ISSUE 1 I DECEMBER 2008
HORIZON THE
POSITIVE NEWS BUILDS CONFIDENCE
NEWSLETTER
INTEREST RATES SET TO KEEP ON FALLING INTO THE NEW YEAR PROPERTY POISED FOR A REBOUND? RIDING OUT THE STORM WHAT DO McCARTHY GROUP CLIENTS HAVE IN COMMON?
Clear skies or Stormy Waters? What the future holds for property investors.
WIN AN APPLE iPOD NANO. SEE INSIDE FOR DETAILS
THE HORIZON NEWSLETTER I ISSUE 1 I DECEMBER 2008
Welcome to Horizon Welcome to our new format newsletter, Horizon. This is the next step in our mission to stay in touch with you as our investor clients and to share news and views on issues of importance to you. We hope you like the new format, and would welcome your input and feedback for future issues.
Bad news sells papers – positive news builds confidence If you feel like the volume of bad news in the papers has reached saturation point, don’t feel alone. Yes, we have travelled through a tough year. But no, the world is not ending, despite what so many media reports would have us believe. We need to sift through the bad news in the search for the good – that’s where the diamonds are – and that is part of the spirit in which Horizon is launched. Sometimes it feels like the media writers are falling over themselves in an attempt to present the gloomiest picture possible. This
negatively affects people’s confidence, and it gets passed on like a virus. As the saying goes, “Misery loves company”. There is an antidote; let’s be realistic, and objective, and look for the positive amongst all the bad news that is out there. We believe there’s lots of good news about to balance the equation. So we’ll share the positive news that we find along the way. We think you’ll relate to that, as we look to balance some of the news from the investor perspective.
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THE HORIZON NEWSLETTER I ISSUE 1 I DECEMBER 2008
A few positives for starters To make our point, how much good will the following do for the property market as a whole?
The First Home Buyer’s Grant – this has now doubled for existing properties and tripled for newly built homes. The full effect will take a while to filter through the system, but the Generation X and Y buyers are out there right now looking for an ownership solution, which will support property prices into the future. Various articles have reported an increase in buyer interest and inspections, and first-time buyer demand should increase further in the first half of 2009.
Falling interest rates - and these are falling much faster than they went up. Yes, this means that the rate reductions were very much needed. But in the property context, every percentage point drop brings property ownership within reach of more and more aspirant Australians. And welcome cash flow relief to property investors and homeowners. And with a 3% reduction in interest rates over the past 3 to 4 months, mortgage costs are falling fast.
Rising rentals - and this has to be the long-term outlook, even as interest rates fall. Driven by the backlog of homes and the slowdown in construction despite the surge in immigration, it’s not surprising that rents continue to climb, that vacancies are so low, and there are reports of bidding auctions for rental properties And with borrowing for housing actually falling, these positive trends (for landlords) are unlikely to change in the near term.
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THE HORIZON NEWSLETTER I ISSUE 1 I DECEMBER 2008
RBA cuts interest rates by a further 1%...with more to follow
INTEREST RATE
INTEREST RATE MOVEMENTS: 2002 - 2008
2002
2004
2006
2008
TIME
UP THE STAIRS... AND DOWN IN THE ELEVATOR!
For the fourth month in succession, the RBA has reduced the bank rate, and we now have an official bank rate of 4.25%, the lowest since late 2001, and a whopping 3% reduction from the 7.25% we were all experiencing as recently as 3 months ago! This is great news for homeowners and property investors, and with the added benefit of falling fuel prices, the average family will be certain to feel relief from the cost pressures of the past 12 to 18 months. The fact that so many Australians have variable rate mortgages compared to e.g. the USA means that the interest medicine works through the system very fast indeed, and with the major banks quick to pass on all or the bulk of the latest reduction, the net result will be more cash in the pocket for most mortgage holders. And from there the surplus cash finds its way back into the economy, circulating for everyone’s benefit. The next RBA meeting will be in February 2009, and the predictions are already out there for a further 0.75% reduction, which would mean that mortgage costs would have more than halved in 6 months. Who would have predicted this when the last move was 0.25% upwards as recently as March 2008?! According to the Reserve Bank Governor, Glenn Stephens, the interest rate setting is now “stimulatory”. That sounds like good news for property investors.
