+ About John McGrath
John McGrath is considered one of the most influential figures in the Australian property industry. As Chief Executive of McGrath Estate Agents, he took the company from a lounge room start-up in 1988 to one of Australia's most successful residential real estate groups, selling $10.1 billion in residential property in FY14.
A total solution company, McGrath Estate Agents currently has offices located throughout Sydney, North Coast, Central Coast, Southern Highlands, South Coast, the ACT and Queensland, as part of its growing franchise network.
In October 2008, he was honoured by the Real Estate Institute of NSW with the Woodrow Weight OBE Award, a lifetime achievement award for his outstanding contribution to the real estate industry.
John himself has become a spokesperson for the industry both in Australia and internationally. John has five books that have reached bestseller status including “You Don’t Have To Be Born Brilliant” and “You Inc.”. In “The Ultimate Guide to Real Estate”, John shares with the reader his invaluable knowledge on the Australian property market.
Tuesday, June 28, 2016
With just a few days to go before the end of the financial year, now is the time for investors to attend to those small repairs and maintenance issues you’ve been putting off. You may want to consider getting them done now so you can claim the cost in this tax year. However to do this you must move quickly as June 30 is only a couple of days away.
Tax deductions are a crucial part of cash flow management with property investment. They’re not a reason to buy – so don’t go purchasing a new property solely because of the depreciation or anything like that, but certainly take your deductions seriously because they can have a big impact on your bottom line and deducting everything you’re allowed to deduct is part of the drill.
I also think the end of the financial year is a great time for investors to take stock of their investment’s performance.
How much income did you receive and how much did you spend on outgoings, including the mortgage? Remember, you can claim a deduction for interest payments only, not principal payments (which is why most investors use interest-only loans).
Next question. Is there new equity in the property that could be used for renovations or a deposit on your next investment? In markets like Sydney where there has been significant annual growth for four years, it’s definitely worth asking your local agent what they think your property is now worth.
Remember, the new equity in a property might not be immediately accessible like your wages and rental income, but it’s still money you’ve earned over the year. The best part is you don’t have to pay income tax on the equity and your bank will give you a big chunk of it (usually 80-90%) in new borrowings if that suits your purpose.
Given it’s that time of year, let’s go over a few common questions about property investment expenses.
What’s the difference between repairs, maintenance and improvements?
1. A repair is usually partial and restores something to its original state, eg. repairing part of a fence by replacing two palings.
2. Maintenance is work that prevents deterioration or fixes current deterioration eg. painting your property or oiling the garage door.
3. An improvement makes something better than it was originally or provides something in a new and more valuable or desirable form. They generally improve the property’s income production or expected life. For example, if you replace a crumbling timber carport with a brick lock-up garage, you are going beyond simply repairing the carport, you are replacing it with an improved feature.
What can I claim as an immediate deduction and what has to be depreciated?
Generally speaking, you can claim an immediate deduction for repairs and maintenance as long as your property is being rented out. With improvements, you can either claim a capital works deduction or depreciation, depending on the type of improvement.
What if I’ve lost my receipts?
If you paid with a credit card or EFTPOS, the ATO will accept bank statements as proof of purchase.
Can I do my own tax return?
Sure but I don’t recommend it. One of two things will probably happen – at best, you’ll make mistakes or forget some deductions that will result in you losing money; at worst you’ll get fined by the ATO for your errors.
Get yourself a great accountant, declare all your income and enjoy the peace of mind that your tax professional will identify every deduction you qualify for. And next year, you can claim a deduction for the accounting costs too.
EOFY Check List
Examples of common immediate deductions:
- Advertising for tenants
- Accountancy costs
- Body corporate fees and charges
- Council rates
- Water charges
- Land tax
- Gardening and lawn mowing
- Pest control
- Insurance (building, contents, public liability)
- Interest expenses
- Property agent's management fees
- Repairs and maintenance
- Travel undertaken to inspect the property, to collect the rent or for maintenance.
Examples of common depreciation expenses:
Examples of common capital works deductions:
- A building or extension, such as a new room, garage, patio or pergola
- Alterations – such as removing or adding an internal wall
- Structural improvements – such as adding a gazebo, carport, sealed driveway or fence.
