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.

The key characteristics commonly shared by top property developers

Not everyone has what it takes to plan and undertake a successful property development. There is a lot you need to know, and last month we looked at four of the critical knowledge areas. It’s not just about what you know; having certain character traits can also prove extremely advantageous.

This month we outline some of the key characteristics commonly shared by top property developers. How many do you have?

Decisiveness
The best property developers live by the old truism ‘time equals money’. They know that unnecessary delays are to be avoided at all costs, because even a small delay can have disastrous flown-on effects to the schedule and budget. Decisiveness, or the ability to make quick decisions, is therefore an important trait to have.

Ability to spot potential
When searching for a development project, great opportunities are typically few and far between. And when these opportunities do come along, they certainly don’t hang around forever. Successful property developers can spot a good opportunity very quickly and in a matter of moments do a ‘quick feasibility’ to determine whether further investigation is warranted.

Deal making
Securing a development site isn’t always straight-forward. When negotiating with a seller, sometimes the developer needs to think outside the box and come up with a solution that works for all parties – they need to get the right deal done. This may involve, for instance, securing an option to buy the property, buying the site outright, or even entering into a joint venture with the property owner.

The key to making some developments profitable can come down to something as simple as a long settlement or an extended due diligence period.

Solution oriented
In any development, problems will arise that can sap the motivation of even the most motivated developer. It’s the developers who don’t get bogged down with the problems and choose instead to focus on solutions that have greater chance of success.

Big picture focus
Professional developers seem to have an innate ability to see the big picture and recognise ‘the wood through the trees’. They have an unwavering focus and the patience to see their vision gradually become a reality, even if it means making mistakes from time to time.

An understanding of quality vs time
There is a constant battle all property developers face. It’s comes from the reality that producing a better quality product will generally cost more in terms of time and money. With any project, you need to find the right balance, which means carefully understanding the particular market you are targeting. There’s no point in spending extra money in a particular area of the project if the market simply won’t pay for it.

Excellent people skills
The best property developers have excellent communication and interpersonal skills. They can relate to people from all walks of life and quickly build genuine rapport. Think about the variety of people a property developer might deal with, from property sellers, consultants, builders, and tradespeople to neighbours and members of the local council. It takes leadership skills and sometimes a big dose of diplomacy to successfully get the most out of these relationships.

Conclusion
This list provides a useful overview of the personal traits and characteristics that lend themselves to the property development arena, but it is by no means comprehensive.

A property development project is almost always a serious undertaking and not one to be faced unprepared. But if it’s done right, the rewards can be excellent.

For this reason, aspiring property developers without the necessary time and resources should always seek the help of a development manager or team, who can coordinate the entire process and provide valuable advice along the way.

Should you spread your loans amongst different lenders?

One of the financing decisions you’ll have to make as you grow your portfolio is whether to spread your loans amongst different lenders. The alternative option, of course, is to keep your loans with a single lender. So, what are the relative advantages of each of these strategies?

Going with one lender
The biggest advantage of having all your loans with a single lender is that you may benefit from volume-based discounts offered by the lender, depending on the total amount of your borrowing. This could mean slightly cheaper interest rates and reduced fees, potentially saving you money over the period of the loans.

There is also a convenience factor in having all your loans in one place, both in terms of managing your loans and submitting further applications.

Some people will also argue that, with this strategy, your lender will be more willing to lend you further money as they have a complete picture of total borrowings. This, however, is debatable.

Going with multiple lenders
A strong argument for having your loans with different lenders is that you can potentially borrow more money versus the single lender scenario. A lender who is right for your first loan is highly unlikely to be the lender most suited to your 4^th or 5^th investment property. Lender policies constantly change and spreading your loans makes it more likely you can move to the next property sooner.

It’s not a universal rule but in my experience you can typically do more with multiple lenders, but it does depend on your specific strategy.

One of the great things about spreading your portfolio amongst different lenders is that you can pick which of your properties you want to refinance when releasing equity. If all your loans are with one lender, the lender may require current valuations on all properties. In this case, the growth in one property may be offset by the decline in another, leaving you unable to draw equity.

