ISSUE 11 I OCTOBER 2009
HORIZON THE
INVESTORS, WELCOME HOME! RBA RATE RISE
NEWSLETTER INVEST HERE
HOUSE PRICES ON THE UP AND UP HOW TO SECURE A TENANT SEVEN COMMON MISTAKES MADE BY PROPERTY INVESTORS TOP TEN HAUNTED HOUSES AUSTRALIAN POPULATION HITS TWENTY TWO MILLION! AUSTRALIA SITTING PRETTY AT NO.2
It’s easy being green Making your house eco-friendly can make or break the deal.
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THE HORIZON NEWSLETTER I ISSUE 11 I OCTOBER 2009
Investors, Welcome Home!
The first home owners’ grant is winding down and investors are pouring back into the market. As we expected, investors are surging back into the market to fill the space left by first-home buyers. Housing commitments were up 7.6 per cent in August, and loans for new homes have risen in 11 out of the last 12 months. It seems that only the mix of buyers is changing. The reasons are clear: a shortage of housing stock, an overflow of renters, continued growth in new migrant arrivals, and historically low interest rates. What’s changed is that while it was previously the first-home buyers using the government incentives and positive buying conditions, it’s now savvy investors who have sensed the big opportunity and who are now out there in force. Further good news is that the number of renters in Australia is increasing despite the number of firsthome buyers now in homes of their own. Recent data from the Australian Bureau of Statistics shows that the proportion of households renting increased from 26.9 per cent of all households in 1995-96, to 28.5 per cent in 2006.
It’s Generation X that is dominating the rise in tenants, with the largest increase for people aged 34-44. This ties in with McCarthy Group’s strategy, which provides new homes that will cater to the needs of this market. Contrast this to the situation in the USA. There, homes stand empty and prices are falling. Their small signs of growth seem to be petering out as the US government’s first-home buyers tax credit scheme expires. But here in Australia we don’t have enough accommodation, and prices are increasing at the rate of 1 per cent a month. And investors are jumping in as the government’s first-home buyers’ scheme is phased down. Do we live in an investors’ paradise in Australia? You decide. But make sure you act on your decision, because the current conditions and positive outlook have seldom seemed better. And the current opportunity won’t last forever.
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THE HORIZON NEWSLETTER I ISSUE 11 I OCTOBER 2009
RBA Rate Rise
Yes, the tide has turned. The RBA has raised rates by 25 basis points, taking the cash rate to 3.25 per cent. However, it doesn’t necessarily mean ‘Bad News’. The Reserve Bank of Australia lifted interest rates on October 6 for the first time since March last year. The decision was noticed worldwide, with the Aussie dollar surging ahead on the news. Other major economies still have interest rates close to zero per cent, and are in recession, suffering their worst downturn since the Second World War.
The positives to be read in this increase are that: • The economy is growing strongly • Business and consumer confidence is soaring • Property increases are rising 1 per cent per month • The share market is back at 12-month highs • Unemployment levels have not risen to the levels feared.
Australia is in a unique position because we avoided a recession and held the line through a challenging period. What the rate rises mean is that rather than contracting, the economy is actually growing strongly, and so the RBA is tapping the brakes to keep growth under control.
So, there’s lots of good news. Moreover, you can brace yourself for a few more 0.25 per cent increases in the months ahead as we return to more ‘normal’ interest rates. It’s predicted that we will see regular increases over the next year to take us back to 4 per cent or above. Mind you, this would still be a fairly low historical level.
The RBA rate rise is not a negative move; in many ways, it’s a positive sign. Objectively, we have enjoyed the lowest interest rates in 50 years. They were described as ‘emergency settings’ by the RBA and were designed for the tough GFC circumstances that we are delighted to see in the rearview mirror!
We think that the good news is that the Australian economy is back on track and leading the world in the race to economic recovery! To fully benefit, however, you have to participate. In other words, “You’ve got to be in it, to win it!”
