Why bubble predictions don’t carry any weight

There has been a lot coverage in the media about a so-called ‘property market bubble’, which has caused concern amongst some investors in Perth. They are questioning whether the market is ‘overheated’ and whether values could be set for a major correction.

For me, the ‘property market bubble’ is one of the most overused and misunderstood metaphors in real estate. It’s an idea that is largely perpetuated by misinformed journalists and publicity-hungry economists from near and afar.

There is no clear consensus on what a bubble actually is, but the term generally refers to a condition of unsustainable growth in property values driven by irrational exuberance. The idea is that the bubble could easily ‘pop’ at any moment.

The Perth property market is certainly not characteristic of a bubble, and any suggestion of such is wrong. Here are some of the reasons I believe we’re not in a bubble:

Australia is not just Sydney and Melbourne

Much of the talk about a bubble has related either directly or indirectly to the situation in Sydney and to a lesser extent Melbourne. This is because of the strong growth experienced by these cities in recent times and because many media publications are very east-coast centric by their nature.

Anyone who bothers to read beyond the superficial headlines knows that there isn’t a single ‘property market’ in Australia and that each city, suburb or area can have unique characteristics and drivers.

Housing debt

One sure sign of a bubble, we are told, is when households are heavily indebted and unable to service their loans. But we’re not seeing this at all. Debt servicing ratios (which show the proportion of a family’s income that goes to servicing loans) are at relatively low levels. Plus, many borrowers are ahead in the repayment having built up a buffer in recent years. The rate of non-performing loans (i.e. defaults) is also very low.

Recent growth

The Perth market experienced growth in values over the course of 2013, but beyond that, growth hasn’t exactly been spectacular. Look at the last 5 years when growth has averaged just 4.3% per annum, only slightly above inflation. Hardly bubble territory.

Remarkable resilience  

The Perth market (along with those in the other capital cities) has proven to be remarkably resilient over the course of recent history. Consider the major economic events that each triggered a flurry of ‘crash’ predictions. We’ve had the Global Financial Crisis, the horror of 9/11, the Asian Currency Crisis of 1997, the recession we had to have in the early 1990s, the stock market crash of 1987 and so on. During all of these occurrences, people predicted a crash and they were wrong.

While some property markets have struggled at times (many of which later recovered), on the whole we’ve successfully weathered many storms. This has to speak volumes about the strong fundamentals of the market.

Population growth driving demand

One of the major drivers of the property market is population growth and it’s no secret that Perth is the fastest-growing capital city in Australia. According to the Australian Bureau of Statistics (ABS), the population increased by 3.5% (67,500 people) between 2012 and 2013. Amazingly, 395,000 people moved to Perth between 2006 and 2013.

Supply not keeping up

Although there is some debate as to whether or not Australia is building enough homes, new supply remains very much insufficient in Perth. According to dwelling approval figures analysed by RP Data, we are building around one new home for every 3.45 new residents in Perth. The latest Census data shows the average household contains only 2.6 persons, meaning supply isn’t keeping up.

Furthermore, a proportion of the new dwellings built are simply replacing existing homes that have been demolished and therefore aren’t adding to the housing stock. And the figures also include holiday homes and second homes, further highlighting the deficiency.

Strong economic foundations

The underlying foundations of the Western Australian economy are sound. We have an abundance of natural resources, world-class industries and are strategically positioned to take advantage of the massive growth in Asia. It’s no wonder that our residents have become amongst the wealthiest in the country.

Although mining investment has moderated, it is still pretty impressive. A quarter of a trillion dollars is being invested in the state, mainly on large gas projects, of which more than half are currently underway or committed. This high level of investment will maintain the employment level and puts to bed the idea of the mining sector collapsing.

Plus, let’s not underestimate how lucrative the production stage of the mining industry could be. Back in the 1970s, about one million tonnes of iron ore was being shovelled from the ground each week. Now it’s about 1.5 million tonnes a day. That’s a lot of money coming into the state.

Conclusion

It’s not the first time we’ve heard the Perth market described as a ‘bubble’ and it won’t be the last. While many experts, who are actually involved in the market, have helped to dispel the bubble myth, it still has an impact.