Everything you could possibly need to know about deductions and depreciation can be found in the Residential Rental Properties section of the ATO website.
Tuesday, June 21, 2016
by John McGrath
It’s a great signal for the market that several lenders have recently changed their policies to make it a bit easier for investors to get back in the game.
Last year, the APRA-imposed 10% annual limit on investor lending growth put the brakes on investor lending.
Banks changed their criteria so that only the best investors with plenty of equity and serviceability were granted loans, which reduced their investment credit growth and created a better balance between their borrowings to investors and owner-occupiers.
CoreLogic reports that the latest housing credit growth figures shows investor housing credit has increased by 7.1% over the past year, which is the lowest it’s grown since November 2013. This has given some scope back to the banks to lend to more investors once again.
One recent change among the banks was Westpac’s call to reduce the size of the deposit they required from investors on new loans. While this merely brought them into line with many of their competitors’ policies, it’s a significant change because Westpac is Australia’s biggest lender to investors.
I think it’s a great signal that banks want to lend to more investors again now that they’ve got growth under the 10% cap. And demand from investors is clearly still there.
CoreLogic tells us that activity across their valuation platforms, which account for more than 95% of all bank valuation instructions, were up 6.7% over May, indicating an increase in mortgage-related activity.
The latest housing finance data for Sydney shows investor mortgages comprised 47.6% of new loans in March compared to the trough of 42.9% last November. This is the highest composition of investors in the marketplace since August 2015.
I had a chat about all these changes with Alan Hemmings, who is General Manager of McGrath’s mortgage broking division, Oxygen Home Loans. Alan says lenders are making changes right now for the following reasons:
- To gain market share by aligning their policies with their competitors
- To gain market share by bettering their competitors’ offers, or by creating attractive new policies such as Westpac’s changes to parental leave criteria
- To reduce market risk specifically on high density housing in major cities which are facing an oversupply of apartments; and lending to foreign investors
Alan has provided a list of the most significant changes over the past month:
- Many lenders began offering further interest rate reductions on a range of products, including Westpac Group, CBA and NAB
- Macquarie Bank reduced LVRs to 70% in certain high density postcodes such as Sydney CBD
- AMP announced reductions in LVRs based on foreign income types, down to 70% for Euro, British Pounds, Japanese Yen; and 50% for Chinese Yuan
- AMP also announced it would not lend to non-residents unless one of the applicants is a citizen or resident of Australia
- Bankwest reduced the benchmark rates used across a range of products to assess serviceability for a new loan, thereby improving clients’ borrowing power
- NAB changed their foreign resident policy by reducing LVRs and implementing a new verification process (contacting employer directly)
- Westpac Group (St George, Bank of Melbourne, BankSA, Westpac) made changes to parental leave policy. They will now use the income to be earned upon the applicant returning to work but the deal must service the loan during any unpaid leave period
A word from Alan …
“Speaking to a broker, who is across all the policy and product changes, is more important than ever. Lenders are making changes to credit policy and product pricing virtually on a weekly basis right now, which makes it very hard for the ordinary consumer to understand which lender is best for their circumstances.
“The last thing you want is declined applications on your credit history. It’s crucial that you approach the right lender from the start and a good broker will make sure that happens.”
Thanks Alan, great advice.
Today, the standard variable mortgage rate is at its lowest level since 1968.
Go back and read that again.
Today’s interest rates present a phenomenal opportunity for buyers, investors and home owners alike to get a better deal on their finance and/or to acquire their next property.
Real estate should always be a long-term play, so you need to consider how rates will change over the 20-30 years you’ll be paying off the mortgage. There will come a time when rates go back to the average of 7-7.5% or higher, so you need to take advantage of every opportunity to buy when rates are low.
I also think it’s worth considering fixing rates on your loans if you want that security and stability in your monthly expenses over the next 2-5 years.
Tuesday, June 14, 2016
By John McGrath
A recent report on Australia’s major regional markets has highlighted the Gold Coast as one of the country’s top performing areas, with a significant increase in prices and sales volumes over the past year.
The report, released by CoreLogic in May, shows the Gold Coast’s median house price increased 7.2% to $563,500 and 4.8% to $370,000 for apartments over the year to March 2016.