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THE HORIZON NEWSLETTER I ISSUE 11 I OCTOBER 2009
Home prices on the up and up
Great news for Australian property owners is that prices increased by over six per cent in the first seven months of this year. How’s that for leading the world? Rising property prices are good for the well-being of the owners and the economy. They add to the sense of increasing personal wealth (the ‘Wealth Effect’) and make everyone feel more positive about their prospects. They encourage renovation and other forms of household spending. The Australian home ownership model is structured so that there is a great incentive for owners to ensure they hold onto their homes in challenging economic times. Default rates are at 0.6 per cent, compared to over 5 per cent in the US. This means that there have been few forced sales, and with prices weakening due to a slowdown in demand, housing stock was also taken off the market by owners, which meant there was less supply. The majority of Australians simply pulled in their horns, enjoyed the low interest rates, cut back spending where they needed to, and waited for the storm to pass. Now it has passed, and we are seeing a return to life as we knew it, and a property market that has resumed an upward path. According to The Age, house prices are still rising, and may continue to rise by 20 per cent or more in some of Australia’s largest cities over the next three years, driven upwards by on-going shortages.* This is very reassuring for homeowners who really felt the cool breeze 9 to 12 months ago. They have held on, weathered the storm, still own their properties, and now prices are rising strongly. They are recovering lost ground, and feel better and better about their situation with each passing month. * Zappone, Chris: “House prices set to jump: report”, October 14, 2009.
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THE HORIZON NEWSLETTER I ISSUE 11 I OCTOBER 2009
It’s easy being green Making your house eco-friendly can make or break the deal.
In May 2011 the Council of Australian Governments (COAG) will implement a system that rates the energy efficiency, greenhouse and water performance of a home. When an owner wants to sell a property, they will have to disclose the level of energy performance to prospective buyers.
government actually plans to phase out the use of incandescent light bulbs nationally by early 2010.
Did you know that 26 per cent of carbon emissions come from our private homes? With the hot issue of fossil fuels, water restrictions, and the growing effects of global warming, the government is encouraging all of us to do our bit to reduce our carbon footprint.
On the private front, investing in energy-efficient white goods will save you some extra cash on your energy bill. For example, that old beer fridge in the garage could be costing you around $200 a year! Other expensive culprits include deep freezes, tumble dryers and old CRT televisions. You should work out the running costs of old white goods and consider whether you still need them, or work out whether to replace them with newer, more energy efficient models.
Actions like installing insulation or retrofitting the latest in efficiency products to a home will help to lower utility bills and add to the value of the home when it’s time to sell.
As an investor, these eco-friendly additions that reduce running costs and power consumption can help you to attract tenants and can be the reason why they choose your property over the one down the street.
Water tanks can be used to water the garden and wash the car, greatly reducing water bills. Energy efficient light bulbs will reduce your electricity bill and the
It’s not only the pollies who have to face up to climate change. We all do. It’s our world to save for our children.
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THE HORIZON NEWSLETTER I ISSUE 11 I OCTOBER 2009
Seven common mistakes made by property investors Starting without a strategy The single biggest mistake investors make is simply launching themselves into an investment property without taking the time to work out what their goals are, and how they are going to achieve them. You need a game plan. This involves making a detailed analysis of your current income and tax position, as well as your plans for the future. Investment property then becomes the vehicle to get you there. No architect would start building a house without blueprints, and no engineer would start on a bridge without extensive planning. You have to be well prepared before you start.
Buying property on emotion You have to invest using your head, not your heart. Investment property is a rational process. It involves property types, locations, affordability, and the economic drivers of area growth. It’s not a good idea to invest around the corner from where you live solely so you can “Keep an eye on it.” Nor is it a good idea to buy a holiday house that you plan to rent out from time to time. You have to be analytical, and coolly rational.
Choosing the wrong location The property market moves in waves across cities and states, and these waves usually don’t coincide. Choosing the right location requires detailed research. As we like to say, “You have to do your homework.” Capital growth and good rental yields are what you are looking for. Selecting a property in a location that will deliver this is no accident, and good investment properties are usually close to schools, infrastructure, transport links and other public amenities. The good news is that the payoff is great when you put in the hard yards in terms of getting the location right.