Using multiple lenders also makes sense from a risk-management point of view. If you default on a loan, it may be more difficult for the lender to get its hands on other properties not under its control.

Spreading your lender exposure also means minimising the negative impact that could result should one lender decide to dramatically change its lending policies.

Conclusion
Despite the potential cost savings of having all your loans with one lender, many investors choose to spread their loans because of the increased flexibility and protection. A good mortgage broker can usually find ways of minimising costs while still utilising different lenders. Ultimately, the choice depends on your overall strategy, risk profile and financial resources, but for property investors looking to build a large portfolio spreading your lenders is the preferred strategy.

The pros and cons of investing in a brand new house and land package

It’s easy to see the appeal of investing in a new house and land package.  Not only does this type of property look amazing in the brochures, it’s an easy option and comes with a host of advantages. However, do these benefits outweigh the negatives? Let’s look at the main pros and cons.

The Main Pros

Tenants love new homes
Tenants typically love brand new property and, let’s face it, why wouldn’t they; everything is in perfect condition, with up-to-date features and modern floor plans. For investors with this type of property, finding a tenant can be fairly easy (depending on the overall supply in an area) and rental returns can be strong.

Maintenance
With new property, there is none of that dreaded maintenance, at least for the first few years. You don’t have to worry about something falling apart after buying the property.

Depreciation benefits
New properties will generally get higher depreciation deductions than older properties, given the high starting value of the building, fixtures and fittings. More deductions means the out-of-pocket cost to hold the property may be lower.

Stamp duty saving
When investing in a new house and land package, you typically only pay stamp duty on the land component, which could mean saving thousands of dollars.

Flexibility
When building a home you can often tailor certain elements to suit your specific needs or to maximise the investment potential.

The Main Cons

Paying for someone else’s profit
When you buy any brand new property, factored into the price is the developer’s profit margin and a proportion of the high marketing costs that come with selling this type of property. These hidden ‘costs’ could be the equivalent of a few years of capital growth, putting you behind the eight ball from day one.

Compromised location
The majority of home and land packages are located on the outskirts of the city, in areas often with abundant supply of land, weaker economic drivers and a lack of infrastructure. Capital growth is therefore often harder to come by.

Uncertainty
When buying off the plan, you really don’t know whether the quality of the finishes will meet your expectations, or what the surrounding facilities and other homes will be like. There is also the uncertainty that the final bank valuation won’t stack up. Also you won’t know how many other similar rental properties have been sold to investors in the area.

Land value
Logic dictates that when investing you should seek out a property with a high proportion of land value, as this is what will drive capital growth. With new property, however, most of the value lies in the building component and not the land, which will hamper capital growth as the building depreciates.

A 30 year old property on a good size block in the middle of suburbia might not look too glamorous when compared to a brand new property, but chances are it will make a far better investment over the long term.

Paying without receiving
When building an investment property, you don’t receive any income while it is in the planning stages or under construction. But you will be paying interest on any money you have borrowed by that point.

Building surprises
Building can be a nightmare at the best of times, with construction delays a fairly common occurrence. The biggest surprise for many first-time builders is the amount of extra money that needs to be spent to get the property ready.

Inability to add value
Smart investors know that adding value to a property through renovations is a key strategy for accelerating the wealth-creation process. This option is rarely available with new property.

Conclusion
The bottom line is that while investing in new property can seem appealing, it often proves unsatisfying over the long term due to weaker capital growth. If you are looking at a long-term investment opportunity, more often than not, your best option will be a second hand property.

What exactly is fair wear and tear?

The reality of owning an investment property is that, in all likelihood, the condition of your property will decline over time. This can be hard for some investors to accept, especially when they don’t see their property very often.

All tenanted properties will experience some wear and tear, just as your own home will inevitably show signs that it has been lived in. If the wear and tear is considered to be ‘fair’, the tenant will not be liable for the damage and it cannot be claimed on your landlord’s insurance.

So, what exactly is fair wear and tear? There is no formal definition in the Residential Tenancies Act (1987), but it’s generally considered to be the damage that naturally and inevitably occurs as a result of normal use or ageing.

