Posted on

Cashflow comes to the rescue

Cashflow comes to the rescue

Many commentators hope that property market prices are on the rise again, but there’s a much more likely prospect in store for property investors, because rents are about to start rising dramatically.

Property investors have two strings to our bow – cash flow and growth, and the recent media focus on prices has pushed cash flow into the background. This is understandable, because capital city rental yields are currently at lows that landlords haven’t had to deal with since the early fifties and seventies.

There is currently little incentive for investors to get excited about property, but while we don’t always experience both cash flow and growth at the same time, our major cities have always consistently delivered either high cash flow or good price growth at different times.

This is clearly demonstrated in the graph below, showing you the average annual rental yield and house price change for Australian capital cities from 1901 to now. 

Rental_Yield_and_Price_Changes

The graph shows that during the years when Australian capital city house price growth was low or even went backwards that rental yields boomed at the same time. The correlation is close because our capital city populations (apart from Darwin in 1975 after Cyclone Tracy) have always been rising. This in turn means that if new households can’t get housing finance the demand for rentals rises.

How many years does it take for rent to equal a house price

The years are grouped together in the way that they appear in the graph because they show you another statistic – the number of years that it took for the rent received by a landlord to add up to the value of a house. In other words, from 1936 to 1939, it took just four years of rent to be the same as the value of a house. But right now, it would take twenty-four years of rent to equal a current house price.

Years_Rent=House_Price

The stats are out of kilter, as the table below shows. Rental yields are way below their historic long-term average, housing prices have gone up too much, although they certainly haven’t boomed, and rents are too low to make housing a viable option for investors.

Rental yields are well below their long-term average

Table

Yet our big city populations keep growing, with most of the new households coming from overseas and interstate, generating an immediate rise in the demand for housing, especially in Sydney, Melbourne and Brisbane. The issue is that most of these new arrivals can’t buy houses or units – they have to rent for a number of years, until they are sufficiently established to be able to obtain housing finance.

While the last few years have seen a massive fall in investor owned housing stock in our major cities, rental demand from new arrivals has been shooting up. History shows us what happens next – that massive increases in rent are highly likely to occur over the next few years.

Posted on

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.

Posted on

The armchair dream of set and forget property investing

The armchair dream of set and forget property investing

With housing prices continuing to slide in most major capital cities, many investors feel exposed and threatened, because they have gone heavily into debt to purchase their properties.

This is when we get reassurance from some armchair experts who insist that the property market is merely subdued, that it’s marking time and growth will return soon. To support such “set and forget” buy and hold strategies, these theorists point to the long-term performance of property and state that growth is about to return, because it always has in the past. But how has the market really performed in the past? And what does this actually tell us about the future?

The theorists show us graphs such as the one below, proving that regular and consistent price growth exponentially increases your equity over time.  

They then assure as that this is how the Australian housing market works, with prices doubling every eight to ten years. Because the market has behaved this way for so long, they argue it will continue to do

But has the market actually performed so reliably in the past? The graph below shows the rate of price growth that has taken place in every capital city other than Sydney and Melbourne over the last fifteen years, according to ABS published data.

Quite clearly, the buy and hold reality is nothing like the buy and hold dream at all.

The differences between the dream and reality are more extreme when we compare the performance of different suburbs to each other, even in the same city, and different types of property in the same suburb.

“Buy and hold” can certainly be a workable investment strategy if you purchase the right type of property in the right area, at the right time and pay the right price, but the evidence shows that jumping in and buying anything, anywhere on the assumption that all housing markets and all types of properties will perform the same over time is totally flawed. Investors who follow such an armchair investing strategy are likely to find that their dream soon becomes a nightmare.

Posted on

Timing the turning point

Timing the turning point

With housing prices falling and many markets in disarray, there’s been a lot of talk in the property media about the benefits of counter cyclical investing, or buying at the bottom.

