Low interest rates good news for buyers??

Low rates good news?

Whilst a drop in interest rates is promoted widely as being ‘good news for the housing market,’ with Wayne Swan bouncing around as if he’s a personal ‘Jiminy Cricket’ sitting on the shoulders of the board during RBA’s monthly meetings, the bleak reality remains that for savers, (many of which are ‘would be’ first home buyers,) the news is not good at all.

Since the beginning of May, cuts of between 65 and 75 basis points have been chopped from the ‘big four’s’ base rates for online saving accounts, and for many renters balancing work, rental payments, and other such necessities, the savings account is perhaps the only area capturing the crumbs in which to advance to ownership.

For property shoppers, it may ‘seem’ a welcome relief to secure a little more purchasing power – except of course every other property buyer in the market place also benefits.  The resulting increased competition which predictably eventuates in upward pressure on median prices, is of no benefit to buyer – only to the vendor who – if keeping up with previous repayments, watches their loan diminish faster and equity appreciate.

Investor’s fare a little better – they usually fix rates on interest only terms which at present are extremely favourable, sitting between 5.29-5.69 per cent for 2-5 year terms. Therefore, the recent increase in yields and subsequent tightening of vacancy rates, coupled with the low cost of borrowing and numerous tax incentives, complements a portfolio nicely, making long term investment in bricks and mortar ever more tempting.

So far, we’ve not seen any significant ‘uplift’ in sentiment to signify a call to arms from property investors. A further reduction in the value of investment loans – which for the month of August dropped 0.8 per cent (ABS) – also doesn’t indicate sentiment in this sector is improving – although it’s yet to be seen if more positive data emerges ‘post’ the latest RBA cut in rates.

At the very least, the perception of low rates coupled with the fact that housing affordability is judged to be at its most favourable level since 2003, will force growth in some sectors of the market. The recent release from RPData, citing a national rise of close to 2 per cent over the September quarter in median prices (the strongest quarterly increase since 2010,) seems to underline this.

The RBA is all too conscious of the ‘housing bubble’ risks so often associated with a low interest rate environment. Deputy Governor, Mr Phillip Lowe said the central bank would be watching “very carefully” for resulting signs.  However, the Treasury have not been so prudish in their commentary, stating boldly, they “expect recent interest rate cuts, and the possibility of more, to kick-start the second housing boom in a decade,” It would – they said – be “a natural and desirable development” compensating for any future downturn in the commodity sector.

However, one direct consequence of the previous boom, which locked increasing numbers outside of the housing market, was a national rise of 49.2 per cent in yields over the five year period to 2011 – outpacing growth in home loan repayments for the same period.  Clearly for the venerable ‘homeless’ sector of our community, another housing boom would not be viewed as both ‘natural and desirable.’

Recent data from Australian Property Monitors places the median rent for a house in Sydney at $520 a week (a record for the city) – and in Darwin at a lofty $700 per week. And, whilst property investors look set to reap the benefits, we have a growing rental affordability crisis on our hands.  It’s no wonder, ‘crowded houses’ – with three or more families sharing accommodation, rose nationally by 64 per cent to 48,499, over the past five years.

News this past week that new home construction across the country has hit a 10 year low, has inspired State Government’s to once again busy their hands, devising new grants and incentives for the purchase of ‘new’ property – principally aimed at the first home buyer sector.

However, you only need glance back at the historical lessons associated with the FHOB grants to assess re-introduction, with no analysis of the underlying issues that deter buyers from purchasing new accommodation in ‘grant free’ environments, is poor short term policy.

Following the recent period of inevitable and painful house price ‘correction’ – resulting from the decade long unsustainable ‘boom’ – the ‘08/09’vendors who rushed to purchase using the last round of incentives are still sitting on a pot of negative equity.   The ‘retail sale’ mentality that goes hand in hand with rate cuts and generous FHB grants is easily offset by the hangover eventuating from the realisation that any savings were simply added onto the property’s purchase price and therefore, in retrospect, were not as much as perceived when purchased.