The number of sales is also up 7% and current sales activity is 24% above the five-year average for the city. The average number of days it takes a property to sell has also fallen by four days for both houses (70 days) and apartments (87 days).
There’s also good news in the rental market, with weekly rents up 4.2% to $500 per week for houses (an average yield of 5.1%) and 5.4% to $390 per week for apartments (average yield now 5.9%).
I’ve been talking about the Golden Triangle in South East Queensland for some time now as the pick of the Australian markets, and for different reasons, I see Brisbane, the Gold Coast, Sunshine Coast and Toowoomba being primed for good growth. The 2018 Commonwealth Games will provide an even greater boost to the Gold Coast in particular.
Demand on the Gold Coast is higher due to a lack of stock; more Chinese investors, more interstate investors (particularly from Sydney and Melbourne), and the generation of more new jobs mainly for Commonwealth Games infrastructure and many new residential apartment projects.
The picture right now is rosy, but the future picture is even better.
This is a city that suffered tremendously during the GFC. But in property, what goes down must eventually go back up if the fundamentals are good. And on the Gold Coast, the fundamentals making this an appealing market are improving every year.
Last year, the country’s most authoritative social demographer, Bernard Salt, produced a report called ‘Beyond the Horizon’. The reports seeks to forecast what the Gold Coast will look like by 2050.
Right now, it’s the sixth largest city in Australia with more than 600,000 residents. The population is expected to double in a city that is only 70km from north to south. What will that do to property prices?
This is a city ‘under renovation’ in many ways, the most important being the expansion of its economic base, so it will not be so heavily reliant on retail, tourism and construction industries, which have made the city vulnerable during economic downturns.
But a change is coming with the strategic development of a broader economic base focused on knowledge industries such as health and education.
Knowledge industries are important because it is envisaged that knowledge workers will have more scope to choose where they want to work and live, and the Gold Coast’s lifestyle and relative affordability will be a major drawcard for highly-paid, highly-skilled expert workers.
The city’s 200-hectare Health and Knowledge Precinct is rapidly growing. It incorporates the new Gold Coast University Hospital, research and allied health facilities; and a master planned mixed use community. It is also home to Griffith University, ranked among the world’s top 5% of universities with $500 million invested in recent years to improve its facilities.
Tourism will remain a huge sector for the Gold Coast. In 2013, the city was accommodating 62,000 visitors per night. By 2050, Mr Salt projects the city will host 99,000 on average per night.
Construction should also remain strong for two reasons – the ongoing desire by Chinese and local developers to build along the coast; and the need for more houses in the greenfield suburban corridor between Mudgeeraba and Pimpama.
The Gold Coast of the future will be an international city, with millions already being invested into the Gold Coast Airport to accommodate greater demand and more international routes.
China is the Gold Coast’s No. 1 source market for foreign investment and international tourists. The city is welcoming Chinese interest, with major Chinese developers such as the Wanda and Ridong groups building on the coast and the local council investing $6.8m to build a Chinatown in Southport.
According to Mr Salt, the number of Asian-born residents on the Gold Coast is projected to quadruple by 2050.
All in all, there are exciting times ahead. The Gold Coast, despite recent price growth, is still a ‘Buy’ market in my view. There is plenty of opportunity, especially for cashed-up buyers from Sydney and Melbourne, to buy well on the Gold Coast for investment or a wonderful lifestyle change.
Tuesday, June 07, 2016
by John McGrath
There’s an emerging trend in major cities like Sydney and Melbourne where neighbours are banding together to sell their conjoining homes in single ‘megalot’ land deals to developers.
This has been happening over the past few years in response to government infrastructure programs that include re-zoning land close to major new projects such as train stations and hospitals.
This re-zoning, which is allowing the construction of medium and high density apartment blocks on land previously restricted to single homes, is definitely the way of the future in major cities where population growth is high.
The great news is that separate to the actual need for more medium-to-high density living to simply fit everyone in; a lot of people actually want to live in apartments over houses these days anyway. So it’s a great marriage between the practical needs of growing cities and the lifestyle preferences of their residents.