It seems simple enough to follow the advice of experts such as Warren Buffet, who advises investors to “buy when everyone is selling, and sell when they’re buying”, or Baron Rothschild who even more dramatically, told investors to “buy when there’s blood in the streets”.  But if that was all there was to it, we could all easily become highly successful investors with little more effort than to do the opposite of everyone else.

In reality, such advice is almost impossible to follow successfully because it flies in the face of perceived logic – if everyone is selling and prices are falling, how do we know that this trend won’t continue and leave us even worse off? Unless we are sure that the market has bottomed out, and we have reached the turning point, our efforts are likely to be futile and costly.

Most investors and analysts attempt to time the bottoming out of market by relying on lagging indicators such as sales and sale prices, but these can only reveal the past, not the future. It’s a bit like trying to navigate a car by looking through the rear-view mirror. Only leading indicators, such as the number of properties on the market, asking price trends and search trends can forecast a likely change in direction.   

Even if the turning point has really arrived and it’s time to buy, it becomes impossible for most of us to take any action, because the price crash has left us with insufficient cash reserves and we discover that the banks are unwilling or unable to lend. The solution to this dilemma is to look for low priced properties in areas which have price growth potential and high rental yields driven by genuine rental demand

Such investments are low risk and will give your lender more confidence in providing finance. Then you can look forward to positive cash flow from day one with healthy price growth over time.

Posted on

The feeding frenzy furphy

The feeding frenzy furphy

Many commentators are predicting that investors will rush to buy established properties before the negative gearing and capital gains tax rules are changed if Labor wins the Federal election. They claim this could cause a mini boom, but the stats show that the opposite may actually occur.

This is because many owners are holding off listing their properties in expectation of the buyer feeding frenzy later this year. This could result in a sudden surge of properties for sale, rather than a surge in buyers.

 

The numbers are revealing this steady decline of new listings in both Sydney and Melbourne – that is, the number of properties for sale on the market is falling, even though the number of sales isn’t rising. The graph clearly shows this downward trend, which is much greater than the seasonal variations that occur each year.

The only possible reason that fewer owners are listing their properties for sale is that they think investors will rush to buy established properties if Labor wins and they’ll get a better price by holding off for a while, so owners are waiting until after the election for the feeding frenzy to start.

But, will sales rise after the election if Labor wins? Investors form only a small percentage of buyers and there’s no evidence that they are putting off buying properties until after the election. There’s no point in their waiting, because if the Liberals win nothing changes, and if Labor wins, the time window to avoid the new tax rules is already open. Property purchases are being held back because of tighter lending rules, and the new tax rules won’t directly affect owner occupiers anyway.

 

On the other hand, it looks like we will see a massive lift in listings later this year from owners keen to secure the anticipated higher prices. This rise in supply is unlikely to be matched by a similar rise in demand from investors. Relying on hypotheticals is never a good reason to put off buying or selling, because the right time to buy or sell should be determined by how such actions help you meet your aims from investment, such as securing long term growth, doing renovations, developments or obtaining positive cash flow. 

Posted on

Pumping and dumping schemes

Pumping and Dumping schemes

Faced with the prospect of little price growth on the horizon, property investors are starting to see innovative get rich quick schemes being promoted which offer huge returns.

It has always been true that if the property market can’t generate a return for investors from market driven growth, then investors can make some growth themselves. We have traditionally done this by improving the value of our investments through cosmetic or structural renovation or even developments.

The issue is that the buy and hold costs for such projects can deter most new investors, and there’s always the threat that if prices fall, they may cancel out the value we have added, or even lead to a loss.

But some new investment alternatives have recently emerged, bringing us glitzy promises of high returns from property investment without the need to outlay any significant cash up front. The risk seems low, the opportunity to participate is high and many of us are sucked in, usually at free so called “investment” seminars.

