ISSUE 9 I AUGUST 2009
HORIZON THE
WHY DOES LAND SEEM SO SCARCE? AND SO COSTLY? WHY DOES EVERYONE WANT TO COME TO AUSTRALIA? PROFESSOR KEEN SHIFTS THE GOAL POSTS
NEWSLETTER
The WOODSTOCK GENERATION – 40 years ON
INVEST HERE
“I HAVE A DREAM” – 46 YEARS ON WHY IS THE OUTLOOK FOR PROPERTY SO POSITIVE? WITH AUGUST COMES THE MONEY STONE!
WIN AN APPLE iPOD NANO. SEE INSIDE FOR DETAILS
THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
The Horizon spreading the good news When we launched The Horizon, it was in the tough days at the end of 2008. We found lots to be positive about then, and the good news hasn’t stopped.
HORIZ ON ISSUE 1
THE
POSITIVE BUILDS NEWS CONFID ENCE INTEREST RATES SET TO FALLINGKEEP ON THE NE INTO W YEAR PROPERT POISED Y REBOUNFOR A D? RIDING THE STO OUT RM WHAT DO McCARTH GROUP Y HAVE IN CLIENTS COMMO N?
Compared to the end of 2008, good news is plentiful. The residential property market is back to pre-GFC price levels, and is still climbing. This is partially due to the government support for first home-buyers. The stock market is 35 per cent up from the trough it reached in March, and companies are reporting better-than-expected results. Australia managed to avoid a real recession, and unemployment has stabilised at about 5.8 per cent over the past year. That’s almost full employment, after the worst economic crisis the world has seen in 70 years!
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CLEAR S KIES OR STORMY What th WATERS e future holds fo ? r proper ty investo rs.
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Readers of The Horizon were quick to let us know how much they appreciated the positive stories, insights and happenings that we have focused on even in the worst of economic times. We believe that good news and opportunities are plentiful if you are open to them and keep your eyes peeled. When you do start looking, suddenly they’re everywhere.
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In our launch issue we said that ‘Misery loves company’. Doomsayers always gather to reinforce their beliefs. That’s why at McCarthy Group we are the exact opposite. We thrive on good news, and we love looking for and finding the positive, and then sharing it with whomever we can. What’s amazing is that when you are tuned into a positive waveband, good things happen! It’s the law of the universe, and is the basis of what has become a global phenomenon in terms of “The Secret.” The thoughts and feelings that you tune into and send out there are very powerful, and we would much rather be constantly searching for good news and sharing it than looking on the dark side. What’s great is that it’s getting easier to find good news. It’s all around us, and we should feel blessed to have come through this period relatively unscathed. Finding and sharing good news certainly gave us focus, and we hope that it helped you too. Onwards and upwards, and into the brightest of futures we go!
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THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
Why does land seem so scarce? And so costly?
Covering over 7.5 million square kilometres, Australia has the 6th largest land mass in the world. So why does land here seem so scarce, and why is it so expensive? With a population density of just 2.7 people per square kilometre - also the size of our average Aussie family - Australia is one of the most sparsely populated countries on earth. America, for example, is only 2 million square kilometres larger than Australia, but has a population density of 31.6 people per square kilometres. And India has 350 people per square kilometres. Less than 0.3 per cent of Australia is urbanized. So, there is plenty of land in Australia, and there is substantial land for growth around all of the nation’s major capital cities. So what’s the problem? Are we short of builders? Is the land not suitable for urban development? Don’t people want to own a home of their own? Why does land seem so scarce? And don’t even mention the price of it! The biggest issue is the extensive regulation of land and the high fees and costs in bringing developed land to market as a result of state government charges. When land is developed, considerable investments in infrastructure and services are required, ranging from water, electricity, the layout of roads, and the provision of schools, hospitals and transport facilities.