Castle Hill case study
The latest case study of this trend is 25 neighbours in Castle Hill in Sydney’s Hills District, who have listed their homes as a single 24,000 sqm lot worth around $100 million. The site is located at 3-7 Ashford Avenue, 17-39 Middleton Avenue and 12-28 Partridge Avenue, Castle Hill.
The area is proposed to be re-zoned as part of the development of North West Rail Link, with the Showground Station being built nearby.
If the site sells for $100 million and the proceeds are split evenly, the vendors will pocket $4 million each, which is about three times the median house price in Castle Hill.
In the Northern Beaches suburb of Frenchs Forest, 62 home owners are offering their combined lots for about $200 million. The block totals 4.3 hectares and is bordered by Epping Drive, Rabbett Street, Frenchs Forest Road West and Bluegum Crescent.
Their site is also close to new infrastructure – about 200 metres from the new Northern Beaches Hospital, which is under construction and expected to be completed in 2018.
The home owners are expecting more than $3 million per lot, which would be more than double the suburb’s current median house price of $1.4 million (CoreLogic).
This ‘mega lot’ trend is a fantastic example of people power and creatively leveraging market conditions (including re-zonings) to your benefit.
Some home owners are motivated by the financial windfall that comes with selling to a developer. Others see it as making the best of a bad situation, feeling like they need to leave the suburb to avoid being surrounded by high-rise developments in the future.
Residents are either approaching each other to form syndicates on their own initiative following a re-zoning, or they are responding to letterbox flyers from developers either pre- or post re-zoning.
Some are approaching agents for an introduction to developers, while others are asking agents to approach their neighbours on their behalf.
Sydney ‘megalot’ sales
- In Epping, eight neighbours sold their homes to a developer for about $30 million, netting them $3.75 million each for properties that were individually worth about $1.2 million
- In St Leonards, nine home owners sold to a Hong Kong developer for about $66 million, netting an average of $7.3 million per vendor
- In Castle Hill, 15 home owners sold their combined 14,000 sqm lot for an undisclosed price
The ‘megalot’ trend is also happening in Melbourne. Sales include:
- In Glen Waverley – two owners sold to a developer for $2.54 million. Individually, the homes would have sold for about $1 million. The two properties created a 1,470 sqm site that drew offers from five parties
- In Bentleigh – three vendors sold to a Chinese developer for $5.76 million. In separate sales, the owners could have achieved $1.3m-$1.5m, but banding together enabled them to pocket $1.92 million each – assuming an even split, for the combined 1,985 sqm lot
- In Glen Iris – two owners sold to a developer for $3.4 million, a reported record land rate for the area of $4,096 per sqm. The owners of the combined 830 sqm site achieved about a 30% premium on the individual value of their homes
If you’re interested in doing something like this with your own neighbours, certainly get excited but also I’d advise you to exercise caution.
You’ll need an iron-clad agreement with your fellow sellers stipulating the terms of the sale (especially settlement periods and whether the sale relies on official re-zoning before exchange), the division of sale proceeds and a commitment from everyone to proceed.
Get a lawyer involved to make sure everyone’s rights are protected. Things can get messy when there are some lots larger than others, for example. You need total agreement between yourselves before you can begin dealing with developers.
You’ll also need an agent experienced in major multi-million dollar transactions with developers to market the property and act as your advocate and spokesperson.
Monday, May 30, 2016
By John McGrath
The Sydney market has certainly slowed down a bit this year in terms of price growth, but the city’s Saturday auction clearance rates have been consistently high – above 70% for most of the year.
The highest clearance rates so far were recorded over back-to-back weekends in May at 80.3% from 505 properties and 77.6% from 573 properties, according to Domain Group.
Clearance rates are an important indicator of what’s going on in the market.
Unlike many other statistics that have a lag time before publication, clearance rates tell us what’s happening week to week, so they’re a great yardstick for supply and demand.
One of the factors keeping Sydney’s clearance rates strong right now is a lack of supply. This time last year around 750 homes were going to auction every weekend, so that’s about a 30% drop.
In the meantime, buyer demand remains strong. There’s plenty of people out there who have been searching for their next home or investment for many months, or even for a year or more.
More new buyers are entering the market every week too, particularly following the surprise 0.25% interest rate cut in May and speculation of a further rate cut to come.