One clever land banking scheme offers you an easy way to get into the property market with one low upfront cost and the promise of eventual riches. The promoter sells you an option to buy land which is slated for future development, showing you the concept plan and glossy “artist’s impressions” of the finished project. All it takes is one affordable fee and no repayments. Then years later, when the land is subdivided, you can exercise your option and sell at a huge profit.

You can even participate in the property market without any upfront cost at all, by searching for and finding property owners who are willing to enter into an options agreement with your mentor. Your mentor signs and pays for the agreement, which gives them the option of buying the property at an agreed price and future time from the current owner. Then by agreement with your mentor, you will be handed a percentage of the profit.

There are also adverse possession schemes using what is known as “squatters rights” where you search for and find long vacant or abandoned properties for your mentor who then improves and rents them out, taking title to the property when the legal waiting period has expired. By agreement with your mentor, you will then split the profit from the sale of the property.  

These sorts of schemes pump you full of confidence and then dump you when they fail. For example, if the land banking property is never developed, or the option for a property you have found is never exercised by your mentor, you receive nothing. Similarly, if the owner of a property which is in the process of adverse possession suddenly turns up before your mentor can legally claim title, you end up with nothing.

You can avoid getting pumped and then dumped by sticking to tested and proven property investment strategies which offer worthwhile rewards and incur risks which are manageable.

Posted on

Playing the long game

Playing the long game

If it’s true that the best time to buy is at the bottom, then now might be a good time to buy Crypto currencies, especially Bitcoin, which has undergone a dramatic plunge in value over the last year. But will crypto prices fall further?

Crypto currencies have lost more than $400 billion off their peak values in late 2017 and some analysts are claiming that now is the best time to buy, because the bloodletting appears to have ended and prices have stabilised.

Bitcoin

The chart shows how Bitcoin prices have moved since the boom started in 2016, with prices dropping dramatically since early last year. In fact, the Bitcoin buying craze had all the hallmarks of a boom-bust scenario, being enthusiastically embraced by a whole new generation of investors for all the wrong reasons.

“Bitcoin is high tech,” they told us. “It’s innovative, it’s blockchain based and best of all, it’s disruptive.” Given this sort of talk, demand was always likely to evaporate once the novelty wore off and the cracks appeared.

Now the supporters of Bitcoin are claiming that recent price falls are due to “market volatility” despite the fact that Bitcoin was somehow supposed to be immune from such dramatic demand related price shifts. Other analysts have come up with the term “crypto winter” to describe the current lack of demand for the commodity. While this describes the phenomenon, it does nothing to explain why such a freeze out of buyer enthusiasm has occurred, or whether we will ever experience another crypto spring.

The facts are that Bitcoin is a commodity and must therefore follow the laws of supply and demand like all other asset classes, but this seems to confound its proponents. To keep the commodity viable, they need continued demand, so they are now expounding the long-term benefits of buying bitcoin. They are playing the long game, as the saying goes.

This strategy will sound familiar to followers of the property market where prices have been falling as they have in Sydney and Melbourne. The focus of the discussion quietly shifts from recent high performance or promises of imminent growth to the fact that prices always rise over time, that they are at the bottom of the cycle, and those who play the long game will still be ahead.

Yet Bitcoin is an asset that is quick and easy to trade, and must suffer from high price volatility as a result. It was never designed to be a long-term investment like property, so it is really interesting to hear the Bitcoin barrackers change their tune completely, and now refer to Bitcoin as a buy and hold asset.

I know which I would rather be holding during the tough times, because in ten years’ time Bitcoin may just be a historical quirk, but property will still be a valuable asset.

Posted on

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.

Posted on

Top tips for obtaining housing finance

Top Tips for obtaining housing finance

Newcastle mortgage broker, David Hoar shares his passion for property by giving us his top tips for obtaining housing finance

The best strategy for getting into the market now depends upon your particular circumstances, and your ultimate objective(s), but remember that in December 2018 around 40% of all home loan applications were rejected – so before you get too excited talk to your broker or bank about getting pre-approved to save yourself unnecessary cost, time and stress.