Meanwhile back in the camp of our renters & ‘would be home buyers,’ not only do they have to battle against the prospect of inevitable rising prices, also hampering any ability to save is the stark reality that Australia’s inching its way up in the ‘cost of living’ ranks which further compromises any perceived benefit from ‘rate dropping’ affordability.

A recent survey by Mercer – an organisation claiming to “help clients around the world advance the health, wealth and performance of their most vital asset – their people” paints a rather worrying outlook for struggling savers.

The index – entitled ‘Worldwide cost of Living Survey,’ – covers “214 cities” across “five continents” measuring the comparative cost 200 items including “transport, food, clothing, entertainment” and of course housing.

Australian cities rank high on the list with Sydney moving from number 14 in 2011 to number 11 in 2012 and Melbourne moving from number 21 in 2011 to 15 in 2012.  The full breakdown can be viewed here – with the results making a trip to London look comparatively affordable. No matter what wealth bracket you sit within, I doubt anyone would deny Australia is an expensive place to reside.

Other data highlights the stress low income families experience whilst meeting essential needs of which housing is the main contributor.  The Australian Council of Social Service recently released a national report making the bold and astounding call that one in eight people now live in relative ‘poverty.’

The analysis of the term “poverty” is defined as those having disposable income of less than half that of the median household (the accepted international definition.) This would equal a disposable income of less than $358 per week for a single adult and $752 per week for a couple with two children.

The term poverty is an emotionally fuelled word – it brings up images of third world hunger and refugee camps – conditions we don’t experience here. In addition, a report which suggests such a high proportion of Australian’s live in ‘relative’ poverty is a poor assessment as no matter how wealthy Australia grows, there will always be ‘relative’ poverty.

However, I would challenge anyone to find appropriate accommodation within Australia for a single or dual income family on the income levels cited above. As much as we celebrate the resilience of our housing market with the various economic and employment offshoots, the widening gap between the supply of appropriately located affordable accommodation suited to those in – or just above – the ‘poverty’ line, is huge and shameful.

Private investment does not narrow the gap.  Australian property investors are not in the business of targeting property that can be rented on a dime.  They want quality tenants, market yields and increasing equity. The NRAS (National Rental Affordability Scheme) which was designed to go some way in bridging the affordability gap for low income workers sitting on the rental ladder is also flawed in its design.

The scheme targets institutions willing to fund a large supply of residential accommodation available for rent at 20 per cent below current market rates.  The tax benefits offered over a ten year duration are designed to buffer the short fall in yield.   However, the system is easily manipulated.

Many of the homes set aside for NRAS investors are new properties in outer suburban zones lacking in facilities and home buyer desirability. Even with a reduction of 20 per cent, the rental rates are no cheaper than that of an older home in a similar location.  This is because the rents are assessed 20 per cent below ‘market rates’ which are always somewhat inflated when dealing with property not previously occupied.

When the scheme was first initiated in 2010, the AHURI (Australian Housing and Urban Research Institute) analysed the project to assess the overall impact in easing affordability. The findings revealed only 40 per cent of applicants using the accommodation had fallen below the 30 per cent ‘housing stress benchmark.’ Claims have also come to light suggesting the scheme is being used by developers and selling agents to take advantage of “unsophisticated investors” Quite clearly there’s a need for re-evaluation and improvement to the current legislation and no one should mistakenly believe it’s an answer to an increasing and overwhelming demand for social housing.

All in all, in our current environment of low consumer confidence, high yields, increasing household expenses, and potential upward pressure on house prices – further rate cuts are of no help at all to the most venerable in our community, and certainly not the outright answer to building a healthier economy.

So amidst the shouts of ‘good news’ when/if the RBA cut the cash rate another 25 basis points on cup day – someone cold perhaps consider the savers and renters who don’t have a mortgage, just a reducing pot of money and consequently, future security.