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THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
Why does land seem so scarce? And so costly? CONTINUED
Typically, these costs don’t get apportioned across the broader community, and instead are allocated against the specific areas that are being developed. This leads to huge costs being laid at the doors of the developers, and they, in turn, have to pass them on to the buyers of the land. HIA chief economist Harley Dale was recently quoted as saying, “A lack of timely and adequate land supply, high development charges and taxes, and onerous planning regulation still present a serious challenge to new home affordability.” In New South Wales, for example, fees and government charges add about $150,000 to the price of a block of land. This is why the rate of construction of new homes has been falling in NSW for so long. The typical costs of new broadacre developments compare as follows:*
Sydney Melbourne Brisbane Perth
Canberra Adelaide Hobart
Land Costs
157,733 75,448
36,265
61,775
Construction Costs
285,675 302,432
314,262 226,435 277,162
216,869 222,987 283,893
104,641 87,957
89,315
Taxes, Charges and Compliance 163,009 115,064
36,265
94,156
73,530
Darwin
18,633 12,050
76,357 74,268
One thing is certain: this is a complex issue that has arisen over decades. The extremely high costs associated with land development will not go away overnight, and land costs will simply go up as the cost of development increases, over-regulation remains in place, and demand exceeds supply. Those who already have land are the fortunate ones, as well as those who are able to use the investment property concept to fund the purchase of more. For the rest, it is true to say that the Australian dream of owning their own home seems to be sliding further away, and will remain just that: a dream. *Source: The Australian Financial Review, p47, 20 August 2009
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THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
The WOODSTOCK GENERATION – 40 years ON
Forty years after the Summer of ‘69, the peaceloving concert-goers of yesterday are known as Baby Boomers, and are heading towards - or are already in - retirement. Woodstock was an event that defined a generation. 500,000 peace-loving, free-spirited, free love-supporting ‘hippies’ gathered to celebrate their values and all they held dear. They listened to the music of 32 bands, including Jimi Hendrix, The Who, Crosby Stills Nash and Young, The Grateful Dead, and Janis Joplin. It ended up as a free concert as the organisers of the event on Max Yangur’s farm in Bethel, New York, were simply overwhelmed by the numbers who turned up, despite the soaking rain that fell for most of the three days between the 15th and 17th of August 1969. It was a time when America and Australia were at war. Almost 500,000 soldiers were fighting in Vietnam in a conflict that symbolised their rejection of society’s values and generated the spirit of Peace and Love that pervaded Woodstock. There has never been anything like Woodstock, before or since. It was a snapshot of a young generation who rejected
the values of their middle-class parents. They went there to let their freak flags fly, take drugs, chill out and listen to the music surrounded by half a million others doing the same thing. Their catch cry was “Don’t trust anybody over 30.” Forty years later, the rebels of yesterday are the stressed out Baby Boomers of today, heading towards retirement after spending their lives working in a system that typified the ideals that they rejected when they were young. Despite being half a world away, the values, messages and music of Woodstock resonated strongly in Australia. Here too, the Woodstock generation is starting to enter, or are already in, retirement. I bet when they huddled in the rain at Woodstock four decades ago, the thought of one day growing old and retiring didn’t come close to entering their minds. The message? Retirement does come around eventually, even if it seems far away right now. So, plan for it and be prepared, so your Golden Years can be just that.
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THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
Why does everyone want to come to Australia? Immigration numbers are growing, and so too will demand for housing. Number of People Years 73 900
1996-97
67 100
1997-98
67 900
1998-99
70 200
1999-00
80 610
2000-01
108 070
2002-03
114 360
2003-04
120 060
2004-05
142 933
2005-06
148 200
2006-07
158 630
2007-08
Almost seven million people have migrated to Australia since 1945, with about one million arriving in each decade since 1950. The table to the left shows the Migration Program outcomes since 1996, and the steady upward trend is very clear. The program planning level set for 2008-2009 is 190,300 people, a 20 per cent increase, with 2009 -2010 reduced to 168,700 places as a result of the economic slowdown and the increased risk of unemployment. These are still record numbers, however. At the close of World War II the government was keen to increase the Australian population and kick-start the post-war economy. The goal was to increase the population by 1 per cent per annum through immigration, to achieve an overall growth of 2 per cent per annum. The migration program is now largely driven by the need not simply for numbers, but specific skills needed in the labour market. There is a list known as the Migration Occupation in Demand List (MODL) that records occupations and specialisations identified by the Department of Education, Employment and Workplace Relations that are in short supply. It lists professional, administrative and trade occupations that are in need of workers.
