Mercia | Taxation, Business & Finance Advisers

5 Signs the Market is Looking Up

Since the GFC, the Perth property market has been somewhat sluggish with brief glimpses of what may lay ahead. But now there are very strong signs that the next 12 months will see solid growth in property values. So, why are so many people convinced that 2013 will be a good year for property prices?

For those with their ears close to the ground, it has been coming for quite a while – a gathering of economic forces and market trends that all point to a near certain future.

In fact, there are already signs of growth in some parts of our city and according to recent figures from RP Data-Rismark the Perth market grow strongly in the 3 months to December of last year. In some suburbs, prices are back to pre-GFC levels.

Some commentators believe property prices in Perth could increase between 5 and 7 percent over 2013, and we believe certain areas could achieve even stronger growth.

So, why are we convinced that 2013 will be a good year for property prices? Here are 5 reasons:

1. Population growth

Population growth in WA, and specifically Perth, has been happening at a phenomenal rate. It has been massive not just by Australian standards but also on a global scale. Currently, around 1500 people are entering the state each week.

The growth has been driven by an influx of new arrivals, mainly from overseas, as a consequence of the economic opportunities in the state. With many parts of the world struggling economically, people are coming over for high paying jobs and to build a better future for their family. And, of course, these people need somewhere to live.

2. Rental market

When the supply of new housing can’t keep up with the rate of population growth, there is increased pressure on the housing market. It first affects the rental market, as many new arrivals choose to rent when they first arrive, then the sales market.

The rental market in Perth has been extremely tight in recent years, which has put upward pressure on rents. In 2012, Perth recorded a 17.5% growth in median house rents and 14% growth in unit rents. We’re currently seeing situations where applicants are offering above asking prices in a bid to secure a rental property. This trend is expected to continue into 2013.

It is widely accepted that rental growth is a leading indicator for price growth. As rents increase, there is simply a greater incentive for renters to buy.

3. The Economy

What can you say about the WA economy that hasn’t already been said? It’s the nation’s powerhouse.

Of the eight key indicators typically used to analyse the economy of the states and territories, WA typically leads the way on most of them – economic growth, construction work, unemployment, retail trade, population growth and equipment investment.

A strong economy means money is flowing into the state, businesses are investing and hiring, there are opportunities being created, and consumers are confident in their ability to take on and service housing debt.

4. Development and Infrastructure

Perth is developing rapidly as a city. Not only is the city centre being totally transformed, but there are various strategic centres being enhanced thanks in part to an increased shift towards suburban infill.

All of these developments are creating new opportunities for work and living, and helping to attract people from overseas and interstate.

Importantly, there is massive investment in transport infrastructure, including roads, hard rail and light rail, which is literally changing suburbs and laying the foundations for future property hotspots.

5. Interest Rates

Interest rates are currently very low, making housing debt more affordable, and therefore increasing demand for property. The expectation is that rates may decrease further in 2013 in a bid to help stimulate struggling parts of the national economy. This will add more fuel to the fire of the booming WA economy, putting even more pressure on the housing market.

Conclusion

If you are investing in property right now or already own property in Perth, these are just 5 reasons why you should be excited about the prospect of capital growth in 2013. There are, in truth, many other positive signs as well, such as the current low stock of properties for sale and historically good levels of affordability.

While the upcoming federal and state elections may result in some uncertainty amongst homebuyers and sellers, I expect this to be only a temporary glitch.

With first home buyers, investors and change-up buyers all expected to be active in the market, 2013 is shaping up to be a year of opportunities. For some it will be opportunities maximised, and for others it will be opportunities lost.

Early Signs Perth is on the Way Up

Perth’s median house price grew by around 3% in the December quarter, according to preliminary figures by the Real Estate Institute of Western Australia (REIWA).

It grew from $480,000 in the September quarter to $495,000 by December, a period that also saw sales activity grow by 4%.

While a higher median price could indicate that property values are increasing, it could also be distorted by strong activity at the more expensive end of the market.

“We have recorded more activity in the $600,000 to $700,000 range, as well as with homes over $800,000,” says REIWA president, David Airey.

In another positive sign for the market, only 55% of sellers discounted their price to achieve a sale in the December quarter compared to 60% in the September quarter.

“Now that buyers have more confidence and sellers are meeting the market with better pricing, the number of selling days has dropped from 71 to 62 for the quarter and this figure has been trending down for a while,” says Mr Airey.

The Road to Property Riches

Why is transport infrastructure so important for property investors? And what type of projects can typically impact on property prices the most?

In recent months, the Western Australian Government has announced a number of significant investments in transport infrastructure. This may have pricked the ears of some property investors who recognise the importance of these projects in determining future property hotspots.
These developments generate demand for housing and can cause price rises in adjacent suburbs. Sometimes the benefit to an area is obvious, other times only the truly astute investors will recognise the flow-on effects.

So why is transport infrastructure so important? And what type of projects can typically impact on property prices?

An area’s “value” is based on many things including its proximity to major centres, lifestyle attributes, beauty, and safety. If new transport infrastructure improves an area in one of more of these factors, the value of the area should increase.