 

Catherine Cashmore

 

 

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Be Cautious where you seek advice.

Be Cautious where you seek advice.

The Home Buyer and property Investor show was in Melbourne last week.  It’s one of those events during which so many free tickets are handed out; it makes me wonder if anyone actually pays to attend?  The show is advertised with the motto of being ‘dedicated to educating home buyers and property investors of all levels’ and having attended many shows during its 6 year run, I can assure all home buyers or investors, if they don’t come out more confused than when they headed in, something’s amiss!

“Now is a great time to buy” – runs the advertisement – and boasts a host of ‘independent’ advice from ‘trusted, reliable experts.’  Let me be the first to say, as with other organisations, ‘trusted and reliable experts’ do exist within the property industry. However, filtering them out from the mishmash of stands and the 80 or so speaking events is not an easy task for any armchair property investor.

‘Independent’ is a funny term. To the layman, it hints at someone who is ‘free of bias’ – a qualification not many would be able to claim. Every professional has met with influences that sway their judgements and learned scepticism to some degree or another. However at a corporate level, seeing the term independent would ‘assume’ the provider has no ‘relationships’ or affiliations that would direct their advice against the best interests of their customers – and these qualities aren’t always easy to identify.

The financial industry has struggled with the term ‘independent’ for quite some time.  In 2010 the IFAAA (Independent Financial Advisers Association of Australia) was established to try and filter out those who could truly claim to have no ‘hidden’ associations.

Their website identifies the following criteria as being ‘independent’ without which, ‘low quality advice (would be) more likely’

  • “Do not have any ownership links or affiliations with product manufacturers;
  • Do not receive commissions or incentive payments from product manufacturers; and
  • Do not charge asset-based fees.”

How much policing goes into checking the ongoing performance of each ‘independent’ advisor on the database is unclear, however, at the very least, it sums up what customers would expect when confronted with the word.

Section 923 of the Corporations Act lists its own restrictions when using the terms ‘independent, impartial or unbiased.’  However, these are broadly limited to receipt of commissions (unless they are fully disclosed and rebated to the client) receipt of benefits, or the need to achieve various ‘provider’ volumes when referring business.

The Home Buyer and Property Investor show has no such ‘gold standard.’ Obviously, most of the speakers and traders pay to promote their wares, and a good proportion are openly associated with various providers and manufacturers.

Within the show itself, you’ll discover a broad array of developers, mortgage brokers, property ‘experts’, and so forth, each promoting their own vested method to achieve that ‘pot of ‘retirement’ gold.’

By the time you exit the show, you’ll have been lectured to invest in the USA, negatively gear a portfolio, positively gear a portfolio, build, develop, purchase in mining towns, purchase within 5km of capital cities and so forth, – from exhibitors affiliated with providers and in receipt of commissions, from many different offshoots.

To inexperienced ears, every piece of well delivered advice can seem persuading, hence the need to do plenty of homework prior to commitment.  However, even taking into account the modest number of exhibitors who do fall under the definition of ‘independent,’ I have a problem with using the term to promote the show – it’s simply incorrect and arguably misleading.

Having said this, the show is always useful for gauging a ‘feel’ of current sentiment, and from the feedback I’ve received from colleagues who attended, numbers were significantly down, even comparative to last year – which was also notably quiet.

As improving sentiment tends to mirror rises and falls in median values, a cautionary approach to calls of ‘market recovery’ would seem appropriate – although I don’t doubt at a micro level, this is exactly what we’ll see in ‘some’ pockets of our cities.

Transaction levels have improved over the month of September – due in part to home buyer incentives in a few states, recent rate drops, and rises in rental yields which have stimulated investor activity. However, ease of affordability on one level, can easily be outweighed by other struggling segments of the economy in which case any uplift in transaction levels – or for that matter median prices – may remain marginal.