My biggest concern is that the misinformation spreads concern amongst the uninformed and ultimately robs them of the opportunity to invest.

Will property values drop? Perhaps in some areas. But this is all a normal part of the cycle.  The latest data reveals that growth in Perth has already moderated, and the number of properties for sale may be increasing (though it’s still very low in historical terms). But I’m confident we still have growth in the market and the long-term fundamentals are very strong.

Meeting the needs of your future self

Choosing between different loan products can be a challenge at the best of times. The difficulty lies in trying to weigh up different features, fees and interest rates to work out which loan best suits your particular requirements.

Adding to the complexity is the fact that, ideally, you want to pick a loan that meets both your current and future needs.

While it is impossible to consider what will happen over the entire life of the loan, which could be 30 years, you do need to think about how your life could realistically change in the next three years.

What could change in your life? Will your family circumstances be the same? What about your job situation? Is there a promotion on the cards or are you worried about retrenchment?

You should also consider your specific plans for the property in question. Will you be selling the property in the near future or renovating it? Or, perhaps you want to leverage this property to expand your portfolio.

You should even consider things beyond your control, such as whether interest rates are likely to change during that time.

Your responses to these ‘what if’ scenarios will help determine how much flexibility you require in your loan.

For instance, will you need the flexibility to make additional payments or access any additional money you have repaid? What fees will apply in these situations and what are the restrictions?

When it comes to redraw facilities, loans often vary with regard to how many redraws are allowed, what fees are involved, and what the minimum and maximum redraw amounts are.

If you plan to sell the property within a relatively short space of time, you might consider the early repayment fees charged by different loan. Bear in mind, however, that these fees often come under different names, such as a delayed establishment fee.

Generally speaking, the more flexibility offered by a loan, the higher its interest rate will be.  Basic, low-rate loans tend to offer very limited features.

However, having flexibility can save you money in the long term, so it’s important not to focus entirely on the interest rate.

If you find that a loan no longer meets your needs, you can always consider refinancing. But if you enlist the expert help of a finance broker, you can save yourself time and money.

Why investing near public transport is a ticket to success

Buying an investment with good access to public transport has always been considered a good strategy. But what many people in Perth don’t realise is just how important it actually is.

As Perth’s massive population growth brings with it increased road traffic and longer commutes, properties near public transport links will become more and more popular.

You just have to look to the bigger cities in Australia and around the world to understand the value people place on having good access to public transport. Many people in Perth don’t yet fully appreciate this fact, which creates opportunities for forward-thinking investors.

By some estimates, there will be 250,000 more cars on the road in just five years’ time. And as the roads get busier, some parts of Perth, such as the CBD, will become harder to access by car.

At the same time, suburbs with good public transport will become more desirable and lead to higher rates of growth in terms of property values and rent. In fact, research has shown conclusively that suburbs with good public transport, on average, have higher capital growth rates than poorly-serviced suburbs.

It’s not difficult to see why people value living near good public transport links. There is the time factor – people don’t want to spend hours in traffic going to and from work.

However, it’s not just about traffic congestion. The rising cost of petrol and parking is also a major factor in encouraging the use of public transport. There is also the general increase in environmental consciousness amongst the population, which is driving people to use their cars less.

In the world of public transport, rail is generally considered king. Properties within walking distance or a short drive from a train station will increasingly be high on the list for buyers and renters. Major bus routes will also be considered important.

There is another major bonus of investing near public transport nodes. It’s the fact that as local councils push to increase housing density in line with state targets, rezoning efforts will focus on areas with good access to public transport. We’ve already seen this happen and it will continue.

It’s worth noting of course that investors need to keep their wits about them when searching for a property near public transport. A property can sometimes be ‘too close’ to public transport when it brings excessive noise, pollution, traffic and safety concerns.

Supporting passionate riders

Momentum Wealth is proud to be supporting the Hall Masters Cycling Initiative, which is aimed at increasing participation and enjoyment around bicycle racing and training.

The Hall Masters Cycling Initiative prides itself on actively engaging new riders with the cycling sport regardless of age or ability.