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THE HORIZON NEWSLETTER I ISSUE 1 I DECEMBER 2008
Property poised for a rebound? The latest data released by RP Data-Bismark International* shows that the median national house price actually rose by 0.3% in the 3 months to October. One factor driving the growth is falling interest rates and the expectation of the further large cut announced in the first week of December. RP Data national research director, Tim Lawless, is quoted in the article as saying, “ The facts are that over the past 12 months Australian property prices have declined by just 0.8%, which is a phenomenal result when compared to the S&P/ASX 200 Index, which reported a decline of 40.5%.” Of equal significance is the strength of the Australian housing market compared to that of the USA, where house prices have dropped overall by 20% since their peak in 2006, and a 15% drop in the UK, depending on location. Whether we are at the turning point of the next cycle of growth in the property market won’t be apparent for the next 3 to 6 months. However, with the minimal 12-month drop in property value despite a global economic year as bad as any in memory, and with interest rates dropping fast, it just might be that property owners in the “Lucky Country” will feel they have dodged a bullet.
In the opinion of Mark Armstrong, a Director of Property Planning Australia in an article reviewing 2008**, “For savvy investors who act now, rather than waiting until the general market confidence is restored, the remainder of 2008 and early to mid 2009 represent a rare chance to enter the property market while demand is muted relative to supply, interest rates are falling and rent levels are rising.”
The facts are that over the past 12 months Australian property prices have declined by just 0.8%, which is a phenomenal result when compared to the S&P/ASX 200 Index, which reported a decline of 40.5%.” Armstrong concludes, “If 2008 represented the slowing of the property market pendulum, 2009 will be the year when the momentum begins to pick up. By acting now, you can buy well and sit back while activity by other investors increases the value of your asset on your behalf.” • *As reported in The Weekend Australian Financial Review, Nov 29-30 2008, p4, “Property shows signs of rebound”, written by Scott Elliott • ** 2008 in Review, Australian Property Investor, December 2008, p12, written by Mark Armstrong
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THE HORIZON NEWSLETTER I ISSUE 1 I DECEMBER 2008
$700 boost to the average family budget* The average Australian now has close to $700 more in the kitty each month than they did just six months ago, according to economists surveyed by The Daily Telegraph. Taking the December rate cut into consideration, home-owners will save around $525 a month on mortgage repayments, compared to six months ago. These savings combined with the dramatic fall in petrol prices as well as an easing in grocery, wine and travel costs will see the cost of living fall to a five-year low, economists told the daily. *Published in the Daily Telegraph on 2 December 2008
These boots are made for walking…. An interesting wager has been made between Macquarie Group economist Rory Robertson and university academic Steve Keen following Keen’s prediction that house prices will fall by 40%. Robertson believes this is impossible. The loser of the bet will have to hike 230km from Canberra to the 2228m peak of Mt Kosciuszko wearing a T-shirt printed, “I was hopelessly wrong on house prices! Ask me how”. We suggest that Prof Keen buys his boots and T-shirt now while retail prices are sharp, and starts some hiking and hill-climbing activity as preparation over the summer months ahead. His journey should be underway by mid-winter.
Retailers crying poor In the past week or two Gerry Harvey (Harvey Norman), Solomon Lew (Premier Investments) and Mark McInnes (David Jones) have been flagging how bad prospects are for retailers despite that Christmas is just around the corner, as is the first arrival of big chunks of stimulus money courtesy of the Federal Government. (Pensioners and lowincome families are set to receive the start of an $8.7 billion boost from the government in the second week of December). With the retailers’ bleak outlook for 2009, one wonders if the timing of their forecasts was perhaps focussed on the looming meeting of the RBA on interest rate settings and sending a message to the decision-makers about how large the retailers would prefer the cut to be? If this played a part in the welcome 2 December decision to drop rates by a further 1%, the retailers will measure consumer gratitude at the check-out tills.