Of course, the one piece of advice you won’t hear at the home buyer show is anything other than ‘now’s’ the right time to purchase – especially as many view interest rate drops as the sole indicator market conditions are about to improve.

Other excuses used to inspire buyers out the woodwork at property shows are the so called ‘hot spots’ all of which range from rural mining towns, to regional townships, and inner city hubs.

Hot spots seem to induce the perception that property prices are about to soar and investors lap the information up as if it’s a piece of insider trading advice. Some advocates base their assessment of a ‘hotspot’ on historical data – others wave this aside preferring to look at new infrastructure projects assuming a ‘rush’ of population growth will add fuel to the fire without any assessment of what may oppose the assumed price rises.

If you purchase at the beginning of a mooted boom and leave at the end you’ll be a winner – but to do this you need to both speculate and gamble and one thing history does teach us, is where there’s rapid inflation, there is also a period of sharp ‘correction.’

To be honest, a hot spot cannot be truly identified until a buyer’s unique circumstances and property investment goals have been assessed.  To do this, takes more than a property expert – and usually begins with a trip to the individual’s financial advisor.

A hot spot for one buyer looking to balance cash flow, will be different from the equity buyer looking for growth – and unless the ‘property expert’ has a crystal ball to hand, all such information should come with a lengthy disclaimer attached.

‘Hares’ who rush in based on a whimsical promise of positive returns or double digit growth, may outpace the tortoise investor in the short term, but every piece of historical data we have to hand proves it’s tortoise who wins in the long run. In other words – those who enter property investment with a long term approach, to hedge against inflation and ride out inevitable short term volatility – are ultimately the winners in the game of building wealth.

Gambling and property markets don’t complement each other; however it never quells the thirst to happen upon riches.  Statistics cover a multitude of ‘property sins’ and never more so when associated with ‘hotspots.’

If someone’s encouraging you to ‘rush in’ based on an imminent rise in median figures or surge in population growth – I’d advise taking a step back and finding an opposing argument for each point presented, because you won’t be warned of rain clouds ahead if all you ever get presented with is a sunny forecast.

All this aside, before you heed the calls to ‘buy now’ which are sprouting from all four corners (except perhaps the camp of Mr Keen) purchasing a property for investment or occupation is a decision each buyer must take based on their own individual circumstances and should not be dictated by drop in rates, home buyer incentives, advice from property magazines, articles, or home buyer shows which liberally use terms such as “market cycles” or “property clocks.”

They are all designed to inspire consumers to spend with a ‘retail sale’ mentality and in such instances, mistakes are often made. Instead it’s vital to keep a long term considered outlook and to do this, it can arguably better to avoid those areas of which consumers ‘flock.’

Of course, the key to any wise investment is in education – and I’ve written plenty on the subject in previous columns. However, it remains the case that many come out of university hand in hand with a degree, credit card, ability to earn, but little idea how to purchase a property, invest in the stock market, manage their super account, or control debt.  Trying to gain such knowledge via self education is also littered with pot holes especially if you glean it based on a mishmash of vested advice.

There’s no easy answer, but I can promise one thing.  You’ll never comfortably build wealth chasing a bargain or timing a boom.  Work hard to save hard, but invest with a slow and considered approach based on what you want to achieve in x number of years, to secure your family’s future.  Hot spots will come but if you’re not careful, they’ll take your profits with them.

 

Catherine Cashmore

 

Apartment or House – the old debate, with a slightly different ‘take.’

Apartment or House – the old debate, with a slightly different ‘take.’

I often get asked the question from investors – ‘which is better – an apartment or house?,’  Of course it broadly depends on what the investor hopes to achieve from their purchase and depending on their preferred location, the answer is often dictated by budget alone.

