ISSUE 8 I JULY 2009
HORIZON THE
PROPERTY’S DR. NO IS STILL TALKING HOUSE PRICES DOWN
NEWSLETTER INVEST HERE
RECORD ARRIVALS BOOST AUSTRALIA’S POPULATION INTEREST RATES ON HOLD MEANS GOOD NEWS HOW WOULD YOU INVEST $50 PER WEEK? RENTAL PROPERTY MOVES CENTRE STAGE HOUSE PRICES ON THE RISE
The vision that was the moon landing 40 years later WIN AN APPLE iPOD NANO. SEE INSIDE FOR DETAILS
THE HORIZON NEWSLETTER I ISSUE 8 I JULY 2009
McCarthy Club: What would you like to see in it? As the next step in the evolution of our client support and group services, we are planning to launch a new concept called McCarthy Club. This will be exclusive for clients, and will add further value and usefulness to our relationship with you. While we have lots of ideas about what might be of interest and appeal, we want to ask you, as our valued clients, what you think we should be considering and what you would like to see in your Club. You would be able to access McCarthy Club as part of our website through a client ID and login, and from there, the content, functions and applications would be many and varied. We want you to help us shape its form. The ultimate goal is to provide a Club for our clients where they would be able to access a suite of services, information, specialist advice as well as a calendar of events and activities all aimed at strengthening the relationship between us and to promote an environment where our forum of clients can communicate and interact.
Help us plan our new Club for McCarthy Group and be in the running to win an iPod.
We will be giving away an iPod for the best idea that we receive, so put on your thinking caps, tell us what you’d like to see in McCarthy Club, and email your suggestions to info@mccarthygroup.com.au
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THE HORIZON NEWSLETTER I ISSUE 8 I JULY 2009
The vision that was the moon landing 40 years later An incredible achievement, all made possible by a bold vision for the future. Are there lessons in this for us? The world has just celebrated the 40th anniversary of the July 20th 1969 moon landing. It hardly seems believable as we look back and see the images of Neil Armstrong and Buzz Aldrin and their celebrated moon walk. Neil Armstrong uttered the now iconic remark: “That’s one small step for man, one giant leap for mankind” when he set foot on the moon’s surface.
landed there and walked around on its surface! Never mind 40 years ago, ever! Such an achievement reminds me of the bold vision and brave actions of many of our clients, who also had to face fears and head into the unknown when they took their first steps and bought their first investment properties.
If ever there was a case of a vision of the future, this was it. President Kennedy inspired the nation, with a rousing speech, in part saying “We chose to go to the moon, not because it is easy, but because it is hard, because that goal will serve to organise and to measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.”
Our first clients are now celebrating the 10th anniversary of their investments. The giant leaps they have made since and the journeys traveled are huge achievements in their own right.
When you walk outside and look at a full moon in the night sky above, it’s hard to imagine people like us
NASA’s next destination is Mars. What is your dream of what you might achieve before then?
Just wait for the 40th anniversary of your first property purchase if you want to appreciate what enormous value means!
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THE HORIZON NEWSLETTER I ISSUE 8 I JULY 2009
Despite the strong conditions in almost all housing markets, the property gloom merchant, Professor Steve Keen, is still forecasting property declines even as values increase.
Property’s ‘Dr No’ is still talking house prices down
Last year he forecast that Australian house prices would drop by 40%, and that if they didn’t, he would hike to the top of Mt Kosciusko. He should have been there and back already.
Academic Professor Steve Keen is still talking Australian property down when he should be walking, to the top of Mt Kosciusko.
He adds that we are in a period of ‘severe de-leveraging’ which we assume is ‘Keen Code’ for fewer and lower loans being approved by the banks, and that prices will fall as a result.
The information contained in this newsletter is of a general information nature only. It has been prepared without taking into account the personal objectives, financial situation or specific needs of any of our readers. It is not intended to constitute financial advice. You may wish to consult your accountant or an independent financial planner for an assessment before acting on any information found within this newsletter.
I recall that Professor Keen was so adamant that he was right that he sold his Sydney property in anticipation of the ‘crash’ that never came. He’ll have plenty of time to wonder about the wisdom of this decision when he undertakes his hike.
Known as the most pessimistic forecaster in the country, Professor Keen has now helpfully explained that the price you pay for a house is the amount of leverage the banks give you to buy it!
Fortunately, no one is listening. Australian property appears to have hardly been affected by the worst global economic conditions in the past 75 years.