It’s become harder for buyers on tight budgets because property prices have grown so strongly over the past three years – and they’re continuing to grow now.
CoreLogic RP Data reports an increase of 4.5% in Sydney’s median house price from January to April; and a 4.2% increase in the apartment median.
To those buyers frustrated by high competition, I say don’t lose hope. Conditions are settling and the frenzy has gone out of the market, it’s just that very low stock is resulting in exceptional prices.
This low supply environment will continue throughout winter and the pre-election period so there’s every reason to expect a lot more stock to come onto the market this spring, so you will have more choice then.
The other important trend in recent clearance rates is the domination of the city’s premium areas.
These areas tend to perform well in pretty much any type of market, whereas outer ring markets can experience greater highs and lows in sales activity and short-term price growth.
The top performing areas have included Sydney’s Lower North Shore, Inner West, Northern Beaches and the City and Eastern Suburbs where clearance rates have recently been in the 80% to early 90% range.
This compares with the South, South-West and Western Suburbs where clearance rates have recently been in the 60% range, according to data from Domain Group.
Monday, May 23, 2016
by John McGrath
Next week marks the beginning of winter, a season where most real estate markets run a bit slower because fewer homes are listed for sale. And herein lies one of the greatest myths in real estate – that winter is a bad time to sell. Actually, the opposite is usually true.
Buyers have no reason to stop shopping during the colder months. For example, growing families and upgraders who need more space do not suddenly stop needing more space. Their motivation to buy doesn’t go away just because it’s a bit colder or raining on Saturday mornings. You also need to remember that most people with approved finance are only given six months to buy before they have to re-apply. So they don’t have time to take three months off over winter.
Thus, demand doesn’t change much. What does change is supply, which means more competition for the homes that do go to market over June, July and August. I think winter 2016 presents a particularly good opportunity for sellers in Sydney.
After three years of boom conditions, prices are still rising this year, just not as much as they were before. CoreLogic RP Data figures show Sydney property values up 4.5% between January 1 and April 30 this year compared to 6.9% over the corresponding period in 2015.
Despite this slowdown, one of the factors currently keeping prices strong in Sydney is a lack of stock, which is creating a favourable supply/demand dynamic for sellers. Add the ‘winter effect’ and it’s reasonable to assume competition could be stronger over the next few months.
This presents the best opportunity Sydney home owners have had to fully cash in on the capital growth they’ve achieved during the boom.
It’s important to remember that true market booms happen only every now and then. If you hold a property for 20-30 years, you’ll probably only go through two or three real booms over that timeframe.
If you’ve been waiting for this most recent cycle to end so you can sell your home for the maximum price possible, I’d strongly encourage you to consider selling this winter. If you don’t, you’re probably going to kick yourself in Spring when a flood of new listings come on to the market.
In 2014 and again in 2015, we saw a significant change in the strength of prices achieved during the final few months of the year, directly due to a higher volume of stock. Across the board, prices didn’t fall per se, but the number of people competing for the same homes declined and this meant fewer properties were commanding those big above reserve results.
Another great benefit of selling in winter is you get to buy in Spring. Ideally, you always want to sell when there are fewer homes on the market and buy when there are lots of homes on the market. A winter sale and Spring purchase fits this ideal scenario.
Some properties present better in winter, some in Spring/Summer. Talk to your preferred agent and weigh the pros and cons of putting your home on the market this winter. As experts in their local area, agents know how each change of season affects their marketplace. The more experienced agents, particularly those who have worked through previous booms, can also advise you how your local market tends to change in the immediate couple of years after a boom.
All of this will help you decide if a winter sale this year is the best option for you.
Tuesday, May 17, 2016
By John McGrath
One of the new trends in Australian real estate today is young families leaving cities – particularly Sydney, in favour of seachange and treechange lifestyle locations.
The boom of 2012-2015 resulted in a significant surge in property prices and our feeling was that more so than ever before, this particular boom would result in many young families considering alternatives to Sydney, especially when it comes time to upgrade to a bigger house.
New internal migration statistics (excluding overseas migration) released by the Bureau of Statistics and analysed by CoreLogic RP Data last month indicate that this trend is indeed occurring.
