Creative Finance Newsletter JANUARY 2010

Strong Market in 2010?

strong economySome of the current property indicators are pointing towards a stronger property market in the next twelve months.

The question is, how resilient is the market to further interest rate rises?

Despite all the gloom and doom, 2009 has actually been a reasonably good year for property.

In terms of prices the value of homes in Australia defied all odds in 2009, rising more than 10% over the year, according to the latest figures released by RPData and Rismark International.

The RP Data-Rismark Home Value Index shows that Australian home prices rose by 1.1% in November with 11.3% cumulative growth in first 11 months of 2009.

Another positive statistic comes from the Australian Bureau of Statistics (ABS), which has just reported that building approvals rose 5.9% to 13,724 units from October to November. The rise exceeded market expectations of a 3% rise.

Looking forward

The surge in building approvals in November, along with still-low interest rates and am improving job market, points to a buoyant property sector in the next 12 months.

Also, a recent survey shows consumers are feeling more confident about 2010 property prices.

The January Westpac Consumer Sentiment survey asked consumers about their expectations for house prices over the next 12 months. It shows a strengthening in the belief that house prices will continue to rise.

A massive majority of respondents, 84%, expect prices to increase over the next 12 months - with 21% expecting gains of over 10%.

Remarkably, just 3% of respondents now expect prices to fall. This compares to a third expecting falls when the survey was conducted in mid-2009.

Interest rates

Given the economy’s continuing recovery, it seems likely that interest rates will continue to increase back towards “normal” levels.

The RBA's interest rate (cash rate) is currently at 3.75% after three 25 basis point moves in October, November and December. The normal or “neutral” rate is 4.5% to 5.0%.

The next meeting of the RBA on 2 February could see a 0.25% increase on the back of the positive data.

Still fragile

Several economists and commentators are cautioning against tightening interest rates any further, saying that the recovery is still fragile.

For example the Master Builders Australia chief economist Peter Jones said that while the big boost in the number of apartments approved was encouraging, the lift was coming off "a disastrously low base".

"Investor-driven building of units and apartments continues to be affected by the credit crunch with approvals running at an annualised 35,000 - still 40% below the peak.”

"A housing recovery is by no means a foregone conclusion, particularly as the First Home Owner 'boost' scheme has been phased out."

Until December 2009 first homeowners were eligible for the First Home Buyers boost of $10,500 for existing homes and $14,000 for new homes.

The federal government scheme was scaled back at the end of calendar 2009 to $7,000 for existing homes and $10,000 for new homes.

Summary

Assuming the economy continues to recover then property should perform well in 2010.

The major short-term concern is the likely increases in interest rates. For those seeking to buy property, it would be sensible to factor in 0.5% to 1% rate increases into calculations on home loan repayments.

Why invest in property

invest in propertyMany investors ask themselves the same question: should I invest in property or shares?

In this article "Property Professor" Peter Koulizos (University of SA) imparts his wisdom on why property is a good option.

This article highlights some of the advantages of investing in property, and outlines some reasons why investing in real estate can be worth it.

The main advantages gained from investing in property are:

  • Capital growth
  • Rental income
  • Degree of control
  • Lower volatility
  • Tax benefits
  • Hedge against inflation
  • Touch and feel it

Capital growth

Depositing your money in the bank or investing in fixed interest products does not provide you with any capital growth. If you buy property, however, you do so expecting that the property will grow in value over time.

Rental income

One of the advantages of owning investment property is that you can start to receive an income almost immediately. Once you have put a tenant into your property, you should receive a couple of weeks’ rent in advance upon signing the lease and then regular payments of rent into the future.

Degree of control

One of the main reasons people decide to invest in property rather than shares is that they have greater control over their asset.

For example, if they want to receive a higher rent, they can upgrade the property. If they want to increase the value of their property, they can renovate, landscape or possibly even sub-divide and create new allotments.

Lower volatility

The other main reason people will buy property instead of shares is that there is less risk in property. They understand that there may be a lower return in purchasing property, but they are willing to consider this in return for the stability of property. They can sleep well at night knowing that the price of their property is very unlikely to plummet overnight, which can happen to the share market.

Tax benefits

Tax is very topical at this time of the financial year. There are several tax benefits available to property investors. Using property as security to borrow money to purchase other property allows you to leverage to a greater extent than if you were using a share portfolio as security.

Most lenders will lend up to 90% (or even more) of the value of the property being purchased (mortgage insurance may be payable at this level of leveraging). However, if you are interested in buying shares, they will generally only lend up to 70%.

One of the tax advantages with this greater leveraging is that you can claim a greater tax deduction on the interest charged on the loan.

Any legitimate expense incurred in running your investment property should also be tax deductible. These include travelling to your investment property to collect rent or money paid to a property manager to manage your property on your behalf.

Depreciation of the building may also be claimed as a tax deduction. Buying brand new or a relatively new property allows for the greatest amount of depreciation. Claiming building depreciation is a clever way to increase your cash flow.

NB you should never buy property (or any asset) just for the tax benefits. Getting a tax benefit should be a bonus, not the sole reason for purchasing.

Hedge against inflation

It has been shown historically in Australia and all over the world that property increases at a greater rate than inflation. Periods of growth can vary but generally speaking in real terms (without inflation) property growth outstrips increases in inflation.

Touch and feel it

When you have a chance to speak to property investors at length, somewhere in the conversation they will state that they like to invest in property because they can see it, touch it, feel it and drive past it.

For many people, investing turns out to be an emotional decision rather than one based on pure numbers, and these are the sorts of emotions that make people feel better about investing in property rather than shares.

Summary

Investors should have a diversified investment portfolio, which includes some property, some shares and some cash. The weighting of the portfolio will often be decided by the knowledge (or lack of it) in a particular asset class. If you want to earn more, you need to learn more!
DISCLAIMER: This newsletter is provided for general information only. Please do not rely on this newsletter as a substitute for specific legal or financial advice. Before making any decisions you should consider your specific objectives, financial situation and needs. You can unsubscribe by sending us a reply email with "Unsubscribe from e-Newsletter" in the subject line.