Author: John Lindeman

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Why our governments are building useful things

Why our governments are building useful things

In its July Statement, the RBA has stated why it has cut the official cash rate twice in just two months: “Easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.’

If you turn this “bank speak” into plain English, it means that the RBA thinks that unless we spend more, we are in for rising unemployment and may well slide into recession.

One of the main reasons for this unhappy situation is that, according to the latest HILDA survey, average Australian incomes have not risen in real terms (after being adjusted for inflation) since 2009. And so, the RBA is doing all it can to increase the amount of spending money we get each week. 

The value of safe haven assets keeps rising

We are not responding to this stimulus by buying more, so the Federal Government has chimed in with tax cut incentives, including a big once off income tax refund. But rather than planning huge spending sprees, most consumers are apprehensive.

They sense that the economic mood is changing and rather than spending more, they are spending even less, putting their spare cash into safe havens such as bank shares and gold (the graph shows the rise gold’s spot price in US$ since August 2018.)

The RBA can do little to prevent this decline in spending and in its July statement urged our governments to spend more money by building useful things to stimulate jobs and growth.

Build freeways, railways, tunnels and airports

The government knows that spending more, while foregoing revenue with its cut cuts will delay the long-awaited return to a balanced budget, but the alternative is far worse – being the first government to lead us into recession in thirty years.

That’s why the Federal Government, in concert with most State Governments are committed to an infrastructure-based approach to economic growth, building freeways, railways, tunnels and airports, all of which will help to reduce unemployment and put pressure on real wages to rise at last.

Real income growth will increase both housing affordability and buyer incentives, something which our exhausted housing markets are desperately calling for, but it’s going to be a very slow process. Investors would be wise not to seize on any slight rise in housing prices over the next few months as proof of a recovery, especially as potential sellers are likely to flood markets hoping to get higher prices, only to find their hopes dashed as buyer demand remains sluggish.

The “two-tiered housing market will soon return

This is why we are likely to see a “two-tiered” housing market dynamic occur once again over the next few years. The losers will be those capital city housing markets which experienced the highest price growth in recent years and also have large supply overhangs. The winners will be those areas which are likely to benefit from current or fully funded government infrastructure projects creating more housing demand. This is where rents and prices could rise dramatically.

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The truth about good yield and bad yield

The truth about good yield and bad yield

Good_yield_bad_yield

Given the current lack of growth in our property markets, many experts, educators and advisers are pushing cash flow as a good investment option. The trouble is that most of the suburbs and towns they put forward are selected purely because of their high rental yields – but there’s good yield, and then there’s bad yield.

Bad yield is not going to deliver you positive cash flow, because rental yield is a function of both prices and rents. Rental yields can rise if prices have fallen, even if rents haven’t risen, or if rents have not fallen as much as prices. This is bad yield, and some of the highest rental yielding suburbs put forward in various glossy promotions are in locations where housing prices have crashed in the last five or so years.

These “high yield” lists feature towns such as Broken Hill in New South Wales, Blackwater, Collinsville and Dysart in Queensland, Newman and South Hedland in Western Australia and Rosebery, Zeehan and Queenstown in Tasmania. Investors seeking positive cash flow might be tempted to buy in these towns because they have high rental yields and extremely low house prices. If you are amongst them, remember that the high yield in these markets has nothing to do with rental demand and everything to do with falling prices.

Good yield is driven by rent demand not by price falls, so if you seek positive cash flow from your properties, look for high rental yielding areas with high rental demand, such as tourist destinations, infrastructure construction zones and locations favoured by overseas arrivals.

All of these households create genuine rent demand. Some of the highest good yields can be found in coastal suburbs where prices have risen in recent years, but these are seasonal holiday locations, and the high yield is only obtained during the peak summer season. Watch out for such seasonal variation traps.

Permanent and semi-permanent rental areas such as ex-Housing Commission estates or the older affordable outer suburbs of our major cities provide consistently high yields with solid rental demand. These areas might seem unattractive to some, but they have strong rental appeal to others.

Remember, that although some of these locations may not appeal to you, what matters is that they do appeal to someone else. For example, Risdon Vale is an outer suburb of Hobart with a constantly high good rental yield and it’s also where Tasmania’s maximum security male prison is located.

The secret to Risdon Vale’s high rental yield is the demand for rental accommodation there, coming from the girlfriends, partners and wives of the prison inmates. They want to live in Risdon Vale so that they can more easily make conjugal and family visits to the prison. You might not wish to live near a maximum security male prison, but the secret to Risdon Vale’s high rental yield is that many others do.

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What makes a potential investment area attractive

What makes a potential investment area attractive?

Some investors will avoid areas because there’s a high proportion of rental properties or it’s a dirty looking industrial town. They might favour suburbs where they would like to live themselves, but this is not relevant. What matters is whether other people want to live there, because this is what makes an investment area attractive.  

Risdon_Vale

Risdon Vale is an outer suburb of Hobart and it’s also where Tasmania’s maximum-security male prison is located. It’s not what most would call an attractive place. The area is dominated by massive walls skirting the jail’s perimeter, topped with coils of razor wire and the night sky is penetrated by floodlit guard towers and the howling of ferocious guard dogs.

Coupled with the constant threat of rampaging escapees running amok through the town, surely here is a place that could be called “unattractive” and deter any potential residents.

Yet, here’s the thing, Risdon Vale has the highest housing rental yield in Hobart and it’s driven by genuine rental demand. The source of housing demand comes from the wives and partners of the inmates, who rent properties in Risdon Vale to be near their incarcerated loved ones for conjugal and family visits.

The irony is that the higher the incidence of burglaries, murders and other serious crime in Tasmania, the greater will be the demand for rental properties in Risdon Vale.

The importance for investors is not that you might find such places unattractive or even dangerous, and that you wouldn’t want to live there – what matters is whether other people want to live there, creating housing demand in the process.