The statistics look at the top 25 regions nationally for internal migration, as calculated by comparing population changes between the 2008-09 financial year and 2014-15.
Many of the top 25 regions are on the outskirts of cities, which is a typical destination for families in the inner or middle ring who need more space. However, more than half the regions are coastal or lifestyle areas, which suggests an increase in sea and treechanging. In many of these areas, the populations of the 0-14 and 25-64 age brackets are the fastest growing, which points to families driving the trend.
This is significant because traditionally, it’s been the downsizers or empty-nesters leaving our cities for the hills or the coast in retirement. That’s still happening, but not at the rate of young families. These days, more empty-nesters are trading family homes in the suburbs for lifestyle apartments in or near their CBD.
There’s a few reasons for this – among them is the impact of the GFC. Seachanging and treechanging was a strong trend before the financial crisis but this has now changed, with many downsizers delaying their retirement to replenish their superannuation nest eggs. Downsizing closer to the city enables them to be closer to work as well as all the recreational amenities they desire.
Family Sea & Treechange Hot Spots
Here are the 15 seachange and treechange areas that made the top 25 list for internal migration 2008-09 to 2014-15.
1. Sunshine Coast, QLD – 4,732 migrants predominantly aged 45-64 & 0-14
2. Gold Coast, QLD – 4,610 migrants predominantly aged 0-14 & 45-64
3. Geelong, VIC – 2,828 migrants predominantly aged 45-64 & 0-14
4. Richmond-Tweed, NSW – 2,198 migrants predominantly aged 25-44 & 0-14
5. Mornington Peninsula, VIC – 2,141 migrants predominantly aged 45-64 & 25-44
6. Mid-North Coast, NSW – 2,057 migrants predominantly aged 45-64 & 25-44
7. Central Coast, NSW – 2,009 migrants predominantly aged 45-64 & 0-14
8. Hunter Valley (exc Newcastle), NSW – 1,814 migrants predominantly aged 25-44 & 45-64
9. Southern Highlands & Shoalhaven, NSW – 1,746 migrants predominantly aged 45-64 & 25-44
10. Bunbury, WA – 1,632 migrants predominantly aged 0-14 & 25-44
11. Mandurah, WA – 1,554 migrants predominantly aged 45-64 & 25-44
12. Sydney-Outer West & Blue Mountains, NSW – 1,434 migrants predominantly aged 25-44 & 0-14
13. Illawarra, NSW – 1,262 migrants predominantly aged 25-44 & 0-14
14. Wide Bay, QLD – 1,148 migrants predominantly aged 45-64 & 0-14
15. Latrobe-Gippsland, VIC – 1,054 migrants predominantly aged 45-64 & 25-44
Source: Australian Bureau of Statistics and CoreLogic RP Data
Some sea and treechanging families are making a permanent change and cutting ties with Sydney altogether, including finding a new job. Others are moving to lifestyle locations with public transport access back to the city so they can remain in the same job but enjoy a better lifestyle, including buying a far more affordable property to live in.
Fly-in fly-out work opportunities, as well as more flexible workplaces that allow people to work from home at least part-time, are also enabling families to change their base from cities to lifestyle locations.
We expect this trend to continue for at least another couple of years. Although the Sydney boom is over (but prices are still growing), many families have hit their limit with housing affordability. Gen Y couples and families in particular are far more nimble than generations past, with the idea of starting a new life in a new, more affordable location a serious option for them.
Tuesday, May 10, 2016
By John McGrath
The market in Sydney is doing exactly what it’s supposed to at this point in the cycle.
After three-and-a-half years of boom-time growth, the pace of price growth is slowing down, but it’s still going up. This period of moderate growth will go on for a while and that’s healthy. After boom conditions, you want to see some moderation in prices without major falls.
The latest report from CoreLogic RP Data shows Sydney house prices have risen by 4.5% over the first four months of the year, with apartments not far behind at 4.2%. That’s great.
Melbourne house prices have lifted 3.7%, also very good for this time period, while the apartment median has dropped – 0.4% – reflective of some inner city oversupply right now.
Here’s the rundown for every capital city.