New infrastructure, such as major connecting roads, can greatly affect people’s perception of distance. In some instances, a suburb may have better access to the CBD than suburbs closer to the city because of better roads. But it’s not just distance that can be impacted. New infrastructure can also improve an area’s beauty and safety.

What types of infrastructure projects have the biggest impact? In Perth, projects involving the rail network (including the proposed light rail system), new major roads, or significant improvements to existing roads have the potential to impact on property values.

Extensions to the existing rail line can certainly improve the prospects of outlying suburbs by providing better access to the city. Similarly, the proposed light rail system will provide some suburbs that previously relied on buses with direct rail links to the CBD and other major centres.

It’s not just new roads that can make a different but even widening of roads can impact areas by reducing congestion and reducing travel times. Reconfiguring of roads and new bridges can also make a significant change.

How do investors take advantage of transport infrastructure developments? By investing in the relevant areas before buyers realise the full benefit of the projects.

Good transport infrastructure is vital for a thriving economy, and public transport in particular, is becoming increasingly important as our population swells and the price of petrol increases.

Next time you hear an announcement of a new transport infrastructure plan, think about how it will affect surrounding suburbs. Which areas will become more appealing as a result? Or better yet, start digging for yourself and find out those plans and projects that other investors won’t know about.

Have You Had Your Yearly Check-Up?

For anyone who owns a property with a mortgage, now is a fantastic time to get a financial check up, which could save you money or help you to reach your goals sooner.

It’s that time of the year when many of us are trying to make improvements in our lives and planning for the months ahead. High on the list may be a fitter lifestyle and getting that long overdue check-up at the doctor.

For anyone who owns a property with a mortgage, now is also a fantastic time to get a financial check up. This type of review is completely pain-free and doesn’t require you to wear a funny gown. But it can uncover some excellent opportunities that could save you money or help you to reach your goals sooner.

Reviewing your loans will help determine whether they are suited to your current circumstance, which may have changed since you first obtained the loans. A change in jobs, the arrival of children or a new wealth creation plan may all warrant an adjustment.

Even if your circumstances haven’t changed, there is a good chance that new products have become available that could save you thousands of dollars. The home loan market is very competitive and so lenders regularly try to outbid each other with various discounts and incentives.
Reviewing your mortgages can often result in lower interest repayments, higher borrowing capacity or more financing options. It is a vital exercise for both home owners and investors, but particularly the latter who may want to unlock equity for another investment.

Even if nothing changes at the end of the review, at least you have the peace of mind knowing your loans are giving you the best chance of financial success.

A lot of work goes into signing up for a mortgage, so it’s understandable why many people do not review their position regularly. But a financial health check is a simple process with enormous potential for financial gain. And it begins with a quick call to your trusted finance broker.

Choosing Between Different Rental Applications

For a landlord, it’s a nice problem to have. Your vacant property has been advertised, there have been countless inspections and now you have received numerous applications. So how do you pick the right applicant?

Screening rental applications is a crucial process. Choosing the right tenant can mean fewer issues and a better maintained property.

While every landlord has a different situation, here are some general tips on choosing between different applications.

It sounds obvious, but consider what you really want in a tenant. At a basic level, you might want a tenant who pays their rent on time and takes good care of the premises. But you may also want a tenant who is going to stay put for a number of years, and this may affect your choice of applicant. In this case, you may place increased importance on the applicant’s previous rental history and the reasons for the applicant leaving their current property.

What if one applicant is offering to pay above the asking price? While the possibility of extra income may be alluring, selecting on this basis alone can lead to disastrous consequences. While a tight rental market might be encouraging applicants to offer more than the asking price, some tenants are forced to offer more because of a poor history or references.

Checking references is very important and one of the time-consuming jobs typically performed by a property manager. Reference checking generally involves obtaining feedback from the tenant’s previous property managers or landlords regarding the tenant’s tenure, payments, and cleanliness.
A reference check may also involve calling the applicant’s employer to confirm they have a job, can pay the rent, are a good employee, and likely to continue working.

Checking personal references may also uncover information that is useful in screening applicants, though it’s important to allow for a certain degree of bias with references from friends and family.
Above all, when deciding between different applications, discuss this with your property manager. In most cases, your property manager would have met the applicants and this will reveal a great deal of information.

Ask your property manager what their impression was of the various applicants. Good property managers have an instinct for knowing which tenants would best suit a particular property and can therefore save landlords a lot of time and money over the long term.

Suburb Snapshot: Yokine

Yokine definitely has strong fundamentals and with the prospect of the new light rail system, it has strong potential for capital growth.

Yokine is an established residential suburb around 6km from the Perth CBD and part of the City of Stirling. It neighbours Nollamara to the north, Dianella to the east, Inglewood and Menora/Coolbinia to the south, and Tuart Hill and Joondanna to the west.

The suburb was mostly established during the post-war years, particularly from the 1950s to the 1970s.

Today, it’s made up of a range of property types including new homes, medium-density duplexes and villas, older detached housing, entry level units and development sites, with a median house price of around $600,000. Compared to the Perth average, it has a high proportion of renters.

