul to help fix the distorted housing market.
Investors who borrow to buy property can claim tax deductions for the interest, reducing tax bills on rent and other income. With median house prices going up 9 per cent in the past year, critics said negative gearing gives investors an unfair advantage over people looking for a home to live in, driving up prices and relegating first home buyers and the less wealthy to a lifetime in the rental market.
“It just isn’t a level playing field when you have first home buyers trying to put together a deposit when they’re up against older people with deeper pockets,” Ms Proust said.
The policy is entrenching disadvantage by pushing buyers into cheaper property on the city fringe where transport, health and education isn’t as good. “The policy is making the cost of home ownership so high,” she said.
Mr Bradley said 15 to 20 per cent of the housing stock sold by Stockland is bought by investors, many of whom would reconsider the investment if negative gearing did not exist.
A father of two who have bought homes within the past five years, Mr Bradley acknowledges capital city house prices are now “pretty high” but has concerns that steps to address the policy’s effect in the housing market would affect other asset classes.
“Negative gearing is a significant policy and any changes to it have to be addressed holistically, you couldn’t change the way it applies to residential housing without having unintended consequences for hotels and shops and so on,” he said.
Addressing inequity effectively
Mr Bradley argues other policy levers, including incentives targeted to first home buyers and stamp duty concessions could be more effective at addressing inequity in the housing sector than reforms to negative gearing.
But placing caps on the level to which the investment property can be geared could also help people on the market’s bottom rungs, he said.
That way, investors would be forced to stump up cash for a deposit, rather than simply funding purchases with equity in other properties.
“Depending on where the cap was set, it may deter some investors from investing in housing, and it would also mean the government got to tax income from the property more quickly,” he said. An alternative could be to place a cap on the proportion of expenses incurred on a property that can be claimed as tax deductible, he added.
But any reforms should not be made retrospectively. “It should only affect new investments, that way any impact it has is gradual,” Mr Bradley said.
John Symond reckons putting a cap on the value of property which can be negatively geared is another way to give first home buyers a better shot of competing with investors.
But if the cap is too low, it could see investor demand becoming even more concentrated in the parts of the market targeted by first home buyers, he said.
“It’s been great for my business, but the government really needs to look at capping it a level,” he said.
The number of first home buyers going through Aussie Home Loans for finance has dropped by 50 to 60 per cent in the past four years.
“They’re walking away from what used to be the great Australian dream,” he said. “But with interest rates at their lowest point in history, and house prices only just coming off the bottom, if first home buyers can’t afford property now, they never will,” he said. “I’m very pessimistic on the outlook for them.”
Agents across the country report a rising incidence of first home buyers missing out to investors.
“I feel terrible for younger people turning up to auctions and can’t quite get there [on price] when they thought they might be able to own a property before Christmas . . . missing out like that again and again can be really disheartening,” Richardson and Wrench agent Andrew Blaxland said.
Events manager Clare Downes, 28, bought her first home in late November after an exhaustive 18-month search in which she lost out at auctions to investors.
“It was frustrating. At auctions I’d stand there thinking ‘they’re paying so much for a home they don’t even want to live in it’ . . . I know that’s the way it is, but you can’t help but think it’s unfair.”
Posted by Samantha Hutchinson - Australian Financial Review on 11th January, 2014 | Comments | Trackbacks | Permalink
How your kids can get a home of their own
Farmer and retired businessman Trevor Eriksson argues that first-home ownership has been “bloody tough” for every generation, but that kids of today face challenges their predecessors didn’t.
“Jobs these days aren’t as permanent as they were when we were all starting out, and people seem to find themselves going through stints of joblessness a lot more,” he observes. “You can’t go out and just buy a home any more. You have to think a lot more these days about what’s going to happen down the track.”
After a year of soaring price growth in capital cities, where the national median price sits 10 times above the national median wage, Eriksson – who helped his son buy a unit – isn’t the only one concerned about the herculean task faced by new buyers.
Reserve Bank of Australia governor Glenn Stevens said in early December that the impact of rising property prices could bring about a situation where the next generation of home owners won’t be able to live in the same city as their parents.
“Perhaps it’s not a bubble,” he said in a December interview with The Australian Financial Review. “We may have done things as a society to make, in some fundamental sense, prices quite high.”
For first-home buyers looking at buying property in capital areas around the country, the property ladder’s first rung has never before seemed so far out of reach.
But for a lucky few, parents like Eriksson are stepping in to help bridge the gap – and finding in the process that direct financial assistance is useful, but solid advice is better.
Eriksson offered both funds and advice when his son Hugh, 30, approached him five years ago after his first year of full-time work pitching for help to buy his first home.
Marketing manager Hugh had a small amount of savings, but it was nothing near a deposit. He told his father that with stable interest rates, a first-home buyer’s grant of $14,000 and a stamp duty concession on offer, he was unlikely ever to see conditions so favourable to buy his first home.
His father agreed, and gifted him the bulk of a deposit on a $360,000 apartment. “I guess I’m one of those parents that if I’m in a situation where I can help, I will,” he says. But the advice that came with the cash has also created real value down the track.
Eriksson’s tip of buying an ageing, run-down apartment in a great location close to public transport was hardly rocket science. But without it, Hugh wouldn’t have netted the 16 per cent capital gain on the property that helped him by his next home, a two-bedroom semi in Neutral Bay in Sydney’s north.