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THE HORIZON NEWSLETTER I ISSUE 8 I JULY 2009
Record arrivals boost Australia’s population Last year’s 1.9% growth in our population doesn’t sound like much. How about 406,083 more people? Now that’s impressive! Australia’s population has hit 21.6 million, and climbing. The combination of high immigration rates and high birth rates has led to a record increase in numbers, with over 253,000 people more in net migration alone (total arrivals minus total departures). With the sorry state that much of the world is in, it’s no surprise that so many people are keen to call Australia ‘Home’. If a quarter of a million succeeded in their efforts, one wonders what the total demand would be in terms of people wanting to follow suit. The ABS predicts a population of 28 million by 2028, and 35 million by 2056. Impressive as these numbers are, the 1.9% increase of 2008 would lead to far higher numbers, to a doubling to 44 million by 2050. How’s that for an example of compound growth at work! What goes through my mind is that we will need twice as much accommodation as we currently have, and we need it all to be built in the next 40 years! That’s in our lifetimes, and in our children’s too. What will properties cost at that point? How will those who don’t get in early, ever get in at all? As readers of The Horizon, you are among the lucky ones, because you probably own a family home as well as at least one investment property, with some clients owning quite a few more. Despite that you made your own luck, there is no doubt you will feel fortunate to be a property owner during a period where demand for accommodation doubles.
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THE HORIZON NEWSLETTER I ISSUE 8 I JULY 2009
Interest rates on hold. Which means good news The RBA looks set to hold interest rates where they are. This is a sign that the economy has stabilized and is strengthening, which really is good news indeed. The RBA is upbeat on the economy and the prospects of recovery. This is the message from their decision to hold interest rates where they are. Having avoided a recession, and with signs of growth in many quarters, the outlook is positive. “The outlook remained for a gradual recovery to begin later in the year, and downside risks to that had diminished.” RBA Board, July 2009. The banks are already discounting the chances of any further rate cuts, so it is likely that the next move - when it happens - is likely to be up. This has to be a better outcome than the preamble to the Budget that was handed down just a few months ago. Further good news was that inflation has fallen to 1.5%, which is below the RBA’s target range of 2% to 3%. It doesn’t seem that long ago that Treasurer Wayne Swan had said, “The inflation genie was out of the bottle.” It has certainly gone back inside, which is further good news for us all.
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THE HORIZON NEWSLETTER I ISSUE 8 I JULY 2009
Seeing is believing: How would you invest
$5
PER WEEK?
As an astute investor, you will be aware that investment property is the way to go. But do you know by how much it outperforms saving? When asked how to get the best return on a $50 per week investment commitment, many people automatically consider a savings plan at the bank, or paying off more on the mortgage. This is what most of us learn from our parents, and is regarded as common wisdom. Those who followed one of these routes would miss out on the staggering returns offered by a third alternative: investment property. As you know, this is not a “high risk” strategy either, despite the exceptional returns. Here’s how the three options compare: A $50 per week investment means $216.67 per month. Let’s invest this every month for 7 years. Here’s what happens: Option Investment Strategy
Increase in net worth after 7 years
A
Save $216.67 per month at 3.5% interest
$19,387
B
Pay an extra $216.67 off a $250k loan
C
Invest $216.67 per month in an investment property
$21,738
$255,089
While you already know that investment property will outperform a savings investment plan, what comes as a surprise is the 13 times greater return that the same weekly investment can achieve when applied to investment property. It really is amazing, and makes one wonder why fewer than 10% of Australians have discovered the enormous power of investment property. For your interest and reference, we have included the calculation below House cost Amount borrowed* Mortgage interest rate Rental income per week
$560,000 $586,944 5.00% $510
Property growth rate** Projected value after 7 years Loan amount Equity
6.00% $842,033 $586,944 $255,089
Income assumptions Spouse 1 income Spouse 2 income Total household income
$80,000 $20,000 $100,000
*Includes property purchase price and all buying costs ** This is conservative. 7% to 8% annual growth has been achieved on average for the past 40 years
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THE HORIZON NEWSLETTER I ISSUE 8 I JULY 2009
Rental property moves to centre stage
An undersupply of housing, weak returns from other assets, and changes to super rules have placed the spotlight firmly on investment property.
The ‘tree schemes’ or MIS have all been pulped as well, and this investment class will probably disappear as a supposedly tax effective investment strategy.
Investment trends resemble the ocean, with endless movement, storms and squalls followed by calm periods, and the continuous ebb and flow as the tides move in and out.
It’s small wonder that investors are turning to investment property, and the potential of negative gearing, as a strategy to increase their net worth as well as reducing tax. This trend will gather pace once the first-home buyers start to drift out of the market come September, easing the upward pressure on the prime investment market properties of $350,000 to $600,000.
With super funds posting their worst returns since super was introduced in 1992, investors have lost up to 20%, depending on their fund, at a time when they can least afford it. The share market has also been through a shocker, with many small investors converting into cash as their share portfolios plummeted in value. Topping up the losses in super would have been the obvious strategy, but with the government changing the rules in the last Budget and limiting the amount that can be invested to $50,000 per annum, this route is less attractive than before.
With the performance of property relative to other assets, it’s likely that investors will think twice before leaving property in favour of other alternatives. The demand for accommodation can only increase, driving up rentals and capital values along the way. With the excellent tax deductions available, investment property seems set for a long run.