Broadly speaking, as a “set and forget” option which promises appreciation over time, it’s hard to beat an apartment close to inner city amenities. Providing you’re careful with the ‘pre-purchase’ due diligence in terms of property style and position, apartments generally attract a higher yield, are low maintenance, and when issues with the building do occur, they are generally handled by the owners corporation and/or property manager.

However, regularly you’ll read property commentators dictating that apartments perform better in their median data than house prices.  Whilst this may oft be the case over the short term – it has not been proven over the long term.  In fact, over a long time frame, median detached house prices have outperformed unit prices and there are sound fundamental reasons why this may continue.

Apartments have their benefits.  The price of land in inner suburban capital city zones has become so expensive, for a good proportion of buyers restricted in location; their budget is ‘hamstrung’ to this type of property.  However, for the larger demographic, apartments are considered the place where you ‘start out’ – not end up.

We get bombarded with this idea that everyone is ‘downsizing’ – and once again it’s another excuse by property commentators specialising in apartment sales, to promote this option over others.  Everyone’s living alone – they cry! Using previous census data to prove the single person household is the fastest growing demographic in the nation.

However, I’d hazard a guess that a good proportion of these ‘single dwellers’ are comfortably living in houses or town residences, rather than pottering about in a one, or even two bedroom apartment – and recent census data proves exactly this.

At 44 per cent, the ‘typical’ Aussie home still has three bedrooms and the stats show the majority are occupied by only 1 or 2 residents. In fact, only 14 per cent of loan person households live in one bedroom dwellings and there’s been a big increase in the number of four-bedroom homes which now make up almost a third of the housing stock.

Not only this but, as the latest census results further prove, the single person household is no longer the fastest rising demographic. In the 2011 results, lone person households dropped from 24.4 per cent to 24.3 per cent, whilst group households (shared accommodation) jumped from 3.9 per cent to 4.1 per cent. This is most likely due to reasons of affordability – renting a one bedroom inner suburban apartment can often be more costly than an older 3 or 4 bedroom detached dwelling a few suburbs out. It makes sense therefore to share, and this trend is mirrored in other international markets – such as the UK and Canada who produce similar data in their own census breakdowns.

Most of the first home buyers who cross my path also follow the above pattern.  Rarely do they opt for a one bedroom apartment – unless they’re restricted to a particular suburb. Most opt to move ‘outwards’ and purchase something larger and if given the option, would rather rent until their able to afford a suitable property for their 5-7 year needs.  Which ponders the question – who’s buying all the apartments?

What we do know is Australia-wide, 58% of apartments are owned by investors. Break this data down to a state-by-state capital city level and the investor-owned percentage of inner-city apartments raises closer to 70% and in some states exceeds even this (ABS data.)

Therefore, whilst there are a proportion of home owners selecting an apartment lifestyle, for many it’s still not the desirable option.  Furthermore, data proves the first home buyer demographic broadly prefer established over new, therefore it’s highly likely they will opt for older style apartments in smaller blocks, all of which generally offer larger floor plans and due to overall size – less owners to battle with in the annual “owner’s corporation” meetings.

Furthermore, it seems when home buyers (first or otherwise) do purchase ‘new’ – due to stricter lending restrictions for high-rise accommodation, coupled with high owners corporation fees and the ‘not so desirable’ aspects this type of accommodation offers, buyers will generally stick to low-rise apartment blocks – with the exception of the few looking for a luxury penthouse.  This is evidenced in the latest NAB “Quarterly Australian Residential Property Survey.”

The report notes, that when it comes to ‘inner’ city new dwellings, demand across all states is strongest for “low rise apartments and townhouses” with “middle ring housing” being the next best option. In fact, when broken down, demand for townhouses far outweighs demand for apartments.  Yet, despite this, across all inner city regions, we’ve seen a boom in high density accommodation – most of which has been in the form of relatively compact one and two bedroom high rise dwellings.

It would seemingly make sense to build as much accommodation on a piece of land as possible, however I often wonder if – once constructed – the council ever go and inspect the developments they’ve approved?