The suburb provides families with plenty of education options, both public and private, and there are numerous shopping precincts including the strangely-named Dog Swamp Shopping Centre, and Flinders Square Shopping Centre. The Mount Lawley coffee strip is also close by.

Yokine is a very green suburb with many parks and a fantastic golf course. The largest park is the popular Yokine Reserve, which incorporates lawn bowling greens, sports ovals, tennis courts and a community recreation centre. The playground within the reserve recently received a major multi-million-dollar upgrade making it one of the best in Perth.

Yokine offers investors development options due to favourable zoning. It is common for older houses to be knocked down and the land subdivided to accommodate new villas and townhouses. These sites typically sell in the high $600,000s.

Yokine is serviced by many bus routes but it has no connection to the rail network. However, this may change with plans for Perth’s first light rail system, called MAX, which will provide residents of Yokine with direct rail access to the CBD. This massive project could benefit the suburb greatly.

Another positive development is the City of Stirling’s plans to develop the Stirling City Centre and make it a large employment area within Perth, which will benefit surrounding areas.

Yokine definitely has strong fundamentals and with the prospect of the new light rail system and the gradual rejuvenation of the suburb, it has strong potential for capital growth, particularly at the cheaper end of the property market.

Growth rate (1 year average) 0.0%
Growth rate (5 year average) 1.0%
Growth rate (10 year average) 9.5%
Population 10613
Median age of residents 37
Median weekly household income 1206
Percentage of rentals 42%
Source: REIWA.com.au, January 2013

Capital Gains Tax (CGT): Main Residence Exemption

One of the few times you can get a tax break is with your main or principal residence which is exempt from Capital Gains Tax (CGT). So what really is a main residence and what rules do you need to be aware of?

The concept of your ‘main’ or ‘principal’ residence is an important one due to its significant influence on your future financial situation. When it comes time to sell your home, it is one of the few windfalls you can receive (assuming you make a profit when you sell) that is not subject to tax. Your main residence is exempt from tax on any capital gains provided it meets a few criteria.

For most people, figuring out what is your main residence is pretty straightforward. But for others, it is not so simple due to their circumstances. In some cases, you may even have a choice as to what property you claim. For these situations it’s important to understand a few key rules:

It must be a dwelling
A dwelling is considered a building or part of a building consisting mainly of residential accommodation with land under the accommodation. Therefore it could be a caravan or mobile home, but cannot be vacant land.

You must reside in the property
Definitions are not explained in the tax legislation; however the Australian Tax Office (ATO) has listed a number of factors that are taken into account to determine whether they would allow your claim for main residence exemption. These include:
• Length of time you lived in the property (it’s often assumed this should be at least 3 months but it’s not stipulated by law)
• Where the rest of your immediate family live
• Whether you keep your personal belongings at the property
• The address where your mail is actually delivered
• Whether your address on the electoral roll matches that of the property
• Connection of services such as gas, telephone and electricity
• Your intention of occupying the premises

Other considerations
One main residence at a time
You can only claim one residence as your ‘main’ residence at any one time. However, you are allowed a six-month overlap of main residences when you are changing homes (between the time of acquisition of the new and disposal of the old).

Temporary absence
If you choose to move elsewhere and rent out your home at some stage, you can continue to claim the main residence status on the property for up to 6 years even though you don’t actually live there. This will not impact on your ability to claim deductions on your now investment property, it will only impact on CGT. The catch is that you will not be able to claim the other property you are now living in as your main residence during this time, if you claim your former home as your main residence.

Partial exemption
There are times when a property can only receive a partial exemption. One of those is when you move house, your new home becomes your main residence, and you then rent out your old home. During the time in which your old property is rented and no longer considered your main residence, it will be subject to CGT. However CGT will not be calculated during the period you lived there and claimed it as your main residence. The other time your main residence will receive a partial exemption is when a part of it is used for business and other such income producing purposes (e.g. a beautician servicing customers in a spare bedroom). In these circumstances, the proportion of the dwelling used for such purposes will be subject to CGT for that period, while the rest of the dwelling will continue to be exempt. This area can be tricky to interpret so do seek professional advice if you have concerns.

Pre-occupation period
If you are building a home on vacant land or substantially renovating a property and therefore cannot live at the property, you can still claim main residency in both examples under a “pre-occupation exemption”. Under this exemption you can treat the property as your main residence for up to 4 years before you actually occupy it provided you occupy it as soon as practicable and live there for at least 3 months after doing so. Naturally, you must not claim any other property as your main residence during this time.

Property in individual names
With a few minor exemptions, property can only be claimed as a main residence if held in individual names. Property held in a company or trust therefore cannot claim the CGT break. Because of this significant tax implication, most people hold their home in their personal names. If asset protection is an issue, best to consider holding it in just one partner’s name which still allows you to access the CGT benefits while affording some asset protection.

Taxation is not always a straightforward area and many rules are subject to interpretation so I encourage you to seek professional advice from your accountant if you have any questions or concerns.