It sounds relatively straight-forward, but it’s an area of constant friction between landlords and tenants because of differing interpretations.

To clarify, let’s consider an example. Carpets have a limited life-span, probably between five and ten years, depending on a number of factors. Therefore, after a few years of use, you would expect to see signs of foot traffic in some areas. This damage would generally be considered fair wear and tear.

Faded curtains could also be an example of fair wear and tear, as the fading has most likely occurred through ageing and normal use. Other examples could be minor scratches on paintwork or even a lock that has broken because of its age.

What about accidental damage? How is that different from wear and tear? Accidental damage is caused by a sudden and unexpected event, such as spilling red wine on the carpet or damaging a wall while moving furniture. Wear and tear, on the other hand, accumulates over time.

What about neglectful damage? Like wear and tear, this sort of damage happens over time, but through some negligence on the part of the tenant rather than normal use. For instance, allowing mould to form in an area by failing to properly ventilate the property could be considered neglectful damage.

Tenants are normally liable for accidental and neglectful damage.

Clearly, when determining what is and isn’t fair wear and tear, it’s vital to have a comprehensive Property Condition Report. This document, produced at the start of a tenancy, will provide the basis for comparison in assessing any sort of damage.

An established favourite with a promising future

Warwick is located approximately 13km north of the Perth CBD and 5km from the ocean. It’s a suburb with a relatively small population, given the eastern third is devoted to native bushland, known as the Warwick Open Space.

Located within the City of Joondalup, Warwick was predominantly developed in the 1970s and consists mainly of three and four-bedroom brick and tile residences. It is a well-established area surrounded by other established suburbs or infrastructure, making the availability of land there very restricted.

Warwick hugs the Mitchell freeway, which is the lifeblood of the northern suburbs, offering quick and easy access to and from the Perth CBD and Joondalup, whether by car, bus or train. It has a substantial shopping complex with cinema, schools and plenty of parks and sporting facilities.

Part of Warwick’s appeal is that it is just a short drive to many of Perth’s most popular beaches, as well as Hillary’s Boat Harbour, a favourite destination for tourists and locals.

By Perth standards, Warwick is considered an affordable suburb with most properties priced close to the median house price of Perth. It offers good value for money, especially compared to the suburbs located to the west.

According to recent figures from REIWA, the median house price in Warwick is $560,000, representing a growth of 13.9% over the past year, with the highest sale price being $738,000. The median rental price is $440 per week

Warwick is in the midst of a transitional phase, a factor that has caught the eye of many investors. Many homes in the suburb are undergoing expensive renovation and some older properties are being demolished and replaced with modern buildings.

Of particular interest to investors is the fact that Warwick is part of the Joondalup Draft Local Housing Strategy, which aims aim to rezone parts of the suburb to allow for more dense residential housing. Large parts of the suburbs look set to be rezoned to R20/R40 or R20/R60.

According to our analysis, Warwick has a high demand-to-supply ratio, meaning demand is very strong compared to supply. Part of the reason is that it appeals to both owner-occupiers and investors. Owner-occupiers love the location, the amenities and the affordability. Investors love the price tag, larger lot sizes, and the ability to add value to old properties via renovation and development.

The Reserve Bank of Australia has decided to keep interest rates the same

The board met today and decided to keep the cash rate unchanged at 2.5 per cent. This is great news for investors looking for their next investment property.

“The latest housing market statistics are likely to have caused the Reserve Bank some additional deliberation at their latest board meeting,” said RP Data’s head of research Tim Lawless.

The amount of investment in the housing market would be causing them concern, Mr Lawless said.

“In Australia, the economy grew at a below trend pace in 2013. Recent information suggests slightly firmer consumer demand over the summer and foreshadows a solid expansion in housing construction. Some indicators of business conditions and confidence have improved from a year ago and exports are rising.

Glenn Stevens the Governor of the Reserve Bank said “resources sector investment spending is set to decline significantly and, at this stage, signs of improvement in investment intentions in other sectors are only tentative, as firms wait for more evidence of improved conditions before committing to expansion plans. Public spending is scheduled to be subdued. “

Mr Stevens said “monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates”.