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THE HORIZON NEWSLETTER I ISSUE 1 I DECEMBER 2008
Riding out the storm Investment property is a long-term investment, which means that you’ll travel through long periods of smooth sailing, but there will be storms along the way. There is no doubt that we are travelling through such a storm at the moment, and with the fall in share prices and super, and the high inflation / interest rate period that we have been travelling through, many budgets will feel squeezed to the limit. In our view, (and in the opinion of many of our clients, and many specialist investors), property has to be held for the long haul. Which means not selling, particularly in tough economic times when prices will be less attractive for the seller. In many respects this means that you have to stick to your ‘buy and hold’ strategy, and find other ways to make the budget fit rather than resorting to selling. This might mean belt-tightening in other areas, cutting back, reviewing existing commitments, re-financing, but essentially taking a number of cost reduction actions that provide the relief to meet cash flow requirements and enable you to hold on to your property.
With regard to holding costs, the recent sharp reductions in interest rates, with more to come, will certainly provide muchneeded relief. And on the income side of the equation, rising rentals will do the same. A key consideration is to review your insurance cover. By this we don’t simply mean your home insurance and landlord’s insurance, but rather life insurance, disability insurance and income protection insurance and the like. These are vital considerations whatever the circumstances, but sometimes it takes the threat of tough conditions around us to review these key support pillars in our personal structures. In summary, our position is that it is the ability to travel safely through times like these that sets investors up for long term success. In our view you should be proactive, and realistically review your situation and budgets with the goal of holding to your strategy, and if needed get specialist advice from experts to assist you in this regard. And don’t neglect insurances – this is not the time to be caught short.
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THE HORIZON NEWSLETTER I ISSUE 1 I DECEMBER 2008
What do McCarthy Group clients have in common?
There are many things that we share. We are blessed to live in Australia. We (mostly) own our family homes. We own investment property. We know the feeling of fear and uncertainty when the investment property decision was first made. We have assets against our names. And mortgages against the assets. We are landlords, and providers of homes to families who don’t have homes of their own. We are in the investment property business. We get income tax benefits and rental receipts for our efforts. We have costs associated with the properties, and we face risks. But aside from all the above, I believe that we are all realists who at some point were prepared to look far into the future to see what our life plan would look like financially once work stopped, and when faced with the harsh reality, were brave
enough to do something about it. In other words, implement a solution by investing in property as a long-term solution to our future funding needs. If this is something that we have in common, it also sets us apart from about 90% of all Australians, who retire into circumstances that don’t allow them to lead a lifestyle where they are financially independent, and who have to rely on the age pension as their primary means of support. For every one of our clients who has faced the future and made the decision to do something about it, there must be at least five others who have been confronted with the same picture but who have decided not to proceed. Why is this?
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THE HORIZON NEWSLETTER I ISSUE 1 I DECEMBER 2008
Win an Apple iPod Nano With almost 18 years’ experience in this industry, and having reviewed thousands of prospects and proposals along the way, my belief is that there is one fundamental difference between those who make the decision to proceed and those who don’t:
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 Horizon readers.
For both groups, a. the long-term reality is clear, but far away b. The short-term reality is also clear, but immediate
Simply email your contribution to info@mccarthygroup.com.au and we’ll send a colourful 16GB iPod Nano valued at $199 to the sender of the best entry. We’ll also publish the story in the next edition of Horizon.
However, the key difference is • Some people are able to face short term fears and make decisions and sacrifices that will enable long term gain and peace of mind • Others can’t make the short-term sacrifices and commitments nor face their fears, and then leave the long term situation to somehow look after itself. (The sad reality is that in most cases, this doesn’t happen). The result is two different worlds. As you will no doubt know.
Happy investing and kind regards
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 e-newsletter, or email us at info@mccarthygroup.com.au or call (02) 9687 3601.
Stephen McCarthy, CEO McCarthy Group
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