BUILDING FAMILY ASSETS
THE HORIZON NEWSLETTER I ISSUE 8 I JULY 2009
Gen B for Boomerang: 25% of Australians under 34 still live at home! Here’s a great story to get some fiery discussion underway at dinner! We found it in Michael Matusik’s itp report. It’s food for thought! “According to the new ABS stats released earlier this month, one quarter of Australians under the age of 34 still live at home. One in six of these “kids” (if you want to call them that) have never left home, whilst one in ten have, only to return again to the family nest. Interestingly, of the 75% of young adults who don’t live at home anymore, close to 25% have returned home at least once. Gen Y should really be renamed Gen B, for Boomerang! Many like the “convenience, comfort and enjoyment” of living at home. In short, it is easier. To baby boomer parents: Now is the time to act! The first home owners boost still applies; rents have reached a plateau and housing interest rates are at record lows. There might not be a better time to get your “kids” out of your home. And to Gen Y: Are you tired of being harassed by your stupid parents? Well, the same applies to you, too - act now! Move out, get a job and pay for your own bills. Do it while you still know everything!” Source: Michael Matusik, itp, 22 July 2009
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THE HORIZON NEWSLETTER I ISSUE 8 I JULY 2009
House price increases are great for consumer confidence It’s hard not to get excited about the good news on the Australian housing market. It makes us all feel more confident and secure. The evidence continues to mount that the Australian housing recovery is underway, which is great news for the country’s psyche. With prices having fallen 2.6% last year (a remarkable performance under the circumstances!), there were fears that more could follow. The latest RP Data-Rismark indices, however, show that prices increased by 4% in the first 5 months of this year. This means that they are higher now than when the GFC began! Rismark’s Christopher Joe said the market had proved very resilient, and we could expect modest gains over the next 6 to 12 months. More good news is that the house prices in more expensive suburbs are also picking up, dispelling the notion that this is a short-term influence of the First Home Owner’s Grant. Property owners feel more secure and confident when the value of their homes increases steadily. Can the return of the ‘wealth effect’ be far behind, when rising asset values lead to the perception of greater wealth, and spending increases as a result? We hope so - more spending can only help the overall economic recovery, and with inflation at 1.5%, there’s plenty of upside to do just that!
BUILDING FAMILY ASSETS
THE HORIZON NEWSLETTER I ISSUE 8 I JULY 2009
The end of retirement The make-up of the world’s population is undergoing a slow and steady change that will have profound consequences for society as we know it. With longer life spans and families having fewer children, by 2020 almost one person in three in the developed world will be a pensioner. How will we afford the healthcare and other agerelated spending when even now the retirement age is being pushed up to 67 simply to keep people in the workforce for longer and reduce the costs of government support? With fewer working people to support more and more retirees, there simply won’t be the funds to provide any more than the most basic support for pensioners. This will be a huge difference to the pensioners of today, who are relatively small in number, and who have benefitted from an economic period of growth where the country has grown richer every year for the past 17 years. When we look back on today’s benefits, they will seem generous in terms of what the country will be able to afford. The lesson in this is that it has never been more important to take responsibility for your own retirement funding. Superannuation is a must,
The whole world’s population is ageing. With more people needing support and fewer to support them, for many retirement will simply be a dream.
so regular savings, paying off the mortgage and economising and budgeting make these strategies possible. Most important of all, however, is the ability to create the kind of future passive income and capital appreciation that property in general, and investment properties in particular, can bring. At McCarthy Group, we believe that as the country ages, and the composition and mix of retirees versus working age people changes, more people will be looking to investment property as a form of security for the future. The challenge, of course, is not to leave it too late. Investment property needs time to do its work: at least one property cycle of 8 years, and preferably two, which means that decisions and investments have to be put into place while you are in your mid-to-late forties, at the latest. The earlier the better, and of course, the more properties the better as well. There is a ‘grey world’ approaching, and only those who prepare for it now will be able to enjoy a comfortable and secure retirement in a very changed world.
BUILDING FAMILY ASSETS
THE HORIZON NEWSLETTER I ISSUE 8 I JULY 2009
2009 auction clearance rates soar If demand drives prices higher, how’s this for demand? Sydney’s auction clearance rate surged over the weekend of the 18th and 19th of July as buyers shrugged off gloomy reports about the top end of the property market. The clearance rate was 74.7%, as $70.6 million of property changed hands, Australian Property Monitors said. This time last year about $59.9 million of property sold in Sydney with a clearance rate of 45.7%. A spokesperson put the higher clearance rates down to a “shortage of stock, low interest rates and confidence.” Melbourne continued its run of high auction clearance rates at 85%, the Real Estate Institute of Victoria said, and was into its 10th week with clearance rates above 80%. There were 344 auctions reported, of which 294 sold. In Brisbane, the clearance rate of 56.5% was close to a 12-month high, as $5.3 million of property sold. The Australian Financial Review, Page 48, 20 July 2009, as quoted in itp, 22 July 2009
Stephen McCarthy CEO McCarthy Group
Win an Apple iPod Nano 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. Simply email your contribution to info@mccarthygroup.com.au and we’ll send a colourful 16GB iPod Nano valued at $275 to the sender of the best entry. We’ll also publish the story in the next edition of 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 e-newsletter, or email us at info@mccarthygroup.com.au or call (02) 9687 3601.
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