I’ve had the ‘good fortune’ to walk through many of the high rise – and for that matter, low rise unit blocks.  The artist drawings depicted in the pre-sale advertisements rarely represent the reality – which is always somewhat of a disappointment.  Therefore, it pays for buyers to enlist the upmost caution when assessing apartments of this type prior to purchase (which of course cannot be done when purchasing ‘off the plan.’)  It’s also my experience, that many ‘home buyers’ consider the accommodation on offer in the newer units, poor value when confronted with the initial asking price.

Last week RPData published some interesting information which further clarifies the above. Their latest research shows the largest number of sales nationally is for detached dwellings as opposed to units or apartments.  Considering Australia’s biggest buyer demographic is made up of family ‘home buyers’ with and without children – this isn’t surprising, however the data also shows a decline in the number of unit sales which is interesting when it’s generally assumed ‘home’ buyers – at all stages – would be flocking to the unit sector for affordability reasons.  After all, as one managing director of Colliers International recently stated;

“Australia is catching up with the rest of the world, with apartment living becoming more acceptable to families.”

I’d suggest there is a lack of significant evidence to back this statement up.

Further research from RPData may throw some light on the demise in sales.  They note that the greatest number of unit sales is predictably in capital cities where there is a large disparity between house and unit prices.  For example, their analysis shows Canberra and Sydney have a gap of $110,000 between house and unit sales.  However, Melbourne only has a gap of $48,000 between the property types.

Consequently, the ‘unit’ sales percentage in comparison to detached dwellings in both Canberra and Sydney is 42.5 per cent and 42.8 per cent respectively.  Obviously – the greater the difference in price, the larger the ‘perceived’ value for buyers and investors who would therefore be encouraged to buy.

The report offers the following statement;

 “Demographic factors are also likely to contribute to greater demand for units with baby boomers looking to downsize from their large family homes into something smaller and more easily maintainable.”

This is may be true for ‘some’ property types which fall under the umbrella of a ‘unit’ sale, however it’s unlikely to be the case for apartment sales.

Whilst downsizing to a younger brain may be simply mean moving into a flat or apartment, elderly residents have a life time’s worth of furniture and memories to accommodate. Selling costs along with stamp duty and the stress involved in a house move, often deters consideration of the above altogether.  However, when it does occur, the preference would certainly be downsizing the land component of the property, rather than the level of accommodation. In other words – the good old single or double level ‘town residence’ or terrace.

It’s clear therefore the predominant market for inner city unit sales (particularity high rise) is firmly in the court of the investor who is one step removed emotionally, and need not have personal lifestyle requirements as their main objective.  This is all well and good, however if the investor is looking for capital growth over rental return they’re going to do a lot better focusing on property that attracts Australia’s larger buyer demographic – the ‘owner occupier’ market.  Hence why established or older style ‘period’ apartments in smaller blocks deliver higher long term returns.

For investors who like the idea of purchasing ‘new’ in order to take advantage of increased yields, various ‘spruiked’ rental guarantees, and tax depreciation benefits – they could find securing long term tenants problematic.  Vacancy rates in high rise accommodation far exceed their established counterparts.  For example, Melbourne’s Docklands and Southbank, which have the largest number of high rise apartments, have vacancy rates of 10.4% and 9.2% respectfully, however St Kilda East, which has a higher percentage of low rise established apartment blocks, currently has a vacancy rate of 2.5 per cent (SQM).

Considering the above, I would suggest it’s far more sensible when re-zoning inner city land, to cater to a home buyer market and provide a greater proportion of accommodation to attract home buyers – principally low rise developments and terrace housing – rather than building an endless supply of tower blocks. However, considering the pace of ‘high-rise’ construction it’s a piece of advice I can all but guarantee developers and town planners won’t adhere to. Perhaps, the property investors out there can take note instead.

Catherine Cashmore