Price movements January 1 to April 30, 2016
Source: CoreLogic RP Data
Looking at the numbers on a year-on-year basis, there are only two capital cities that have experienced a decline in house prices, but it’s pretty small. Perth house prices are down -2.2% and Darwin house prices are down -5.2%. Remember though, these cities are at a different point in the cycle to Sydney and Melbourne.
Last week’s announcement of a further 0.25% cut in official interest rates presents further opportunity for both investors and owner-occupiers in the property arena.
It doesn’t mean you can borrow more, as banks will usually assess your borrowing power at the long-term average of about 7-7.5%. However, it does mean historically low-cost repayments and a phenomenal opportunity to buy or get ahead on your current loans by making extra payments.
But there’s a word of warning. The official cash rate is now 1.75%. That is incredibly low. Official rate cuts mean the Reserve Bank is concerned about the economy. So, you need to think carefully before committing to a mortgage.
Compared to other economies around the world, we are very stable, however we have a challenge right now in transitioning from the mining boom. The most important consideration is your employment. As long as you’re employed, you can make your repayments. If you’re working in a volatile industry where job losses might occur, you’ll need decent back-up savings to help you through any period of unemployment.
That said, if your job is secure and you’re doing well, then this is an absolute ‘golden era’ for financing your next property purchase. Interest rates are probably going to stay low for some time, with the banks still offering five-year fixed deals well below 5%. That means they still expect to make money out of new borrowers, even on that very low rate, all the way through to 2021. This should give you confidence that interest rates are going to stay low for a while.
Two things worth highlighting
1. The most expensive period of your loan is the first five years. That’s when your repayments will be mostly interest and very little principal. Over time, your repayments will comprise more principal and less interest as you continue to pay down the debt. So the opportunity to take out a loan with a record low interest rate for the first five years is amazing.
2. Interest rates have been low for a while and many people are used to this by now. Especially young first home buyers, who have just started thinking about buying. But this is not the norm. Interest rates will go up and it’s important for every buyer to realise this because home loans are a long term venture. Over a 30-year mortgage, you’re inevitably going to have periods of high interest rates. So you need to understand the opportunity before you right now. We shouldn’t focus on first home owner grants and the like, interest rates as low as they are today are the best leg-up a first home buyer could ever ask for. Australia’s largest mortgage broker – AFG – reports the national average for new loans is $474,360. On a 4.5% principle and interest loan for 30 years, the repayments are $2,404 per month. On a 7.5% principle and interest loan for 30 years, they are $3,317 per month. See what I mean? Right now, the average Australian loan is $900 cheaper per month compared to the average.
This is a really exciting time to be buying real estate. A lot of lament occurs in property – people often talk of missed opportunities five, 10, or 20 years ago. If you’re looking to create wealth, you need to look long term and take advantage of every opportunity that makes it easier. Now is one of those times.
Tuesday, May 03, 2016
By John McGrath
I never get tired of hearing success stories in real estate. There is so much wealth to be created through property and I love hearing about investors and owner-occupiers making great money out of bricks and mortar.
Individual stories are always best but big statistics can also paint a nice picture of what is achievable, so I was interested to see the latest stats from the Australian Tax Office which show a record number of property investors made a profit in the 2013-14 tax year.
The ATO finds out this information from our tax returns. So basically, after taking into account all the expenses that investors declared such as strata levies, repairs, renovations, depreciation and the like, a record number of them ended up in positive territory with extra money in their pockets.
Sure, they would have paid a bit more in tax because of this, but you only pay tax when you’re making money and that’s what we all want from our investments!
CoreLogic RP Data analysed the stats to give us the breakdown.
There were about 775,000 investors who had a net rental profit in 2013-14, an increase of 6.1% on 2012-13 and setting a new record. The total profit was $7.25 billion, which was also an historical high and up 5.3% on the year before. The average profit in these investor’s pockets was $9,330.
Among the 1.257 million who claimed a net rental loss, the average loss was -$8,720 – the lowest recorded since 2005-06.
Obviously, lower mortgage rates are the main reason that so many people recorded a neutral outcome or profit with their rental returns in this particular year. Expect the stats to be even better for the 2014-15 tax year because mortgage rates were even lower.
CoreLogic RP Data also looked at the most common income bracket of investors with a net rental profit and it’s clear that older Australians are by far the largest contingent who are positively geared. That’s definitely where you want to be as you approach retirement, you want those investment assets that you’ve been paying off for years to eventually deliver an income you can live off for life.