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THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
Why does everyone want to come to Australia? CONTINUED
In 2001 the population was 19.1 million, or 7.4 million households. With the population growing by over 2 million since then, between 650,000 and 700,000 new homes have been required. That’s a lot of property! Numbers aside, what’s the appeal of Australia? Why do so many people want to live here? The answer is all around us. We’re a peace-loving country that is stable and well governed. As a nation we are highly educated, we are clean and green. There’s space, and natural abundance, a country with beauty that’s ‘rich and rare.’ It’s clean, law-abiding and well-run. Our island continent is ‘girt by sea’, and is a land of endless opportunity for all who come here. For migrants who have left behind over-crowded lands riddled with conflict and poverty, Australia represents the best possible new start they can make. One thing that migrants all share is the need to re-establish themselves and their families and build their assets in a new country, as quickly as they can. Well aware of the intrinsic value of real estate in their own countries, many express astonishment at the ease with which property can be accumulated. They have identified property in general, and investment property in particular, as key strategies in terms of wealth creation. For native Australians, many don’t feel the same urgency as new migrants in terms of the need for wealth creation. So, while the same opportunities and solutions are right under our noses - like investment property, for example - it’s only the minority who feel the need to make a decisive move. The steady stream of migrants will continue for a long time to come, providing a constant source of demand for new housing. The vast majority will settle in the major cities, which is where savvy property investors will be positioned to greet them.
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THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
For a secure retirement, one investment property is three too few.
To fund the millions of dollars a comfortable retirement will require, three or four investment properties need to be in the mix. The prospect of funding a comfortable retirement is a subject that is worth a lot of attention given how long retirees will live, and how much money they will need to maintain a comfortable lifestyle. You’ve no doubt seen how life expectancy is continuing to rise. Advancements in medical care and the general awareness of maintaining our health means that a man aged 65 is expected to live till about 84, and a woman to about 87. That’s a lot of time to spend in retirement years, and these are just the averages. A woman aged 60 has almost a 1 in 3 chance of living to 95 and a man 1 in 5. The question is, how do you plan to fund it? Sure, the Age Pension is still there when your savings run out, but can you live on it?
Phase Age Let’s look at those retirement years and break them down into three phases and broadly assess what money you’ll need to fund them.