While some property investors get it right all the time, others can, and do, make mistakes. Here are some common mistakes to avoid.
Getting the financing wrong There are many pitfalls for the unwary. Like using the same bank that finances your home mortgage, paying too large a deposit, and underestimating the cash flow requirements in the early years. Overoptimistic budgeting, for example, failing to provide for any period with no tenants, or not keeping good records, so you miss out on tax benefits, are also traps that first time investors can fall into.
Selling too soon Some investors enter the market with high expectations and are looking to make a killing in a few years. When this doesn’t happen they sell and move on, wasting huge amounts of money on costs and fees in the process. A typical property cycle is 7 to 10 years, so ideally you should plan to go through several of these cycles to get the best long-term returns.
Trying to self-manage the property* The amount of skill and experience needed for successful property management should not be under-estimated. This is a field best left to the professionals, and when investors try to manage their properties themselves, it often ends in tears. The process of getting the right tenants, minimising vacancies, and ensuring that the property is well looked after and well maintained, is a worthwhile expense when you consider the value of the asset being managed.
Choosing the wrong agent* A cheap rate from a property manager will simply result in a poor level of service and ongoing frustration for the owner. As with so many things in life, “You get what you pay for.” Your property is valuable, and it produces income. You need to entrust it to the very best people available, and be prepared to pay the market rate to get the best results.
*McCarthy Group offers professional property management services through Koala Blue Real Estate. Our motto is “Doing it all for you,” which sums up the Koala Blue proposition. Please call us if you wish to discuss any aspect of your property management needs.
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THE HORIZON NEWSLETTER I ISSUE 11 I OCTOBER 2009
Top Ten Haunted Houses
It’s Halloween, which means it’s time to crack out the haunted house movies and enjoy a good old-fashioned fright night!
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THE HORIZON NEWSLETTER I ISSUE 11 I OCTOBER 2009
We have compiled a top ten list of scary movies so you can have a spook-fest to end October. It’s been a scary ride through the GFC, but it looks like it’s over. Let’s hope that none of your properties have anything that goes ‘bump in the night’ or any unwanted inhabitants living under the beds! Top Ten Haunted House movies for Halloween ‘09 1. THE AMITYVILLE HORROR
2. THE SHINING
3. POLTERGEiST
4. PSYCHO
5. THE HOUSE ON HAUNTED HILL
6. RETURN TO HELL HOUSE
7. THE HAUNTING
8. THE UNINVITED
9. GREMLINS
10. HOUSE OF WAX
If you’ve had your own horror experience - like The Tenants from Hell - please call us, as we have the professional investment property management solutions that can make the risk of getting caught up in a situation like this simply...disappear.
THE HORIZON NEWSLETTER I ISSUE 11 I OCTOBER 2009
The Australian population just hit 22 million
Thanks to immigration and the increasing birth rate, the Australian population grows by one person every one minute and 12 seconds. And at 1.58pm on October 1, 2009, the population hit 22 million people, three decades ahead of when it was forecast to do so. Immigrants continue to flock to Australia in record numbers, while the birth rate continues to soar. In addition, advances in medical technology mean that people are living far longer, and when we add all of this together, it leads to forecasts that show that Australia’s population is growing at the second-fastest rate in the world! Australia’s population increased by 2.1 per cent for the year ending March 2009. In 2008, there was a baby boom with 300,000 births and there are estimates that Australia’s population will reach 40 million by 2050. This growth in population has been one of the factors that has cushioned Australia from the economic downturn. With the population growing by over 400,000 people last year alone, that’s a lot of additional consumption of goods and services, as well as extra production within the economy. So, where are all these people going to live? How will they all be accommodated? There is already a huge demand for housing, so add another 18 million people to the mix over the next 40 years and Australia looks set to be an investor’s paradise. The greater the demand, the more rent and property prices will increase, which will strengthen demand even more.