While these latest tax stats are pleasing, they only look at rental returns – not capital gains. For tax purposes, the ATO is only interested in capital gains figures when you sell. But every year, over the long term, property owners who hold their assets are making money in new equity all the time.
I think people often forget about this. They don’t acknowledge in their heads the serious money they make as their assets grow in value. It’s not money immediately available in their pockets like wages and rental income, but it’s real money and often a lot of money which can be drawn down for renovations, further investment and other opportunities whenever you like.
In some cases, you might make more money through capital gains in a year than you do by working, especially during boom periods like we’ve just had in Sydney and Melbourne.
Talking straight averages and accepting that quality properties double in value every 10 years, if you own an $800,000 house now (the Sydney median), then on average you’ll make about 10% or $80,000 per year over a 10-year period. Sure it won’t happen uniformly but that’s the average you can expect over 10 years. You know what $80,000 is? It’s the average Australian income, according to the ABS.
Show me another asset class as easy to understand as residential property that can earn you the equivalent of a year’s income while you do nothing but hold it and make your repayments. That’s the advantage of owning real estate.
Tuesday, April 26, 2016
By John McGrath
Sydney and Melbourne are proving to be Australia’s renovation (reno) hot spots right now, with the amount of money spent on renos in both cities far surpassing other capitals.
New figures from the Bureau of Statistics and modelled by Domain’s Chief Economist
Dr Andrew Wilson show $1.882 billion was spent on renos in Melbourne last year and $1.684 billion was spent in Sydney.
The two big cities eclipsed the next in line – Brisbane, with just $766 million spent in comparison. Here’s the state by state run-down.
1. Melbourne $1.882 billion
2. Sydney $1.684 billion
3. Brisbane $766 million
4. Perth $500 million
5. Adelaide $299 million
6. Canberra $111 million
7. Darwin $57 million
8. Hobart $57 million
Source: ABS, Domain Group
So why the massive difference between Sydney and Melbourne and the rest?
Well, putting aside obvious factors such as larger populations and higher incomes, one of the reasons is that these two cities are at the end of a three-and-a-half year boom, so more people are finding it tough to buy and many are choosing to renovate instead.
The Housing Industry Association’s latest Renovations Roundup report shows renovation activity nationwide has increased for two consecutive years. Almost 1 in 4 renovation jobs have a budget of $12,000 to $40,000 and 13% are in the $200,000 to $400,000 range – which is the type of major renovation the HIA expects to see more of over the next few years.
Another contributor to rising reno activity is low interest rates. Many people fund home improvements by topping up their home loans and given interest rates remain at historical lows, it’s a fantastic time to borrow because you’ll be able to pay it off that much faster.
Another reason for a spike in renovation spending in the late and post stages of a boom is that buyers’ budgets no longer stretch as far, so they begin targeting lower priced fixer uppers with potential for extensions in their favoured locations.
A great way to spend less with the assurance you can renovate right away is to target homes with DA approved plans already in place. Make sure you read advertisements thoroughly as some agents don’t include this information very high up in their ad copy.
A two bedroom property with DA approved plans for say, a third bedroom and second bathroom is worth more than a two bedder without approval, but not as much as a finished three bedder. So this is a good way of getting the three bedroom home you need for less.
Renovating done well should increase the value of your property over and above the amount you spent but there’s broader community benefits too. Every renovated home adds value to the neighbourhood and in the case of sleeper suburbs, it can completely change them from rundown lower socio-economic areas to prime blue ribbon neighbourhoods.
But renovating doesn’t just happen in up-and-coming suburbs.
Last year, the suburb with the largest renovations spend nationally was Mosman on Sydney’s Lower North Shore, where local home owners spent a whopping $92 million to improve their homes.
Mosman is one of those aspirational suburbs where people move in and stay put – they don’t want to leave. So once they’re in, they’ll spend the money required to make their home perfect for the very long term.
If you’re thinking of renovating, the most important thing is to plan it well. Work out a budget, source well-qualified people and consider whether you can live through it or need to move out (usually a decision based on the scope of the job – as well as your patience!).