Activities
1
55-65 Adventure/Active
2
65-75 Sea Change
3
75>
Health/Care
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THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
For a secure retirement, one investment property is three too few. CONTINUED PHASE ONE In the first phase many of us may still be paying off a mortgage as well as supporting adult children. We may put off our retirement until these responsibilities are off our hands. It’s natural also to have our own lifestyle aspirations. It’s a reasonable assumption that this phase will be the most active. After all, you still feel young, not “old” in the traditional sense. You are now free to pursue your sports, hobbies and travel, and naturally you’ll need money to do that. Either way, balancing these requirements is going to be an expensive time. PHASE TWO The second stage is when we may opt to have a change of lifestyle, coined “sea change” after the popular television show. We may decide that the family home is too big for our requirements and we may decide to downgrade to a smaller property and enjoy apartment-style inner city living, or alternatively, a beach or golf course lifestyle. Again, like always, your options will be somewhat dictated by how much “swap equity” and cash you have available. PHASE THREE The third phase covers the twilight years, and is arguably the most expensive. In this phase our world becomes smaller, and our thirst for travel and adventure has largely been quenched. For many of us this is the time when those old rugby injuries start to flare up and medical care becomes an important factor in our lives. With the current state of our public health system, we all know that we need to have the money to receive the best care. It seems somewhat daunting just thinking about it, doesn’t it? How do you fund all three of these expensive phases of retirement? The world’s most successful investor, Warren Buffet once said “Someone is sitting in the shade today because someone planted a tree a long time ago.” McCarthy Group’s investment philosophy is to assist our clients to fund each of these phases so that they can “sit in the shade”. Rather than fighting a losing battle against the inevitable rise in the cost of living, like a martial arts opponent, we use the opponent’s power to our advantage. By investing in a property to fund each of our three life-changing phases, our living standards can rise with the tide. Question: How this can work? Answer: Invest in 3 or 4 properties. The profit from the sale of the first property can be used to pay out your home mortgage. The second property funds the first decade of retirement. The third property funds the second decade, and the fourth property is there to see out those twilight years. Naturally, what you decide to do with your properties is your decision. Either way it’s a strategy that provides you with many options on how you will live your future, putting you in control. Either way, providing one starts early enough and follows the investment guidelines in our Immutable Rules, (free download on mccarthygroup.com.au) a comfortable lifestyle can be achieved.
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THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
Professor Keen shifts the goal posts
The much-quoted University of Western Sydney professor who forecast that house prices would fall by 40 per cent - and sold his property in anticipation seems to be shifting the goal posts in terms of the timing over which the bet plays out. As a reminder, the facts in this story are: • Professor Keen forecast a ‘peak-to-trough’ fall of 40 % in house prices; • The index referred to is the Australian Bureau of Statistics house price index; • The peak was 131.0 in 2008; • The wager was made between Professor Keen and Rory Robertson of Macquarie Bank; • The loser of the wager would hike to the top of Mount Kosciuszko in a T-shirt that reads, “I was hopelessly wrong on house prices! Ask me how!”; • Robertson would hike if the index dropped by 40%; • Professor Keen would hike if it dropped by about 20%.
“My interest is more in the long-term one, and Rory’s in the short term. “I do think it’s quite likely I’ll lose the short-term side of it, but I expect the long-term (10 to 15 years) scenario to play out.” We think he’s simply moving the goalposts, and should already be planning his hike for this summer. The risk of course is that if he’s as accurate about the weather forecast as he is about property, he might show up in winter hiking gear. (As reported by Andrew White in Rear Window in the AFR)
As house prices start rising again, Professor Keen now concedes that he will lose the ‘short term’ bet. For example, as the index goes above 131, but he then adds,
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THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
“I have a dream” - 46 years on As we mark the 46th Anniversary of Dr. Martin Luther King’s “I Have a Dream” speech, an African American President sits in the White House. For a dream to come true, however, you have to have one first. When Dr. Martin Luther King stood on the steps of the Lincoln Memorial in Washington D.C. in August 1963, he delivered one of the greatest speeches of all time. But more than the speech, he really did have a dream. A dream full of passion that inspired millions of people, and that has since come to pass. A dream to make the world a better place. Who would have thought that one day the American people would not only embrace the message of equality and opportunity for all in the “Land of the Free”, but that in August 2009, an African American President would be in the White House? This is not a political story. It’s a life story. A dream is like a vision. It involves projecting yourself forward to years, or even decades ahead, and imagining how, in the best of all worlds, things might be then. Dreams are free, for all of us. But once they’re out there, they become like the North Star in the night sky, a beacon for us to follow. Dreams can and do come true. The next time you see Barack Obama, think back to Dr. King’s speech 46 years ago and reflect on where it all began. Believe that your dream is worth making a reality. Be passionate about it and never let it go. And most of all, make sure that you have one.