Last month Hall Cycling and Momentum Wealth held an individual Time Trial event which saw 30% of participants ride the timed event for the first time as competitors, thus engaging new-comers to bicycle racing.

There is unprecedented growth in cycling as a sport, for fitness and as a social and recreational activity in Western Australia. WA has a higher participation rate than any other Australian state and an estimated 405,000 Western Australians ride a bike in a typical week.

At Momentum Wealth, we believe that cycling offers a great opportunity for self-development, preventative health and social interaction.

Find out more at http://bradhall.com.au/hall-masters-initiative/

Attracting the perfect tenant

It’s something every investor wants – to find the perfect tenant. But few investors know how to achieve this often elusive goal.

How do you increase your chances of finding and securing the perfect tenant for your investment property?

Although the definition of a ‘perfect tenant’ might vary from investor to investor, there would undoubtedly be a number of common characteristics.

For many investors, the perfect tenant would probably be described as one who pays the rent on time every time, actively cares for the property and deals with minor issues themselves rather than contacting the property manager.

The best tenants are those individuals who tend to take pride in where they live. Consequently, when searching for a suitable home, they expect a property to be well presented and everything to be in good working condition.

Each potential tenant will have slightly different needs and wants, but making sure your property is up to standard will go some way to attracting the best applicants.

Given that every landlord wants to secure a great tenant, it’s fair to assume the best applicants won’t be ‘available’ for very long. This means you can’t afford to make a bad first impression, both in terms of your marketing campaign and price. Poor photos or an inflated price can easily scare off potential tenants and therefore limit your pool of applicants.

Attracting the best tenants is one thing, but how do you actually spot them when they arrive? This is not always easy but involves the quality of their application, the strength of their references, and the general impression they make on the property manager at the viewing.

Skilled property managers certainly have an innate ability for spotting the best tenants, so it’s worth listening to their advice before deciding on a tenant.

Of course, if you’re lucky enough to secure a fantastic tenant for your investment property, you’ll want to do everything you can to hold onto them for as long as possible. This means responding quickly to any issues that arise, doing your bit to maintain the property and being reasonable when it comes time to increase the rent.

Is this one of the most underrated suburbs in Perth?

Innaloo is an established suburb located 9km north-west of the Perth CBD and part of the City of Stirling. Its neighbouring suburbs include Gwelup to the north, Doubleview to the west, Woodlands to the south and Osborne Park to the east.

With most of its development happening in the decades leading up to the 1970s, Innaloo consists mainly of older single detached homes. However, it now also features a scattering of modern units.

Residents of Innaloo appreciate its convenient location just a ten-minute drive to the city and a five-minute drive to popular Scarborough Beach.

The suburb also has many high quality schools and parklands and is close to Osborne Park Hospital, a major employer in the area.

Innaloo has its own major shopping centre (despite being close to Karrinyup Shopping Centre) and is home to many large-scale commercial and retail operations, including IKEA. It is also adjacent to Perth’s largest cinema complex.

A key feature of Innaloo is its excellent public transport options. It has direct access to Stirling train station and is well-serviced by a comprehensive bus network.

The median house price in Innaloo currently sits at $610,000 (REIWA) and the median unit price at $558,000. The median advertised rent is typically around $550 per week.

In a survey by Westpac, Realestate.com.au and RP Data, Innaloo was identified as one of Perth’s hidden property gems, offering excellent value for money compared to more expensive neighbours.

The future looks bright for Innaloo. It will benefit from ambitious plans to develop the Stirling City Centre, which includes the Innaloo shopping centre, cinema complex and a residential pocket within the suburb. The vision is to develop an integrated and modern, mixed use, transit-oriented centre around the Stirling train station.

It could also benefit from a planned redevelopment and expansion of the shopping centre by owner Westfield.

With older housing stock and favourable zoning, Innaloo offers numerous development possibilities, making it popular amongst investors and developers. Gradually, homes are being renovated or rebuilt, which is helping to revitalise the suburb.

People often make fun of its name, but Innaloo could be one of the most underrated suburbs in Perth and a potential gold mine for investors and developers.