At 1.58pm on October 1, 2009, the Australian population hit 22 million people. And counting.
Investors are already lining up to get in on the act, but with about 150,000 new homes needed each year, and a huge existing backlog, it’s hard to see how there will be enough investors to meet the housing need. Given what looks to be huge demand for housing in the future, our rule of thumb for investors is to get into a position where you own 3 or 4 investment properties by the time you retire. This enables you to live off the proceeds for 3 or 4 decades after you stop work. This is a recipe for financial independence in your golden years.
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THE HORIZON NEWSLETTER I ISSUE 11 I OCTOBER 2009
Australia is sitting pretty at number two Australia has jumped to number two on the global ranking of financial centres released by the World Economic Forum. Britain is sitting at number one, and the US - which usually holds the top spot - has slipped down to number three. The Aussie economy is growing strongly, with the June quarter registering a rise of 0.6 per cent, a drop in unemployment to 5.7 per cent and a 6.8 per cent growth in retail sales. The banks are strong, exports are healthy, consumer confidence is buoyant and property prices are on the rise. So, the Christmas decorations are going up in the shops, consumers are heading back out there, restaurants are filling up, and employers are starting to see the light at the end of the tunnel. Some people have put the majority of this down to the powers of Lady Luck. However, our strength is linked to a growing export industry, and our proximity to strong Asian economies such as China and South Korea. Mining exports in the form of coal and iron ore are powerful supports for the whole economy. The latest news on China is a quarterly growth rate that supports annual growth of 9 per cent, which is the third highest on record. I think we live in the right country, next to the right neighbours! This is definitely good news for all of us!
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THE HORIZON NEWSLETTER I ISSUE 11 I OCTOBER 2009
Here’s the exact opposite of an investor mindset
“Slower pokies plan to help cut $18 billion in gambling losses”*
Lowering the speed at which poker machines can be played and using technology to help people “pre-commit” to a limit could help reduce the estimated $18 billion that gamblers lose each year. At McCarthy Group we don’t have an anti-gambling bias, but it is hard to imagine how much further removed an investor mindset could be from that of a problem gambler:180 degrees at least. The two could not be further apart.
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THE HORIZON NEWSLETTER I ISSUE 11 I OCTOBER 2009
Here’s the exact opposite of an investor mindset
Win an Apple iPod Nano Gambling is: Property investment is: Short term Long term Random Predictable Unplanned Planned Almost effortless In need of effort Reliant on chance Reliant on trends and certainty Funded by your cash Funded by mortgage loans Home to few real winners Enabling lots of winners Little benefit to society A major contribution to society Against your favour In your favour A source of losses A source of wealth creation Harmful to many families Building your family assets There’s no doubt that serious property investors devote lots of time and effort to setting their goals, developing the right strategy, and then making sure that they do everything right. If their efforts are great, so too are the rewards that grow over time. Gamblers must also have a goal. They are looking for a lucky strike, a big win, the payout that will feed their habit, and enable a big jump in wealth. However, to enable a few to win, many must lose, and this is the source of the problem. Yes, it’s hard to follow. Even $50 or $100 a week would be sufficient to fund a long term investment property strategy. I can’t understand the logic in feeding it into poker machines instead. Can you? *Lunn, Stephen: “Slower pokies plan to help cut $18bn in gambling losses”. The Australian, October 21, 2009
here’s how. We’d love to hear your views on the investment property market or any other subject that you feel would be of interest and relevance to The Horizon readers. Simply email your contribution to info@mccarthygroup.com.au and we’ll send a colourful 8GB iPod Nano valued at $199 to the sender of the best entry. We’ll also publish the story in the next edition of The Horizon. If you have friends or relatives who you feel would benefit from an obligation-free review of their future financial circumstances, please feel free to forward them a copy of this newsletter, or email us at info@mccarthygroup.com.au or call (02) 9687 3601.
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