Hugh almost walked out of the first home – a one-bedroom apartment in Wollstonecraft, also on Sydney’s North Shore – the first time he saw it. In poor repair, it needed a new kitchen, bathrooms, carpet and a paint job. His father, noting the unit’s location in a leafy street, walking distance from the train station and needing only light cosmetic work, urged him to reconsider. Hugh bought the home and used the first-home buyer’s grant and a small amount of savings to update it, netting himself a 12.5 per cent net capital gain – not bad in three years.
First home should be quality property
Eriksson’s strategy strikes a chord with buyers advocate Monique Sasson. The Melbourne-based adviser says first-home ownership is about buying “quality” property in the best area you can afford.
That doesn’t necessarily mean the best-looking home in the street, rather, apartments in small blocks that have a uniqueness, in a pleasant locale close to shops, good public transport and the city.
Project manager Will Churcher*, 29, was after different financial support when he approached his father fresh out of university in 2008 with a bold proposal for a crumbling investment property in Sydney’s Woollahra that had been owned by the family for years.
“Dad had an investment property that he wanted to sell. He’d had it valued, and I knew that if I spent time renovating it, it could be worth a lot more,” Will says.
He persuaded his father to sell him the two-bedroom unit for $2, which qualified him for a first-home buyer grant, then $14,000. He used the grant money and a small amount of savings for renovations.
He did the lion’s share of the work, including demolition to open up the ground floor unit and putting in doors for garden access .
After living there for one year to satisfy grant conditions, Churcher sold the property and, as agreed with his dad, kept the difference between the valuation at the time he bought it and the sale price of the renovated apartment one year on, minus interest.
He admits it was an unconventional method that relied on a high level of trust from his dad, but says he’d still be trying to scrape together his first deposit if he’d gone about it any other way.
His father, who works in finance, acknowledges that he was happy to help. The process wasn’t hugely financially exhaustive, but delivered a huge head start to his son’s financial security.
Five years on, Churcher lives in a share house with friends, subsidised by rent from a three-bedroom apartment he owns in Sydney’s Rose Bay and a 60-square-metre commercial suite one kilometre from Sydney’s CBD that he bought through a self-managed superannuation fund.
It’s not rocket science
He knows he’s the exception to his generation, but says it’s not rocket science.
“If you’ve got that level of trust with a parent and you think they can help you out, then there’s no reason why you shouldn’t ask. The sooner you get started, the better.”
Other agents suggest that first-home buyers crack the market by teaming up with friends to buy an investment property together, sometimes looking further afield to the outer rings of a metropolitan area where larger homes can attract stable demand and strong yields.
A near-new two-bedroom, two-bathroom townhouse in Mount Druitt in Sydney’s north-west costing around $350,000 is likely to bring in more than $350 weekly in rent, says the local Ray White agent. A four-bedroom home on a 400-to-500-square -metre block could fetch above $450 a week.
With yields above 5 per cent, the returns look compelling.
Parents unable to stump up a deposit for their kids can help in other ways.
“It’s the kids who budget and live within their means who come to me ready to buy a property,” says Karen Forbes, Smartline mortgage broker and mother of two uni students. “That advice comes from parents.”
Forbes advises her kids to deposit cash into a savings account on pay day, not at the end of the month. Credit cards are also a no-no, or if they feel they need one then keep the limit low (“well below $2000”) because banks will always assume a loan applicant is in debt to the full amount.
“Say you’ve got a $20,000 limit, the bank will assume you’re making monthly repayments for the full amount and it counts against the loan,” she says.
Her advice for first-home buyers? “Ditch the fancy cars and the expensive hobbies. I see some [potential] young ones who decide it’s a good idea to lease a $50,000 car. They don’t need it, and it eats into savings.”
She’s also got some no-nonsense advice for parents with cash to help their kids. “Avoid acting as a guarantor for the loan, and providing the family home as security. There are other ways to help.”
Parents can take out a small loan on their property or redraw a small amount on an existing loan to gift to their children. This way, parents are liable for a manageable sum of money, rather than having the family home on the chopping block.
“You can take out a limited guarantee for say, $50,000. It means if the kids skip the country or default on their payments, all the bank can get from the parents is $50,000, and in most cases, there are other assets they can sell to repay the debt before the house.”
Kids keen to save the deposit themselves can open a First Home Saver Account (FHSA) and take advantage of a generous annual kicker from the government.
Since 2008, first-home buyers have been able to earn 17 per cent a year on deposits up to $6000 through the government-funded FHSA program. This is on top of bank interest, for example 3.5 per cent from ME Bank.
Individuals have to contribute a minimum of $1000 a year for at least four financial years. Once four years are up, the cash can be used for a home, or tipped into super.
Savers can satisfy the four-year criterion in as little as two years and two days, Paul Smith of Loan Market says. If a saver opens the account and makes their first deposit of more than $1000 before June 30 this financial year, they will be able to access their funds by July 2, 2016, the start of the fourth financial year. However, they won’t qualify for the full 17 per cent a year government contribution in the first and the fourth year.
Posted by Samantha Hutchinson - Australian Financial Review on 11th January, 2014 | Comments | Trackbacks | Permalink