Leveraging equity

If you’ve been fortunate enough to own property that has gone up in value over the last 5 or so year’s then you can look at using equity in your current property to buy another one.   In this situation the bank re-values your property, to identify the equity you have available, and will generally allow you to borrow up to 80% of your current properties value.

Most lenders will structure the deal as follows:

  • 20% of the new property value plus costs (stamp duty, pest and build, conveyancing etc) secured against your current property
  • 80% of the new property value secured against your new property

By doing it this way you avoid Lenders Mortgage Insurance (LMI), which is normally charged by lenders if your loan on the new property is more than 80% of its value.

Buying on low or no deposit

There are some lenders that will allow you to borrow up to 95% (including LMI) to buy an investment property, however this can be expensive as LMI ramps up quite considerably when your loan/value ratio is over 90%.

If your parents or siblings own a property, then some lenders will allow you to use equity from their property to help support your purchase and avoid LMI.

Like where you live but can’t afford to buy there?

Then rentvesting might be a good strategy for you.  In this case you continue to rent and then buy an investment property somewhere else.

Many people choose to do this – as they enjoy the lifestyle or proximity to work and social and entertainment options of where they live – but can’t afford to buy there. 

So rather than miss good buying opportunities an investment is purchased in another location. Remember, that you don’t have to like where you buy an investment property, you just need a good supply of tenants that do!

About David Hoar

David Hoar of Home Loans Newcastle is a finance lending expert with clients from Brisbane to Hobart. David is a qualified Accountant, has a Graduate Diploma in Taxation, a Graduate Diploma in Marketing and Management, and a Certificate IV in Mortgage Broking – and he is passionate about ensuring property buyers have access to expert information and help.

For more information, visit: https://www.homeloansnewcastle.com.au/

Posted on

Top Tips for dealing with Real Estate Agents

Top tips for dealing with Real Estate Agents

Melbourne real estate agent, Bryce Houston shares his passion for property by giving us his top tips for dealing with real estate agents

Become a local expert

Try to inspect at least twenty properties of the type that meet your criteria in the town or locality you are looking at before making any purchase decision.

Don’t rush things

Make the effort to visit the area a few times. During the week, at weekends, in the day and during evenings. Talk to the locals to get a feel for the area and what it has to offer – and what it doesn’t.

Check recent sales

Look at the property sales (sold results) on realestate.com.au or domain for the last six to twelve months to ascertain the actual market value of sales. Don’t go only by the listed asking sale price – study what has sold and for how much.

Know your buy price limit and preferred type of property

Know how much you can borrow and the type of property you want before talking to agents. Then tell them that you are pre-approved and what you are looking for. This will make you a serious buyer in their eyes and they’ll try hard to find you a suitable property. Call them once a week to see if anything has turned up.

Set up alerts

Set watch alerts on your favourite real state app like realestate.com.au or domain to alert you of any new listings so you can get into action as soon as they come online.

Check the days on market

Ask the agent how many days on the market a property has been on for or simply search realestate.com.au from newest to oldest as this will show you the oldest. Older listed properties are often more negotiable and agents will be keen to sell.

Don’t be reluctant to make an offer

Real estate agents and Vendors love to get offers especially if the property has been on the market for a while. Even if it’s a low offer, it could be the one the vendor accepts.

Keep in front of the agent’s mind

Agents may not chase you, especially in hot markets, and good deals go quickly in any market. Let them know you are a serious buyer and stay in touch. You may be offered a property off-market, which can save the vendor thousands of dollars in advertising and staging costs, save the agent’s time and reduce your purchase price.

About Bryce Houston

Bryce has bought, subdivided, renovated and sold properties from Frankston to Byron Bay. He combined his thirty years of sales experience with his passion for property by becoming a real estate agent in 2016, and now gets to share his passion for property with other sellers and buyers.

For more information about Bryce: https://carrumdowns.harcourts.com.au/Profile/Bryce-Houston