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THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
Why is the outlook for property so positive? There are a great many reasons for property having such a strong long-term outlook. Many of the reasons are driven by factors of supply and demand. The Australian property market is stable and resilient like the Huon Pine tree. Since the early seventies, the median house price has doubled every seven or eight years. If we go back a hundred years, the same rate of increase applies. You may be asking yourself questions like, “Why should this trend continue?” “Why are property prices rising again, even before the slowdown is over?”
To get to the answers, consider the points below: 1)
The starting point is the current shortage of 200,000 homes that are needed but haven’t been built yet, because the land hasn’t been developed, held back and strangled by Local Government bureaucracy.
2) This backlog is increasing at the rate of about 30,000 homes a year. That’s 82 new houses every single day of the year. 3)
No surprises then that this has led to increased competition to buy and rent available housing stock. Rental vacancies are around 1.5 per cent. When put the other way, rental occupancies are at 98.5 per cent! In addition, seven out of ten houses are selling at auction on a consistent basis. These factors serve to push up prices.
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THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
Why is the outlook for property so positive? CONTINUED 4) The demand for housing will continue to increase due to: a. The increase in the natural population growth rate, for example an additional 150,000 people in 2008 (birth rate less deaths); b.Increased immigration to meet the shortage of skills and to support economic growth. Last year 250,000 more people arrived in Australia than left; c. Changes in social conditions, where a higher divorce rate leads to more houses being required. The average household size has fallen from 4.5 people per household in 1911 to 3.6 people per household in 1954 and 2.7 people per household in 2008. 5)
The reduction in the supply of housing has had an impact on developers and builders, with many being cautious as a result of the high costs associated with construction, government charges, and the impact of the economic slowdown.
6) The Australian economy punches above its weight, and is among the best in the developed world.
7)
The huge potential of China and its demand for resources. The buzz word today is Liquefied Natural Gas, or LNG. We are about to become the world’s largest LNG producer to satisfy China’s demand for clean fuel, creating the next wave of a resources-led recovery.
8)
The federal government actively promotes the investment property concept through tax deductions and the amortization of buildings. Over 10 per cent of Australians already make use of this concept to grow their wealth and save tax.
9)
Housing construction costs will continue to increase ahead of the inflation rate. This applies to the cost of new materials as well as labour costs. Building homes is a very labour intensive process. Just think of how many trades are involved. All of these tradespeople are looking to maintain or improve their own standard of living, and the cost of labour will rise accordingly, particularly if there are skills shortages in the future.
10) The price of developed land can only increase due to high development costs and the inability of state governments to absorb them.
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THE HORIZON NEWSLETTER I ISSUE 9 I AUGUST 2009
With August comes the Money Stone Peridot, the birthstone of August, brings healing and opportunity. Peridot is the stone of emotional healing. After the GFC hit the world, a little bit of healing won’t go amiss. As the healing stone of healers, this green gem is said to mend emotional wounds and draw money and opportunity our way. As the birthstone of August, the Money Stone enhances growth, prosperity, wealth, recuperation, renewal and rebirth: all things that the global economy has been in need of for some time now. Investors are also enjoying the benefits that come with Peridot as they provide for their own future prosperity and wealth. The global economy has certainly stabilised, and there are signs of improvement and early growth in many markets. China looks to be playing the role of locomotive, certainly for our economy, and we have reported elsewhere the many positives we are seeing in the Australian economy. It looks like the Money Stone is doing its job. Have you got a Money Stone working for you?
Win an Apple iPod Nano
Some great lines
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.
Muhammed Ali
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.
Before fighting George Foreman: I wrestled with an alligator, I done tussled with a whale; handcuffed lightning, thrown thunder in jail; only last week, I murdered a rock, injured a stone, hospitalised a brick; I’m so mean I make medicine sick (1974) On his golfing abilities: I’m the best. I just haven’t played yet (1965) On his aura: If Ali says a mosquito can pull a plough, don’t ask how hitch him up (1970)
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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